Sometimes a business model fails, a market changes or the owners are simply ready to move on. Whatever the reason, closing a Massachusetts business the right way protects the owners from claims, tax notices and lawsuits that can surface long after the doors close. This guide covers how to dissolve an LLC or a corporation, how winding up works, and a checklist for the practical steps.
- Why not just walk away?
- The three stages of closing a business
- Dissolving a Massachusetts LLC
- Dissolving a Massachusetts corporation
- Winding up: creditors first, owners last
- Business closing checklist
- Getting help closing your business
Why not just walk away?
It’s tempting to lock the doors and stop filing paperwork. The old saying applies: if you walk ten miles into the woods, it takes ten miles to walk out. A business that simply stops operating still owes its debts, its taxes and its final wages, and nothing has been done to settle them in the right order.
The state will eventually dissolve a business that stops filing. The Secretary of the Commonwealth can administratively dissolve an LLC that fails to file annual reports for two consecutive years, after 90 days’ notice (G.L. c. 156C, § 70). Corporations can be dissolved the same way for missed annual reports or unpaid taxes. An administratively dissolved company still exists, but only to wind up its affairs, and owners are often surprised to learn it’s happened. A planned closing is cleaner and usually cheaper.
The three stages of closing a business
Whether your business is an LLC or a corporation, closing it happens in three stages, in this order:
- Dissolve. The owners formally decide to end the business, following the company’s own documents and Massachusetts law.
- Wind up. The company finishes its business, collects what it’s owed, sells its assets, and pays or provides for its debts.
- End its legal existence. An LLC files a certificate of cancellation after winding up. A corporation files articles of dissolution, usually before it winds up.
Skipping a stage, or doing them out of order, is how owners end up personally exposed to claims after they thought the business was gone.
Dissolving a Massachusetts LLC
An LLC dissolves at a time or on an event set out in its operating agreement, by written consent of all the members, or by court order (G.L. c. 156C, § 43). Start with your operating agreement. It may set a different vote, a buyout right or a required procedure. If there’s no written agreement, plan on getting every member’s written consent, and keep the signed decision with the company records.
Dissolution doesn’t end the LLC. It continues to exist so it can wind up its affairs (§ 45). Once winding up is complete, the LLC files a certificate of cancellation with the Secretary of the Commonwealth’s Corporations Division (§ 14). The filing fee is $100. The certificate states the LLC’s name, its federal employer identification number, the date its certificate of organization was filed, and the reason for cancellation.
One requirement catches many owners: the LLC must file every annual report and pay every fee it owes the state before the certificate can be filed. If annual reports have lapsed, budget for catching up.
Dissolving a Massachusetts corporation
A corporation follows the Massachusetts Business Corporation Act, G.L. c. 156D. Check the articles of organization, bylaws and any shareholders’ agreement first. If they set a dissolution procedure and say it’s the only one, that procedure controls. Corporations formed through online services often have articles that say nothing about dissolution, and then the statute’s default rules apply.
Under the default procedure (§ 14.02), the board of directors proposes dissolution and the shareholders vote on it. Every shareholder must get notice of the meeting, including shareholders who don’t otherwise have voting rights. Unless the corporation’s documents set a different threshold, the proposal needs two-thirds of the shares entitled to vote, and separate voting groups can change the count. The shareholders can skip the meeting if every shareholder entitled to vote consents in writing.
After the vote, the corporation files articles of dissolution with the Secretary of the Commonwealth (§ 14.03), stating its name and the date dissolution was authorized. It then winds up. The Department of Revenue must also be notified: according to the DOR, that means a letter on company letterhead, signed by an officer, stating the corporation’s intent to dissolve, with a copy of the vote attached.
Dissolution doesn’t stop a lawsuit by or against the corporation, doesn’t change the duties directors and officers owe, and generally doesn’t affect title to the corporation’s property (§ 14.05).
Winding up: creditors first, owners last
Winding up is the stage where the most mistakes are made. The company should take on no new business beyond what’s needed to close, and it should work through these tasks:
- Finish or settle open contracts and projects
- Collect what the company is owed
- Make a list of company assets, then sell or distribute them
- Prosecute or defend any lawsuits
- Pay, or make reasonable provision for, all debts, including taxes and contingent claims
The order of payment matters. An LLC pays creditors first, including members or managers who lent the company money, then distributions already owed, and only then returns money to members (G.L. c. 156C, § 46). A corporation likewise must pay or provide for its debts and obligations, including to taxing authorities, before distributing anything to shareholders. Paying the owners before the creditors invites claims against the people who received the money. If the company can’t pay everyone in full, get advice before distributing anything.
