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Types of business dissolution

On Behalf of | Apr 19, 2022 | Business & Commercial Law |

One common misconception about businesses is that they are immortal entities. However, the reality is that businesses can come to an end. There are a variety of reasons why a business might dissolve, ranging from financial difficulties to disagreements among owners.

When a business is no longer profitable or the owners want to move on to other opportunities, dissolving the business is one option. There are various ways to dissolve a business, and the method chosen will depend on the type of business, state laws, and other factors. Here are the most common types of company dissolution:

Voluntary dissolution

There are cases in which all the shareholders, or at least the majority of them, agree to dissolve the business. Where it requires a majority vote, the shareholders must have previously agreed to dissolution by majority vote. Usually, this happens in closely held businesses where the majority of the shareholders’ goals are aligned. 

Involuntary dissolution

The state can step in and order the dissolution of a company if, for instance, the company incorporation was fraudulent, it’s found to abuse its power or if it fails to meet legal obligations such as paying taxes, etc.

Judicial dissolution

A shareholder usually files it. In this case, the court can order the dissolution of a business if the leadership has acted illegally and if corporate assets have been wasted such that shutting down the business is in the best interests of the shareholders.

Additionally, the court can also order dissolution if the directors cannot agree on the direction in which to take the business and the shareholders cannot break the deadlock, causing the business to suffer irreparable harm. 

In any case, the dissolution of a business can be a complex process. As such, it is important for businesses to have a plan in place in case they need to dissolve.