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Factors Affecting Dissolution

Businesses usually dissolve because it is no longer operating profitably or its owners are having problems among themselves on how to run the business. Dissolution could be voluntary, that is, it is initiated by the owners.

It could also be started by creditors who may have reason to ask for intervention so that the business could be wound up before it losses more value.

There are many ways to classify the reasons why businesses dissolve. The dissolution may be done voluntarily. That is, by members of the company, which are the shareholders in the case of corporations or partners in case of limited liability company. Dissolution may also be started as an involuntary process. In this case, the creditors are the ones initiating the process to save the business first through a restructuring (when possible); but when it’s not, the business is usually dissolved and its assets sold to pay creditors.

Reasons for Voluntary Dissolution

Voluntary dissolution is initiated by owners of the business for several reasons. One, the owners may have determined that the business is no longer operating at a profit. Second, management may be having problems such that they think it is best to split and abandon the business. Third, it could be that the other owners already abandoned the operation for one reason or another (vacation or health reasons) and the remaining ones could no longer support it. Fourth, the owner or owners may be facing financial difficulties and they would like to monetize the business by liquidating assets.

Financial and Management Reasons for Dissolution

From the above situations, the factors affecting dissolution may also be classified as management or financial reasons. The second and third reasons have to do with management issues. While the first and last reasons are due to financial problems. When the returns are not enough to cover the cost of running the business, it is best to stop the operation. Or, the business is accruing debts that could potentially grow to unsupportable proportions once the business insists on continuing to exist.

Factors Affecting the Speed of Dissolution

The dissolution process may be done informally, that is, without paperworks. The owners will simply decide to stop the operation without notice to the public or the state. This is applicable only for businesses without creditors. For businesses with creditors, the entity is required to formally apply for a dissolution and issue a notice to creditors to file claims so that they can be paid from the remains of the value of the business. Failure to apply for proper dissolution could result to a legal problem for the owner(s) of the business.

How fast or slow will the business dissolve depends on the laws of each particular state. But generally, it will depend on how complex the legal and financial situation of the business is at the time of the dissolution. An incorporated business is more difficult to unwind than businesses with simpler legal structures. The number of creditors and any pending lawsuits and tax problems could also complicate the dissolution process.

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