Should You Dissolve Your Corporation Before Year-End?

Cliff Ennico
Posted: Dec 12, 2012 12:01 AM

"I have been running a service business for the past several years, but business is way off and I'm thinking of calling it quits.

I have a corporation and am thinking of shutting it down by year-end so I won't have to file tax returns for the bloody thing after next year. I'm worried, though, that I might be exposing myself to personal liability if I'm sued after I shut the corporation down.

What do people normally do in a situation like this?"

The decision to shut a corporation down is never easy, but if you're going to do it, the end of the calendar year is a great time.

Here are some of the questions you will need to ask your advisors:

1. Is there a risk I might be sued in coming years? Generally, when a corporation dissolves, it continues in business for the sole purpose of winding up its affairs. This means that it can't take on any new business after it dissolves, but it can clean up old business such as collecting accounts receivable, paying debts and so forth.

In most states, this applies also to lawsuits -- if your corporation has breached a contract or injured someone and you did not personally guarantee anything, the plaintiff would be forced to sue your corporation even if the suit is brought after your corporation is dissolved.

Of course, your corporation probably will not have any assets to satisfy a judgment, so this increases the likelihood that a plaintiff will attempt to pierce the corporate veil and attack your personal assets on the theory that your dissolving the corporation was done solely to cheat the plaintiff of its day in court.

If your corporation was properly formed and you have been scrupulous about your corporate paperwork, that argument probably won't stand up in court. Still, if there's any doubt about whether or not your corporation is liable to someone, you should:

-- see if your corporation's liability insurer will issue a tail policy covering any lawsuits brought from the date of dissolution until the expiration of the appropriate statute of limitations period (usually three years). If it does, have your corporation buy the tail policy before it dissolves

-- talk to your attorney for advice if someone has threatened to sue you, or something has happened (for example, a slip and fall accident) that you know is likely to lead to a lawsuit

-- if you don't know of any pending or threatened lawsuits, publish a legal notice in two or three local newspapers announcing to the world that you are dissolving the corporation -- many states require such publication, but even those that don't will often bar any lawsuit against your corporation that isn't brought within a certain time period (usually 90 days) after the legal notice is published

2. Does the corporation have any debts for which I would become personally liable if it shuts down? Generally, if you haven't personally guaranteed any of your corporation's debts, only your corporation will be liable (see above). However, some states have statutes imposing personal liability on shareholders of a dissolved corporation (that's you) for certain corporate debts. For example, in New York the five largest shareholders of a closely-held corporation are liable for wages and benefits due to employees when a corporation dissolves. Talk to your lawyer and make sure there aren't any statutes like that to worry about.

3. Does the corporation have net operating loss carryforwards or other tax benefits that will expire if I shut down? Even if there's no concern about liability, there may be good tax reasons for keeping your corporation alive, at least for a while. If your corporation is carrying forward net operating losses from prior years, you will lose these when you dissolve your corporation. Your accountant or tax advisor will tell you whether these carryfoward losses can be used to offset income from your other activities in future years. If they can, then consider whether the cost of keeping the corporation on life support justifies the tax savings.

4. Will there be an income surprise if I shut down this year? When a corporation dissolves, its income is taxed twice -- once when the corporation shuts down and a second time when its assets are distributed to the shareholders (that's you). If your corporation owns assets that have appreciated in value, you will be clobbered with income tax on the full amount of the gain. If your corporation has taken aggressive depreciation deductions during its existence, some of those deductions may be recaptured when your corporation is dissolved.

5. Will I be starting another new business next year? If none of the above apply, ask yourself if there's a chance you will start another business next year. If so, it's a lot easier (and cheaper) to change the name of your existing corporation and keep on keeping on than forming a new one.

Cliff Ennico ( is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at