Business Dissolution and Reinstatement

General Information

A business entity ends its existence by being “dissolved.” There are four basic ways a business may be dissolved:

1. Voluntary Dissolution – following a decision to end operations, the business files Articles of Dissolution with the Kentucky Secretary of State’s office.
2. Involuntary/Administrative Dissolution – The Secretary of State may administratively dissolve a business entity for non-compliance with various Kentucky business laws. An administratively dissolved business may not carry on any business except that necessary to wind up its affairs and liquidate its assets. KRS 14A.7-020(3). Often, business owners of an entity that has been administratively dissolved did not intend for this to occur, and must then apply to the Secretary of State for reinstatement to continue business operations.
3. Judicial Dissolution – if an owner or manager of a business feels like the business should cease operations, but other owners/managers disagree, the eager party may petition a court for an order mandating dissolution. A court will grant such a request if it appears it is not reasonably practicable to continue business given disagreement among the owners. See KRS 271B.14-300, KRS 275.290, KRS 362.1-803, and KRS 362.2-802.
4. End of Duration or Occurrence of a Dissolving Event – in some cases, a business may wish to specify a set period of duration for a business’ existence or an event that will end the business’ life. If such provisions were not initially included in the business formation document, they may be added later through an amendment.

Purpose/Necessity

After an event occurs that mandates dissolution, a corporation may and an LLC shall file Articles of Dissolution. KRS 271B.14-030, KRS 275.315. An LLP may file a Statement of Dissolution and a Limited Partnership or LLLP shall file a Cancellation of Certificate of Limited Partnership. KRS 362.1-805, KRS 362.2-203.

In addition to it being a legal requirement, there are three practical reasons why a business should ensure it is properly dissolved:

1. Continuing Liability
   Until a business is officially dissolved, its owners or managers continue to bind the business by their actions. If an owner or manager enters into a contract, takes on a loan, purchases real estate, etc. from a person without knowledge that the business is ending, the new obligation will be enforceable against the business. See KRS 271B.8-010, KRS 271B.8-410, KRS 275.135, KRS 362.1-301, KRS 362.2-402. Accordingly, other business owners will be financially responsible for any such debts incurred to the extent of their interest.
   However, the filing of Articles of Dissolution constitutes notice of dissolution and thereby a limitation of authority. See KRS 271B.14-050, KRS 275.305(2), KRS 362.1-805(3), KRS 362.2-804. This prevents third parties from enforcing new obligations against the business.
2. Observe Formalities
   In general, business owners are not personally liable for business debts and obligations. However, the failure to observe basic business entity formalities may allow a court to pierce the corporate veil and take away this liability protection, thereby holding its owners responsible.
   Owners might be inclined to, for example, forego filing an annual report and allow the Secretary of State to administratively dissolve the business, but doing so will cause the entity to go into “bad standing” with the state and serve as evidence that formalities were being ignored. A better practice for owners seeking to conclude a business would be to file Articles of Dissolution, thereby eliminating a rationale for piercing the corporate veil and imputing business debts to owners personally.
3. Exhibit Professionalism
   Simply put, a reputable business concludes operations by formally dissolving. It is brings closure to the business’ existence and serves as official notice of that fact.

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