Calling It Quits: Dissolving Corporations in Michigan
Background
The dissolution of a for-profit Michigan corporation can come about in a number of ways—both voluntary (such as after, or as the result of, an asset sale, shareholder dispute, financial distress, retirement, or expiration of the period of duration stated in the corporation’s articles of incorporation) and involuntary (due to a court order or the failure to file annual reports). This article focuses on the voluntary dissolution process.*
It is often a misnomer, even amongst attorneys, that a dissolved corporation doesn’t exist or that it can’t be sued. Sometimes, incorrectly, decisions are made to “dissolve” a corporation in an effort to avoid or stop creditor claims or lawsuits with the thought that they will simply disappear. However, a dissolved corporation under the Michigan Business Corporation Act (the “Act”) (MCL §450.1101 et seq.) “shall continue its corporate existence but shall not carry on business except for the purpose of winding up its affairs” such as selling assets and collecting accounts receivable, paying debts and liabilities, taking all other acts related to the liquidation of its business and affairs. MCL §450.1833. “A dissolved corporation, its officers, directors and shareholders shall continue to function in the same manner as if dissolution had not occurred,” MCL §450.1834. A dissolved corporation “may sue and be sued… in the same manner as if dissolution had not occurred”. MCL §450.1834(e).**
Corporate Approval/Certificate of Dissolution
A typical voluntary dissolution of a Michigan corporation requires both director and shareholder action (notice, meeting and an affirmative vote) or written consent under MCL §450.1801(c) and MCL §450.1804. Once approval has been obtained, in order to effectuate the dissolution, a Certificate of Dissolution (Form CSCL/CD-531) must be filed with the Michigan Department of Licensing and Affairs, Corporations, Securities & Commercial Licensing Bureau (“LARA”). Typically, a Certificate of Dissolution will not be filed until all of the corporation’s affairs are wound up. The effective date of the dissolution is the date LARA receives the certificate, not the filing date. MCL §450.1806(1).
Administrative Issues/Personal Liability
The winding down of an entity requires careful attention to details and compliance with all applicable laws. The company should work with its attorneys and accountants to make sure nothing falls through the cracks. The failure to take charge of the process could lead to personal liability for creditor and other claims for any individual that controls, manages, or directs the entity. This includes, but is certainly not limited to, paying all wages and commissions and related withholding tax obligations, issuance of W-2s and 1099s, filing final state and federal tax returns, submitting final unemployment insurance agency (UIA) filings, paying all applicable taxes and dealing with creditor claims.
Tax Clearance Certificate
The instructions to the Certificate of Dissolution state that within 60 days after submitting the Certificate of Dissolution, a tax clearance should be requested from the Michigan Department of Treasury using Form 5156, Request for Tax Clearance Application. Once the Tax Clearance Application is submitted, the Michigan Department of Treasury can determine whether the business owes any outstanding taxes. After any such obligations are resolved, the Michigan Department of Treasury will provide the company with a certificate of tax clearance, which it should save with its books and records.
Other Forms
Among many other things in connection with its cessation of business, the corporation should also be filing (a) a Notice of Change or Discontinuance with the Michigan Department of Treasury using Form 163, and (b) a Notice of Change with the Michigan Unemployment Insurance Agency using UIA Form 1772.
Notice to Claimants—Creating a Time Bar for Claims
Depending on the size of the company, how long it has been in business, the complexity of the business, the amount of indebtedness owed by the company, the type and scope of creditor claims and whether they are disputed, the desire to create an out of court notice and/or publication claims process, and a desire to create a time bar for claims, the Act provides a voluntarily statutory framework for such a claims process and time bar by (a) written notice under MCL §450.1841a (6 month notice), and/or (b) publication in a newspaper of general circulation under MCL §450.1842a (1 year notice).
As stated above, the out of court notice and/or publication claims process is voluntary and not required. Careful consideration should be given as to whether any form of claims process and related bar date would be in the best interest of the corporation or, alternatively, whether it would be better to “let sleeping dogs lie”.
a. MCL §450.1841a – Written Notice (6 month notice)
Under MCL §450.1841a, a dissolved corporation may, but is not required to, “notify its existing claimants in writing of the dissolution at any time after the effective date of the dissolution”. The notice must satisfy the statutory requirements under that section including a description of the information that must be included in a claim, a mailing address where a claim may be sent, deadline (at least 6 months after the effective date of the written notice) by which the dissolved corporation must receive the claim, and a statement that the claim will be barred if not received by the (6 month) deadline. MCL §450.1841a(1)(a)-(d). ”The giving of notice described above does not constitute recognition that a person to whom the notice is directed has a valid claim against the corporation. MCL §450.1841a(2). A claim against the dissolved corporation will be barred if (a) the claimant who was given written notice under §450.1841a(1) does not deliver the claim to the dissolved corporation by the applicable deadline, or (b) the claimant whose claim was rejected by a written notice of rejection by the dissolved corporation does not commence a proceeding to enforce the claim within 90 days from the effective date of the written notice of rejection. MCL §450.1841a(3).
b. MCL §450.1842a – Publication (1 year notice)
Under MCL §450.1842a, in addition to or in lieu of the (6 month) written notice under MCL §450.1841a, a dissolved corporation may, but is not required to, also “publish notice of dissolution at any time after the effective date of dissolution and request that persons with claims against the corporation present them in accordance with the notice”. MCL §450.1842a(1). The notice must be (a) published 1 time in a newspaper of general circulation in the county where the dissolved corporation’s principal office is or was last located, and (b) state that a claim against the corporation will be barred unless a proceeding to enforce the claim is commenced within 1 year after the publication date of the newspaper notice. MCL §450.1842a(2)(a)-(b). Generally speaking, “if the dissolved corporation publishes a newspaper notice in accordance with [MCL §450.1842a(2)(a)-(b)], the claim of [the claimant will be] barred unless the claimant commences a proceeding to enforce the claim against the dissolved corporation within 1 year after the publication date of the newspaper notice…” MCL §450.1842a(3). “A claimant having an existing claim known to the corporation at the time of publication in accordance with [MCL §450.1842a(2)(a)-(b)]. and who did not receive written notice under [MCL §450.1841a—see above] is not barred from commencing a proceeding until 6 months after the claimant has actual notice of the dissolution”. MCL §450.1842a(4).
Conclusion
The decision to wind-down and dissolve a corporation is a major decision outside the ordinary course of business. Hanging the proverbial “going out of business” sign simply won’t cut it. Be smart and work with your professional advisors through the process.If you have questions or would like assistance dissolving your Michigan business, please contact David H. Freedman at Maddin Hauser.
*While Michigan corporations and Michigan limited liability companies each have their own requirements regarding voluntary dissolution, the broad contours of the process are very similar for both types of entities in Michigan. For limited liability companies in Michigan, see generally, the Michigan Limited Liability Company Act (MCL §450.4101 et seq.). See also MCL §450.4801, MCL §450.4804, MCL §450.4805, MCL §450.4806, MCL §450.4807 and MCL §450.4808.
**This is not for an unlimited period of time and, generally, is only until all of the corporation’s affairs are wound up. See Flint Cold Storage v. Department of Treasury, 285 Mich. App. 483 (2009).