Closing a business can be an exciting, difficult, or bittersweet decision depending on the circumstances. Regardless, and whether you are celebrating a liquidity event or heading back to the drawing board, founders, directors, and shareholders of Michigan for-profit corporations should consider formally dissolving their corporation and winding up its affairs before moving on. To successfully dissolve and wind up a Michigan for-profit corporation and receive maximum protection against known and unknown, outstanding liabilities, founders, directors, or their authorized representatives must follow specific steps set out by Michigan law and often the corporation’s governing documents, which are discussed in detail in the following memorandum.
A for-profit corporation may voluntarily dissolve for any number of reasons including, for instance, the sale of the corporation’s assets, the retirement of a sole shareholder, discontinuation of operations, or a shareholder liquidity event.
While Michigan’s law governing for-profit corporations, the Business Corporation Act (“BCA”) does not mandate that founders, directors, or shareholders formally dissolve a corporation, doing so is recommended and a best practice for several reasons, including but not limited to preventing taxes, fees, and penalties from accruing against the business and ensuing shareholders remain protected from personal liability. Further, formal dissolution demonstrates good corporate governance practices and can instill confidence in future business partners or investors when raised in due diligence or fundraising discussions down the road.
Voluntarily dissolving a for-profit corporation in Michigan typically requires three steps: approval, filing a certificate of dissolution, and requesting tax clearance. The complexity of these three steps is largely contingent on the composition of the corporation’s shareholders as well as the amount and character of the corporation’s assets.
First, the dissolution must be approved by the corporation’s shareholders pursuant to a shareholder agreement or by way of a director proposal providing notice to the shareholders and subject to shareholder approval. In either case, it is critical that the directors or shareholders advancing the proposals – where multiple shareholders exist – ensure they adhere to the corporation’s articles of incorporation, bylaws, other governing documents, and the BCA to ensure that all shareholders are properly provided notice and have an opportunity to vote, where applicable, on the proposed dissolution.
In addition to the approval, directors, officers, and shareholders may want to develop a plan of dissolution detailing the authority and process for the dissolution, particularly where the corporation maintains significant or complex assets such as real estate, stock, investments, or intangible assets such as intellectual property. Plans of dissolution are not required by Michigan law, but may prevent disputes or confusion when winding up the corporation’s affairs.
The second step of the three-step dissolution process requires the filing of a certificate of dissolution with the Michigan Department of Licensing and Regulatory Affairs (“LARA”). The certificate of dissolution is available online (Form CSCL/CD-531) and can be completed and processed online or mailed into LARA. LARA provides specific instructions on how to complete the certificate, though the primary requirements include the corporation’s legal name, the way the dissolution was proposed and approved, and a signature from an authorized officer or agent of the corporation. Filing the certificate costs $10 and additional expedited service options are available for extra fees.
The third step of a formal, voluntary dissolution requires a corporation to request a tax clearance certificate from the Michigan Department of Treasury (“DOT”) within 60 days of filing its certificate of dissolution. Upon filing, the DOT will review the corporation’s business tax account and determine whether the corporation owes any outstanding taxes. Subject to clearing up any existing tax obligations, the DOT will provide the corporation a certificate of tax clearance, which should be saved to the corporation’s books and records. Tax clearance request applications are available online (Form 5156) but must be completed and mailed to the DOT consistent with the form’s instructions.
Once a corporation is formally dissolved, it may no longer carry on business except for the purpose of winding up its business affairs. Under the BCA, winding up affairs includes the collection and sale or transfer of the corporation’s assets, the payment of any outstanding debts and liabilities, and any other actions required to liquidate the business. The process of winding up is, again, either simplified or complicated by the existence of claimants of the corporation and the corporation can protect itself against future claims and liabilities by following specific steps providing notice to claimants of the corporation’s dissolution. Thereafter, claimants have a limited amount of time whereby they may pursue a debt or liability against the corporation. Once the applicable time limits expire, the corporation is generally free of any obligation to those claimants.
In addition to providing notice to claimants of a corporation and subject to those obligations, the winding up period is typically when the corporation will make final distributions to its shareholders. Directors and shareholders of a corporation should review the BCA, the corporation’s governing documents, and consult legal counsel regarding the corporation’s right to make distributions during the winding up phase.
In addition to the legal considerations associated with dissolving and winding up a Michigan for-profit corporation, the liquidation and distribution of corporate assets can result in significant tax consequences to the business and its shareholders. Accordingly, founders, directors, and shareholders also consult their financial and tax advisors concerning the potential ramifications and make fully-informed decisions regarding the same.
A quick online search of “corporation dissolution in Michigan” will lead to countless options and advertisements for companies providing fill-in-the-blank corporate formation and dissolution services. Undoubtedly, some of the services will provide efficient and straightforward assistance in dissolving your corporation. However, a one-size-fits-all approach is rarely optimal when it comes to voluntarily and formally dissolving your corporation. Accordingly, we recommend a discerning and tailored approach to allow you to close up shop and move onto the next big thing with confidence.
Patrick M. Ellis is a Traverse City-based attorney counseling businesses across numerous industries and stages of maturity regarding corporate governance, strategic transactions, commercial contracts, and day-to-day, operational and legal matters. If you have any questions about the issues addressed in this memorandum, or if you would like a copy of any of the materials mentioned in it, please do not hesitate to reach out to:
Patrick M. Ellis
Phone: (231) 947-7900
[i] This memorandum focuses on voluntary dissolution for corporations that have already commenced business. For more information on dissolving a corporation before business commences, administrative dissolution, or judicial dissolution, please contact the author.