Just as new businesses start every day, some businesses must cease activities, wind up their affairs, and dissolve. This can occur for any number of reasons, including bankruptcy or the decision of the owners to stop doing business. Any New Jersey business that must wind up and dissolve must follow procedures established by state law, which include notification of creditors, payment of debts, and disposition of other assets.
Reasons for Winding Up a New Jersey Business
Businesses may wind up voluntarily or involuntarily. An involuntary dissolution usually results from bankruptcy or a court order in some other legal matter. A court-appointed trustee may handle the dissolution of a business in a Chapter 7 or Chapter 11 bankruptcy case, but in other situations, the management of a business must handle the winding up process itself. Court-ordered dissolutions in non-bankruptcy cases are rare, but might occur in a dispute between partners in a joint venture or some other single- or limited-purpose business entity.
Shareholder or partnership agreements may include provisions for mandatory dissolution if certain events occur. Voluntary dissolution usually results from a decision by the business’ owners, made according to the procedures established in a shareholder agreement, partnership agreement, or other management agreement.
Steps You Should Take in Order to Voluntarily Wind Up a New Jersey Business
In a voluntary dissolution, shareholder, partners, or members in a limited liability company (LLC) are responsible for payment of the business’ debts, compliance with any contracts still in force, and equitable distribution of any remaining assets.
1. Identity and Value of Assets. Business owners must determine what assets the business owns and whether or not they can sell those assets. Assets include cash, securities, accounts receivable, inventory, equipment, intellectual property, and real property.
2. Liabilities. A business must satisfy its outstanding debts prior to dissolution. Tax debts generally receive the highest priority, including federal income and payroll taxes, state income and payroll taxes, and local taxes. Other liabilities include leases on real property or equipment, payroll obligations, bank loans and credit cards, and accounts payable. Business owners may have personal liability on some business debts, especially loans to new businesses that require individual co-signers.
3. Contractual Obligations. Businesses enter into multiple contracts with owners, employees, customers, vendors, and others as part of doing business. The winding-up process requires a business to close these contractual relationships, taking care to avoid any action, or omission of action, that could give rise to liability for breach of contract. With employment contracts, a business must fulfill any obligations it undertook with regards to termination of employment, which might include notice to the employee or severance payments.
4. Plan for Payment of Liabilities. Again, tax debts generally receive higher priority than all other debts, and should be first on the list for payment. Debts that could lead to personal liability for business owners or officers should also receive high priority. Secured debts should be separated from unsecured debts, and care should be taken to ensure that property used as collateral is used to pay the debt it is securing.
5. Distribution of Remaining Assets. Assets remaining after the payment of all liabilities, if any, should be distributed to the owners. A business’ formation or operating documents may include procedures for distributions.
The business attorneys at Samuel C. Berger, PC offer fixed-fee packages of legal services in New York and New Jersey. We assist businesses and entrepreneurs with a wide range of legal issues, including every phase of the business life cycle, from formation to dissolution. To speak to a member of our skilled legal team, contact us today online or at (212) 380-8117.
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