That amazing idea that you had and the electric synergy that you shared with your initial partners have both fizzled. It happens to the best of us, particularly when economic conditions are tough! So, what steps will you need to take for an orderly winding down of the business? This will depend a lot on the facts and circumstances of your business, but here are some general steps and considerations.
STEP ONE – GO BACK TO SQUARE ONE.
READ YOUR SHAREHOLDERS AGREEMENT, OPERATING AGREEMENT OR PARTNERSHIP AGREEMENT
If your business was formed as a corporation, limited liability company or partnership in the State of Illinois, and you had an attorney helping you form the business, then chances are very good that you have a Shareholders Agreement, Operating Agreement or Partnership Agreement with the other owners of the business. You need to review that foundational document and, as a starting point, determine whether all of the owners need to agree unanimously to dissolve your business, or whether you need the vote of a certain percentage of the owners in order to dissolve.
Corporations in Illinois are also governed by the Business Corporation Act, which you can find here https://www.ilga.gov/legislation/ilcs/ilcs5.asp?ActID=2273&ChapterID=65. There is a specific Article spelling out the steps for dissolution and winding down of a corporation’s business. That Article also addresses judicial remedies which are available to shareholders in the event of certain disputes. https://www.ilga.gov/legislation/ilcs/ilcs4.asp?DocName=080500050HArt%2E+12&ActID=2273&ChapterID=65&SeqStart=14500000&SeqEnd=16500000
Illinois Limited Liability Companies are also governed by their own statute, called the Limited Liability Company Act, which you can find here: https://www.ilga.gov/legislation/ilcs/ilcs5.asp?ActID=2290&ChapterID=65. Likewise, the specific rights, obligations and steps for dissolution are spelled out in the statute. https://www.ilga.gov/legislation/ilcs/ilcs4.asp?DocName=080501800HArt%2E+35&ActID=2290&ChapterID=65&SeqStart=8400000&SeqEnd=10500000
It is important to note that in Illinois, with very limited exceptions, the Business Corporation Act and the Limited Liability Company Act create the framework or fallback position in the event that your Shareholders Agreement or Operating Agreement are silent on a topic. Shareholders in a corporation and Members in a limited liability company can agree to set many of their own rules of engagement, whether they be more strict or more lenient than the statute. Your ‘rules of engagement’ do have to be in writing, signed by all of the owners and other specifics which an attorney can help you comply with.
Once you have done your homework and determined what the foundational documents and operative statute will require, I strongly recommend that your next step is to become one of those people who makes a lot of lists.
PRACTICAL STEPS AND CONSIDERATIONS FOR WINDING DOWN AND DISSOLVING A BUSINESS.
Hopefully you planned ahead and picked a target date for your last day of operation. The following are some of the steps that you will likely need to complete:
- One or more members needs to be appointed to be in charge of the dissolution and winding down process
- As a group, decide how decisions (such as settling with creditors) will be made during the winding down process (unanimous or other percentage?)
- Make a list of all accounts and assets that need to be sold and terminated.
- Make a list of any vendor or other agreements which need to be terminated.
- Does your business have employees? Do any employees have employment or stock option agreements? Health insurance? Retirement accounts for employees?
- Do you have a Lease? When does it end? Did the principals personally guarantee the lease?
- List all creditors, amounts outstanding, whether these are fluctuating or static, and start to form your strategy for negotiating each one.
- Prepare and File Articles of Dissolution or the appropriate dissolution submission with the Secretary of State.
- Start Winding Down process.
- After all assets are marshalled, determine whether all creditors can be paid in full.
- If creditors cannot be made whole, start negotiating resolutions with each. Try and obtain a release for any negotiated resolution that is less than the full amount due.
- Members can also be creditors. Did any member loan money to the LLC? What do the books of the LLC say about member loans and/or were any loans booked on the annual tax returns? Members can be repaid even if there are not enough assets to satisfy all creditors; be aware that a creditor may come back and challenge members for self-dealing.
- If you have any employees, determine their last date of work and give them notice.
- If there is health insurance or retirement accounts, know that these require special care, advanced notice, etc and seek guidance from your broker.
- If there is a lease term that is not fulfilled, negotiate with Landlord. Remember that often commercial leases include the personal guarantee of the members.
- After all creditors, including member creditors, are repaid and/or settled with, any remaining money should be distributed between the members according to their ownership percentage.
- You should prepay or set aside funds for a final tax return, final I-941, and any other professional fees associated with completing filings with governmental entities.
- Once the Winding Down process is complete, creditors are paid and remaining funds are split among the members, a Statement of Termination should be filed with the Illinois Secretary of State.
WHY DO IT THE RIGHT WAY?
OWNERS CAN HAVE PERSONAL LIABILITY IF THEY DO NOT FOLLOW THE NECESSARY STEPS TO PROPERLY DISSOLVE THEIR BUSINESS ENTITY AND WIND UP.
Things have not been going well, that’s how you got here. Why would you want to invest even more time and effort? Wouldn’t it be easier to just close the doors and walk away? In the short term this may seem appealing, but many of the good reasons that lead you to take the steps to properly form a business entity still apply now. Without following these formalities, owners can face personal liability for debts of the business, they could be accused of fraudulent transfers, a creditor or other party may try to pierce the corporate veil and unresolved issues between you are your business partners may fester into lawsuits down the road.
Every situation is unique; therefore, this is not a complete list. Leaning on an attorney, as well as your tax and other trusted professionals, will be important during this process.
If you are reading this post and you are thinking: none of this is going to help me because my partners and I are in a huge dispute or deadlock about whether to dissolve in the first place or how to go about it, please reach out to us. An experienced attorney can often serve as a valuable barrier to diffuse some of the fighting and to direct the focus to these necessary exit steps. We can also provide insight into the statutory framework or even what to expect in the worst-case scenario of a lawsuit or arbitration proceeding.
If you have any questions about the content of this blog, contact Navigant Law Group, LLC at (847) 253-8800 or email us at hello@navigantlaw.com.
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