Giving notice to creditors
Notice isn’t always required, but for a corporation it’s often the wisest step. The Business Corporation Act sets out procedures for notifying known claimants by letter and unknown claimants by newspaper publication. Following them starts the clock on claims and limits the assets creditors can reach, which protects shareholders and directors. A claim from an unknown claimant is generally barred unless it’s brought within three years after the notice is published. The contents of a notice, and what assets must be held back for potential claims, follow specific rules. See Dissolved but Not Done: What a Massachusetts Company Still Owes for how creditor claims work after you file.
Business closing checklist
This checklist covers the practical steps that apply to most businesses. Your situation may call for more.
Collect accounts receivable
Collect what’s owed to the business before closing, and if possible before customers learn you’re closing.
Reduce inventory
Sell as much inventory as you can to raise money for creditors. If sales aren’t possible, consider donating it, and ask your accountant whether a donation is deductible.
Notify customers
Tell clients and customers the business is closing, and follow any obligations in your contracts with them. A contract review can show what you owe on the way out.
Deal with the lease
Read your commercial lease for its termination terms. Many require advance written notice. If you can’t stay for the full term, understand what leverage the landlord has before you negotiate, since landlords often demand the full rent.
Pay employees correctly
Give employees notice of the closing. Under the Massachusetts Wage Act, employees you let go must be paid in full on the day they are discharged, including earned vacation pay, and late wages can bring mandatory triple damages.
Pay off or settle debts
Where full payment isn’t possible, creditors will sometimes settle for less once they know the business is closing. Get a payoff letter or receipt for each debt paid or settled.
Watch the bulk sales rule
Under G.L. c. 62C, § 51, a business selling or transferring its assets must notify the Commissioner of Revenue in writing at least five days before the sale and file its returns and pay its taxes. Otherwise, the Commonwealth gets a lien on the assets.
File final tax returns and close tax accounts
- Final federal and Massachusetts income or excise returns, prepared with your accountant
- Final payroll filings, including IRS Forms 940 and 941 and state withholding and wage reports
- Final sales, meals and withholding returns, then close those registrations in MassTaxConnect. See the DOR’s guide to closing your business registration
- Close the company’s unemployment insurance account once final returns are filed
The tax information here is general information, not tax advice. Talk with your accountant about the company’s final returns.
Close accounts, licenses and policies
- Keep the bank account open until final checks clear and final bills are paid, then close it with any merchant and payroll accounts
- Cancel business credit cards once final charges clear, and confirm the closings in writing
- Cancel local licenses and permits, and any business certificate (DBA) filed with your city or town
- End or assign leases, contracts and subscriptions
- Ask your insurance carrier whether you need “tail” coverage for claims made after closing
Keep records and stay reachable
Keep the company’s records, especially tax and employment records, for several years. Give former customers and vendors a way to reach you. It shows good faith if questions come up later.
Getting help closing your business
Closing an LLC or corporation is interdisciplinary work. Your business lawyer, your accountant and any other advisors should be involved so the owners keep the liability protection the company was formed to provide. Learn more about our Massachusetts business law services, or contact our office to talk through closing your company.
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About the Author
Richard Alan Gaudet, Esq. is a Massachusetts attorney at the Law Offices of Richard Alan Gaudet, LLC in Middleton, Massachusetts, who advises clients on business closures, dissolution and wind-up. His practice focuses on professional license defense, business law and litigation, family law, and landlord representation, serving clients across Northern, Eastern, and Central Massachusetts. Reach him at 978-273-8337 or rgaudet@gaudetlawoffice.com. Office: 35 Village Rd., Ste 100, Middleton, MA 01949.
ABOUT THIS ARTICLE
This article was prepared by a Massachusetts attorney and is provided solely for general informational and educational purposes directed to members of the general public. It does not constitute legal advice and does not create an attorney-client relationship. The law applicable to any particular situation depends on the specific facts and circumstances of that matter. Readers are encouraged to seek the advice of a licensed Massachusetts attorney before taking any action.
