Voluntary Dissolution Definition

What is Voluntary Dissolution?

What is the definition of voluntary dissolution? Dissolution describes the legal process for closing a business. A dissolution can be voluntary, judicial, or administrative. Judicial dissolution occurs when a shareholder successfully sues the directors for acting illegally, oppressively, or fraudulent — or for misapplying or wasting corporate assets. The government may order an administrative dissolution if you don’t pay taxes, file annual reports, or meet other legal requirements.

On the other hand, a voluntary dissolution means the corporate shareholders have approved a vote to close the company. The owners of a limited liability company can also agree to a voluntary dissolution if allowed in the Operating Agreement. Once approved, the company will file documents with the state, wind up the business affairs, and distribute assets to shareholders. 

Voluntary Dissolution Benefits

Voluntary dissolution advantages include placing a timeline on creditors’ claims and controlling the details of liquidation.

Filing for voluntary dissolution requires you to give notice of the dissolution to the company’s creditors. Dissolution limits the creditors’ claims unless you have guaranteed the company’s debts. It’s a best practice to inform lenders, suppliers, and anyone else to whom the company owes a debt about the closing. Successfully providing notice ends the shareholders’ liability for late claims.

When choosing voluntary dissolution, the corporate directors can create the timeline for closing and appoint their own liquidator. A voluntary dissolution happens according to the individual terms set forth in the Operating Agreement or Corporate Bylaws. Some business owners set a dissolution date when forming the legal entity, while others vote to dissolve later. In a judicial or administrative dissolution, the details of the liquidation will be set by law or judicial order.

Voluntary Dissolution Considerations

Voluntary dissolution advantages also include the fact that a dissolution accomplishes a permanent liquidation of the business. Valuable assets are sold, debts are paid, and any remainder goes to the owners. 

Voluntary dissolution disadvantages include the unfortunate fact that employees will have to be let go. You’ll also need to cancel registrations, permits, licenses, and business names, file additional paperwork with the IRS, and pay final taxes. However, voluntary dissolution is a natural end for a business when it isn’t profitable or the owners want to take on new ventures.

What Are Other Names for Voluntary Dissolution?

Here are some examples of other names for voluntary dissolution:

• Voluntary liquidation
• Going out of business
• Winding-up
• Termination

Winding-up occurs when you close operations and pay off creditors. Termination happens after you have filed all the paperwork to end the business.

Summary: Voluntary Dissolution Definition

Voluntary dissolution means the shareholders or owners have voted and decided to close the business. To complete a voluntary dissolution, the company will wind up operations, liquidate assets, pay creditors and taxes, and distribute any remaining assets to owners.