Dissolving Your Business? Here's What You Need To Know
Updated: Jul 4
Unfortunately, one of the outcomes of containing COVID-19 has been the economic impact resulting in businesses shutting down. With the lengthy lockdown order in Ontario, the province has seen some of their favorite restaurants, retail stores, local gyms and communities falter. So what does this mean for your business? As sad as it may be to see what you've built from the ground up come crashing down as a result of the global pandemic, you have options.
What is Dissolution?
The term "dissolution" is the termination of corporate existence under the corporate law regime. Upon dissolution, a business corporation essentially ceases to be a legal entity. Therefore, the business corporation ceases to have the legal capacity to conduct business or commence any new legal proceedings.
Dissolving a business corporation voluntarily means exactly what it sounds like. If the directors and shareholders of the business corporation voluntarily applies to have the business dissolved, then it may be dissolved by way of voluntary dissolution. However, it is important to note that the shareholders, regardless of whether or not they have voting rights, must authorize the dissolution of the corporation by way of special resolution prior to or during the filing for dissolution.
What if the corporation never issued shares?
If the business corporation you want to dissolve has no shareholders, has not yet issued shares and has not yet commenced business activities, you are still required to apply to have the business corporation dissolved. This would still be considered a voluntary dissolution. The only difference is the form that you file.
Tax/Financial Implications Associated with Dissolving a Company
Prior to dissolving a corporation, it may be wise to work with an accountant to determine whether there are any tax and/or financial liabilities associated with the business corporation. You may want to consider obtaining a clearance certificate as governed by the Income Tax Act. Understand that the directors of the corporation may become liable for the tax and financial liabilities of the corporation. Prior to dissolving the corporation, consider how the following financial matters will be addressed:
Are corporate/sales taxes owed?
Does the corporation have any other outstanding debts, obligations or liabilities?
Is there are property owned by the corporation?
A business corporation may also be involuntarily dissolved. This is not initiated by the business corporation and/or its directors or shareholders. Essentially, the dissolution of the corporation results from the failure of the corporation to fulfil certain legal requirements of the governing statutes of the incorporating jurisdiction, such as the filing of corporate annual returns. You can read more about your corporate annual maintenance requirements from our previous article Maintaining your Corporate Law Records. The filing of an annual return is mandatory and failure to do so may result in an involuntary dissolution of your business corporation. Please note that this is only one example of a way in which a business corporation can be dissolved involuntary. The good news however, is that if the business corporation is dissolved involuntarily, the corporation can be revived.
Dissolution vs. Winding-Up
The key difference between winding-up a business corporation and dissolving a business corporation is that winding-up involves a third-party, better known as a liquidator, whereas by contrast a dissolution is a process managed primarily by the directors of the corporation, after receiving authorization from the shareholders. Since a voluntary dissolution does not involve third-parties, dissolution can be quicker and possibly a less expensive option.
A voluntary wind-up is similar to a voluntary dissolution. The difference is that in a voluntary wind-up the business corporation may decide to appoint a liquidator to liquidate the corporation's assets. The shareholders and/or directors of a corporation voluntarily decide to put the company in liquidation. Generally, the shareholders will appoint one or more individuals to act as a liquidator for the purpose of winding-up the business corporation's business affairs and distributing its property. A liquidator may be a director, office or employee of the business corporation. Once the process has begun, the business corporation must cease to operate its business affairs.
Winding-Up By Court Order
Sometimes, a company may be legally forced to wind-up their business corporation by way of court order. In these cases, the business corporation is ordered to appoint a liquidator to manage the sale of assets and distribution of the proceeds to any or all creditors. The court order is often initiated by a suit that has been brought by the business corporation's creditors or other interested parties. In other cases, the winding-up of a business corporation is the final conclusion of a bankruptcy proceeding.
Froese Law is your ally for success. If you think that dissolving your business is the best option for you, we can help. Contact us today!