Zombie Companies: Real, Scary
November 1, 2016
Zombie Companies: Killing the Corporate Walking Dead
When companies fail to file their annual reports, or [fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][fail to] do other things which can cost them their limited-liability protection, often the state in which the company was organized or incorporated will send them a notice of “Administrative Dissolution”. Despite the plain meaning of the word “dissolution,” the state action to which this notice is related does not do what one might expect. That is, it does not dissolve the company, per se, ending its existence.
The Notice of Administrative Dissolution puts the recipient company on notice that (1) they have lost their limited-liability protection, and (2) they cannot legally continue to operate the business, except to wind-up the business of the company. (“Winding-up” the business of a company means closing down all its accounts, paying its creditors, and employees, and preparing to cease operations. It’s the opposite of winding up a wind-up toy; so, that’s kind-of counter-intuitive.)
Administrative Dissolution does not effectively end a company’s existence. Read that again, and let it sink in. In Tennessee, under Title 48, Chapter 64, Part 2, Section 202(c) of the Tennessee Code Annotated, the law says, “A corporation administratively dissolved continues its corporate existence but may not carry on any activities except that necessary to wind up and liquidate its assets and affairs under § 48-64-106 and notify claimants under §§ 48-64-107 and 48-64-108.” (T.C.A. § 48-64-202(c)) In fact, under T.C.A. § 48-64-202(d), “The administrative dissolution of a corporation does not terminate the authority of its registered agent.”
And for those of you out there who think you’ve found a “loophole”—“Hey, my company is an LLC, not a ‘corporation.’ That must not apply to my company!”—think again! Both LLCs and corporations administratively dissolved continue their corporate existence, but neither may [legally] carry on any activities except those necessary to wind-up and liquidate their assets and affairs and notify claimants (i.e., creditors). (Bagwell, 2014)
What to Do If You Want to Keep Operating Your Business
If you do not want to close down your business, you should call the Department[s] of Revenue (if in Tennessee; if in another state, your state’s agency that reports to the State Treasurer and is responsible for collecting taxes), and catch up on any back taxes, penalties, and / or fines you may owe. This process should be completed in every state in which you do business.
Then, you should contact the Office of the Secretary of State in the state in which your company is organized or incorporated, and catch up your LLC Registration Renewal / Annual Report filings, along with any other past-due filings. It’s a good idea to actually call and speak with a person in the Office of the Secretary of State who can tell you exactly what documents you need to file.
Finally, before actually filing these documents with the Office of the Secretary of State, you should connect with a business lawyer and ask them to review your filings to ensure everything is in order. This is also a great time to purchase, for a flat fee, a legal risk assessment for your business, which will help you make smart strategic legal decisions for the foreseeable future.
What to Do If You Want to Close Your Business
If you want to close down your business, there are several things you need to do, first. The first thing you need to do is hire and consult with legal counsel. Make sure the attorney you hire:
- Maintains a strong reputation;
- Has expertise in the business law;
- Holds a good track record with similar matters in terms of size, scope, and the business legal issues;
- Is accessible and responsive to you;
- Speaks clearly and understandably to you, and is patient when explaining legal concepts and issues;
- Understands your business to the extent necessary to represent you;
- Has no conflicts of interest;
- Has feasible billing rates; and
- Is willing to offer alternative fee arrangements, which compensate attorneys based on a structure other than hourly billing.
You also will need to hire and consult with one or more accountants to help do a final accounting and file your taxes. Work with your attorney and accountant to wind-up all the affairs of your business, put them in order, and close the company. Listen carefully to their advice, and follow it or get a second, qualified opinion before taking permanent action that could impact your (or others’) legal rights.
Selling Your Business: Bringing Your Company Back from among the Walking Dead
Consider selling your business, if that is a viable alternative to closing it down. Shareholders, unaffiliated third parties, and buyers at auction are the principle buyers of businesses, and a good business broker can help you connect to them. If you’re planning to sell the business, you should hire and consult with a business valuation expert. Finally, you may also want to hire and consult with a public relations or corporate communications specialist to ease the company’s transition under new ownership or new management, and to prevent causing unnecessary damage to the brand.
These considerations are the tip of the iceberg, even when only contemplating the preliminary considerations. If you start the process of closing or selling your business by hiring a business attorney, they can guide you through the process much more easily, effectively, and efficiently than you could ever manage on your own.
ExecutiveLP® offers robust, cost-effective legal support for businesses engaging in Mergers & Acquisitions (“M&A”) transactions. If your business is seeking to be acquired, contact one of our business attorneys to guide you through the legal aspects of that process. In the alternative, if you really do want to just close down your business, ExecutiveLP® can help you do that, too. Whatever your corporate wind-up needs are, we can help.
Don’t let your zombie company terrorize your life. Put it down mercifully or find a way to breathe new life into it as you pass it on. The worst thing you can do is nothing.
- Bagwell, N. R., III. (2014, September 03). How to Kill a Corporation-Administrative Dissolution Is NOT Enough. Retrieved November 01, 2016, from http://executivelp.com/leadership/how-kill-corporation-administrative-dissolution-not-enough/
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