Dissolution of a Corporate Entity: When Legal Proceedings are Necessary

Corporate building

In South Carolina, there are three types of dissolution processes for a corporation: voluntary dissolution, administrative dissolution, and judicial dissolution. Planning ahead can help avoid a situation where court intervention and litigation is required to wind-up your entity and distribute its remaining assets.

Voluntary dissolution is the process by which a corporation’s members choose to dissolve and wind-up a corporation. Corporations can also be involuntarily dissolved for administrative reasons (such as failure to pay taxes or to follow statutory corporate procedures), or by court decree. If your corporation cannot or is not voluntarily dissolved, for example, it becomes necessary to have the corporation dissolved by court decree, which takes additional time and expense.

To voluntarily dissolve a corporation, there may be important terms in the corporation’s operating agreement that can assist with the process. Most operating agreements have specific provisions and rules for how to dissolve. This process will be easiest when the corporation’s initial documents contemplate an eventual dissolution and set these rules at the outset. Oftentimes, the rules for dissolution contain a vote of the members. Some issues may arise if a corporation continues its existence after all corporate members have passed away or are no longer affiliated with the corporation, and in that case there may be a requirement for a judicial dissolution instead. Trying to anticipate these matters ahead of time will likely save time and expense. A lack of dissolution provisions in an operating agreement will likely mean that the corporation must seek an attorney’s expertise to determine the proper next steps for dissolution.

If for some reason a corporation cannot continue its existence, but it cannot be voluntarily dissolved (for example, if the corporation has no living members or members have abandoned the business), the judicial dissolution process must be followed. A Circuit Court in South Carolina has the authority to issue a court decree dissolving a corporation. Such an action is typically brought by the Attorney General, but it may also be filed by an interested party, such as a shareholder or a creditor. Some statutory reasons for a judicial dissolution include, but are not limited to: misapplied or wasted corporate assets, exceeding or abusing authority, fraudulent actions of the corporation, or the corporation has abandoned its business and has failed to dissolve. The law also allows for a corporation to specifically ask the Circuit Court to supervise its voluntary dissolution under certain circumstances. The court may also order a receiver or custodian to assist with the judicial dissolution process.

It is important to keep in mind that even after a vote to voluntarily dissolve a corporation, or an order requiring the same, the corporation must wind-up and take care of all corporate assets, and distribution of the same. In this sense, the corporation will continue its existence for the sole purpose of winding up its affairs. If there is disagreement among interested parties as to how the winding-up process should proceed, court intervention may sometimes be necessary. There are also very particular procedures for how to officially wind up a corporation, and it is best to consult an attorney on this topic to ensure the process is completed effectively and without other implications, including tax penalties.