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How Are Debts Paid When a Business Closes?

Corporate dissolution tips in Oregon

Although an Oregon corporation can theoretically continue indefinitely, in practice many businesses choose to wind up their affairs at some point. Whether it is due to a voluntary decision by the shareholders or the consequence of unfavorable economic conditions, dissolving a corporation is not as simple as hanging a “CLOSED” sign on the door. Shareholder and corporate officers alike need to be aware and follow the proper dissolution procedures for corporations to ensure they are not held personally liable for any outstanding business debts.

“It’s not unlike the estate planning process,” says Kimball H. Ferris, of Miller Nash Graham & Dunn in Portland. “You’ve got to collect all the assets, identify all the liabilities, make proper provision for all of the creditors—including paying all taxes.”

Though Ferris notes that the process is relatively simple, here are some basic steps to consider before closing your Oregon business:

1. File Your Final Paperwork With the IRS.

Even if you are no longer actively conducting business, your corporation still needs to report its final taxable activities to the IRS, as well as state and local authorities. Make sure the corporation has made its final tax deposits, including employee withholding taxes, and you have issued any necessary W-2s or 1099s. You may also need to report the sale or exchange of any business assets as part of the closing process.

2. File Articles of Dissolution.

Just as you filed articles of incorporation when starting a business, you must also file articles of dissolution to officially close it. Articles of dissolution are filed with the Oregon Secretary of State. The articles should contain the date the dissolution was authorized and the result of any shareholder vote on the action.

“In the old days,” says Ferris, “there was a formal plan of dissolution, and liquidation would be presented by the board to the shareholders. Then that plan would be filed along with the articles of dissolution. It’s become a little less formal now, but it’s still a good idea to go through those steps, because they create a very good discipline, which is really the main thing you’re looking for in this process.”

3. Notify All Known (and Unknown) Creditors.

The decision to dissolve a corporation does not automatically invalidate its debts. Remember, a dissolution is not a bankruptcy, so your corporation will still need to deal with its creditors, vendors, unpaid employees, and anyone else who is owed money or property. Under Oregon law, a corporation must “notify its known claimants in writing of the dissolution at any time after its effective date.” The notice must give the claimant at least 120 days to file a claim.

The dissolved corporation must also file a public notice “in a newspaper of general circulation” in the county where it had its principal office. This notice targets any unknown claimants. As a general rule, unknown claimants may take legal action within five years of the date the notice was published to recover any money it is owed.

4. Distribute Any Remaining Assets

The corporation's board of directors or shareholders should adopt a formal liquidation plan to manage the orderly payment of claims and distribution of assets. Keep in mind, dissolution does not automatically transfer title to any assets under Oregon law. Every asset of the corporation must be distributed to a creditor, claimant, or shareholder. If a person entitled to a distribution of corporate assets cannot be located within one year of dissolution, Oregon law mandates the asset in question be reduced to cash and deposited with the Department of State Lands, which will hold the funds until the person appears to claim them.

These are just a few of the legal issues that need to be addressed when dissolving an Oregon corporation. A qualified Oregon business attorney can advise you on more specific steps applicable to your corporation’s unique circumstances.

And remember: “Carefully think through all the assets, liabilities, ramifications—that’s really the main thing,” says Ferris. “Take your time, be careful, and don’t be in a hurry.”

For more information on this area, see our overview of mergers and acquisitions.

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