Legal Studies 3050

Section 4: Business Challenges and Dissolution of a Business

Lesson 2: Dissolution of a Business

There are a variety of reasons businesses end, and these can be categorized as either voluntary or involuntary. For instance, some businesses may wish to continue their business operation, but may be forced to close down due to legal or economic factors beyond their control.


Voluntary Dissolution

Some businesses dissolve because there is no longer a demand for the products or services they provide. Some businesses dissolve because they are no longer able to profitably compete. Sometimes owners simply decide to close down because their interests change.

Depending on the type of organizational structure, voluntary closure can be relatively simple. When the owner of a sole proprietorship stops doing business, its operation automatically ceases.

Partnerships, by their very nature, are not intended to last forever. If successful, they usually tend to incorporate; if unsuccessful, they will cease operations. The closures of partnerships are more complicated than sole proprietorship. One reason for this is that it is necessary for the partners to file a notice of dissolution. This is very important because, until this has been done, all partners remain liable to the partnership's creditors. Furthermore, a partnership is automatically dissolved in the event one of the partners dies or becomes personally bankrupt.

An incorporated business is different from the above two forms, in that it is a legal entity unto its own. Its existence is separate from its owners and it has permanence, even though the shareholders and directors of the company may change over time. Therefore, in order to dissolve a corporation, some action needs to be taken by the company itself.

The usual manner in which companies dissolve is through a special resolution of its shareholders, in which an "Article of Dissolution" is passed. Notice of such a resolution is filed with the appropriate government authority, and, from that time onwards, the company is no longer permitted to carry on business except to do what is necessary to finalize the closure. This includes collecting its accounts receivable, paying debts, and dividing any remaining money among its shareholders.