Common Reasons for Business Dissolution in New York

Choosing to end a business is a major decision for owners, members, and shareholders. There are several common reasons for business dissolution in New York. Identifying these reasons may help you decide whether dissolution is right for your company and how to avoid these situations.

Consulting with an experienced business dissolution attorney may provide valuable insights into this decision. A lawyer may help you with these decisions and identify potential alternative strategies. Get in touch to learn more about how an attorney could help.

Understanding Business Dissolution

A business dissolution is the formal and legal closing of a business. Completing the business dissolution process is required to officially end business operations.

Business dissolution in New York involves several key steps. Those choosing to officially end business operations must thoroughly complete every step. Accuracy and transparency are critical. The legal steps to dissolve a New York business are:

  • Getting approval from business owners
  • Notifying creditors of the decision to dissolve
  • Filing a final tax return and obtaining consent from the New York Tax Department if filing a Certificate of Dissolution
  • Filing a Certificate or Articles of Dissolution with the New York Department of State
  • Distributing assets, canceling all licenses and permits, and closing all business accounts

The New York Department of State also requires the payment of all outstanding fees and penalties before dissolution is finalized. An experienced lawyer could help with the decision to dissolve and assist with the process, as some steps vary depending on the type of business entity.

Common Reasons for Business Dissolution

There is no single reason that companies choose to end operations. Several different circumstances can lead to business dissolution, many of which are outside of the owner’s control. Some of the common reasons for the dissolution of a New York business include:

Financial Issues

Cash flow issues are one of the top reasons for closing a business. This can be caused by a lack of revenue or too many losses. When a company does not have sufficient funds to continue operating or cannot meet its debt obligations, dissolution may be appropriate.

Internal Issues

Internal issues may make it difficult to successfully operate the business. Examples of internal issues that could lead to dissolution include:

  • Disagreements among owners, members, and shareholders
  • Fraud, misappropriation, or mismanagement of company assets
  • Death, disability, or illness of an owner
  • Poor management of the company

If the company is unable to overcome these challenges, corporate dissolution may be necessary.

Market Conditions

Economic circumstances are outside of the control of the owner. When market conditions change, competition rises, or demand drops, businesses may not be able to continue operations. In these situations, owners may opt to end their business.

Ineffective Succession Plans

In some cases, businesses may need to dissolve if there is no one to take over operations. To avoid this situation, owners should create a comprehensive succession plan or consider selling the company, if appropriate.

By Operation of Law or the Governing Documents

Business dissolution in New York can be by operation of law, the Certificate of Incorporation, Bylaws, the Partnership Agreement, or the Operating Agreement.

Limited Liability Companies

  • Operation of Law: If a business lacks an Operating Agreement, or the Operating Agreement does not specify how or when a company may terminate or dissolve, New York’s LLC law governs the business closure process, allowing it through a majority vote or written consent from most LLC members.
  • Operating Agreement: If a business has an Operating Agreement, it outlines the rules for dissolution, often specifying conditions or requiring a majority vote. Adhering to these procedures helps avoid disputes among owners.

Corporations

  • Administrative Dissolution (By Operation of Law): The state may administratively dissolve a corporation for failing to file biennial statements, pay taxes or fees, or engaging in illegal activities. However, dissolution does not absolve the corporation of its legal obligations, such as settling debts or taxes.
  • Dissolution According to Governing Documents: If a corporation’s Certificate of Incorporation or Bylaws specify dissolution provisions, these must be followed. They may detail events triggering dissolution and procedures for voting and approvals.

Partnerships

  • Voluntary Dissolution by Agreement: Partnerships can dissolve voluntarily if the partners mutually agree or by the events specified in the Partnership Agreement (e.g., completion of a specific project or purpose or expiration of a set term).
  • Dissolution by Operation of Law: A partnership may dissolve automatically by operation of law if its business purpose is fulfilled, its activities become illegal, or it faces bankruptcy unless otherwise agreed.
  • Dissolution by Withdrawal or Death of a Partner: In a general partnership, the withdrawal or death of a partner may trigger dissolution unless the Partnership Agreement or remaining partners allow the business to continue. Limited partnerships and LLPs may have specific rules for these situations.
  • Dissolution Without a Partnership Agreement: If no Partnership Agreement exists, New York’s Partnership Law governs dissolution, allowing it if a partner withdraws, the partnership fulfills its purpose, or all partners agree to dissolve.

Fulfillment of Business Purpose

In certain cases, a company may be dissolved when its business purpose is fulfilled, and it ceases to operate as a going concern. This method is particularly relevant for companies established with a limited scope or specific objectives, such as Special Purpose Vehicles (SPVs) created for:

  • Film or TV Production: The production or financing of a specific Film or TV project. After the film is completed and distributed, the production company is dissolved.
  • Live Event Production: A company may be formed to manage and finance a one-time entertainment event, such as a concert, festival, or theatrical performance.
  • Intellectual Property Acquisition and Development: A company may create an SPV to acquire and develop rights to a specific intellectual property, such as a novel, song, or play, for adaptation into a film, TV show, or other media.

Involuntary Business Dissolution

Involuntary business dissolution, or dissolution by proclamation, occurs when a business does not file franchise tax returns or pay taxes for two or more years. In these situations, the New York Secretary of State may dissolve the business.

A dissolution by proclamation remains indefinitely in effect until the owner files for reinstatement or completes the voluntary business dissolution process.

The New York Attorney General may seek to dissolve a corporation for fraud, illegal activities, or exceeding its legal authority.

Judicial Dissolution

Judicial dissolution involves a court order to terminate a business when it is no longer feasible or equitable to continue. The process and grounds differ for corporations, LLCs, and partnerships:

Corporations

  • Grounds: Deadlock among directors/shareholders, minority shareholder oppression, or insolvency.
  • Process: Shareholders file in the New York Supreme Court. The court evaluates dissolution or alternatives (e.g., buyouts) and oversees liquidation if granted.

Limited Liability Companies

  • Grounds: Management deadlock, member oppression, failure of purpose, or impracticability.
  • Process: A member petitions the court, which assesses equity and alternatives. If granted, a receiver manages the winding-up process.

Partnerships

  • Grounds: Deadlock, partner misconduct, breach of agreement, or impracticability.
  • Process: Partners petition the court, which determines the need for dissolution and supervises asset liquidation and debt settlement.

Judicial dissolution is a last resort to ensure fairness and resolve conflicts when a business can no longer operate effectively or equitably. Each entity has specific grounds and procedures, making legal counsel crucial for navigating the process.

Winding Up and Liquidation

After dissolution is initiated by any method, the business must complete a winding-up process, which includes:

  • Settling debts and liabilities.
  • Distributing remaining assets to owners.
  • Filing the final tax returns and paying any outstanding taxes.

Consult With a New York Attorney About Causes of Business Dissolution

There are many common reasons for business dissolution in New York. Depending on the situation and the complexity of your operations, dissolution may be a lengthy and challenging process. Engaging with a trusted lawyer may help decide if the time is right to close operations.

At Rodriques Law, PLLC, we offer comprehensive and dedicated support for your business during a dissolution. Contact us now to schedule a consultation.

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