I have the privilege of representing business owners in many capacities. A favorite service that I provide to my clients is assistance with business formation. For most people, this is an exciting endeavor because they are starting a new business and are embarking on an important step in realizing their entrepreneurial dreams. There are many reasons to form a business entity, and the reasons are fairly obvious (liability protection, insurance coverage, tax considerations, and accounting incentives). The reasons to dissolve a business entity are less obvious (and less exciting), but equally important.
Here’s Why You Should Dissolve Rather Than Abandon Your Business
All good things (usually) come to an end for one reason or another. Businesses are no exception to this general rule. Businesses “end” for a variety of reasons, including an asset sale, or, the sale of property owned by a real estate holding company. I have several clients who own “shell” companies that legally exist with the Pennsylvania Department of State, but do not own any assets and/or do not otherwise conduct business. Some of these “shell” companies have existed for decades without any relevant business activity.
These clients ask the obvious questions when I tell them that they should formally dissolve their business: What’s the big deal? If the business does not own anything, there is no need to worry about liability – why should I care? I haven’t filed taxes for the business in years – can’t we just let it exist forever?
The purpose of this article is to briefly identify five important reasons to formally dissolve your business. At the outset, it is important to note that the dissolution can be very complicated, and time-consuming, and the process varies in key respects for different entities (e.g. an LLC vs a Corporation). If you own a “shell” company, or are considering abandoning your business without consulting an attorney, consider the following:
1. Your business is subject to fraud.
Much like your personal name and information, your business has an identity that can be fraudulently used by a third party to purchase equipment, property, enter into agreements, etc. If you are the owner of a business that is subject to fraudulent or illegal activity, and you have not operated that business as a living and breathing entity (e.g. keeping corporate records, annual meeting minutes, etc.), an aggrieved party may be able to pierce the corporate veil and pursue claims against you personally.
2. Your business can be sued.
As long as your business exists, it is subject to suit and potential judgment(s) in connection with various disputes.
3. Continuous ownership of a business without activity can turn into a violation of Pennsylvania law.
Business entities are required to file a decennial report every ten years with the Pennsylvania Department of State. Allowing a business to simply exist in the hopes that it will be forgotten after decades is not only a misunderstanding, it is technically illegal.
4. Failure to formally dissolve a business entity can cost your family time and money.
Many of our estate planning clients have started a business at some point and failed to formally dissolve the company. We try to catch and dissolve any “shell” companies during the estate planning process, otherwise, it is likely that the business owner’s heirs will have to deal with dissolution down the road. This can become extremely complicated if the business owner is deceased, as many of the required filings include information that only the business owner will know.
5. Your business may owe money that you don’t know about.
Any outstanding liens on the business will be identified through the dissolution process. Failure to resolve these issues may cause the business to continue to incur debt unknown to the business owner.
Pittsburgh Business Attorneys
Victor Kustra is a corporate lawyer at The Lynch Law Group. If you or someone you know needs assistance with the dissolution of a business entity, or any other corporate matter, reach out to Victor today at 724.776.8000 or firstname.lastname@example.org.