Most U.S. corporations operate as C corporations -- a status that provides legal distance between the owners and the business and some protection from liability for the corporation's debts. C corporations are taxed at the corporate level, and individual owners are taxed for their portion of the business's profits. Even though a corporation has a technically unlimited lifespan, many businesses fail, and the corporations that control them are often dissolved. Proper planning for dissolution can help soften the blow for the various stakeholders of the company.
A business generally fails when it is unable to generate sufficient revenue to cover its expenses and debts. C corporations can apply for bankruptcy protection under Chapter 11 and continue functioning as they restructure their obligations, or a court-appointed receiver might take over the company's affairs. A corporation that goes through a Chapter 11 bankruptcy can re-emerge more streamlined, although it may need to restructure its ownership, management or business lines.
Dissolution effectively ends the legal existence of the corporation and is done through a legal filing with the state of incorporation. Because the C corporation exists separately from its shareholders and provides its owners with limited liability, some owners are encouraged to simply let the company default on its obligations and then dissolve it. Recognizing this, state legislatures, starting with Delaware, have enacted "saving statutes" that can extend liability to managers and shareholders in the event of an opportunistic or fraudulent dissolution.
Most C corporations should have provisions in their bylaws that establish procedures for winding up the business's affairs. Management usually will continue running the business as long as necessary to close out all existing contracts, pay off obligations and distribute the remaining assets. If the dissolution results from conflict among shareholders or a potential exists for fraud and abuse, a court may appoint a liquidator to conduct the dissolution, and this officer will have the power to conduct winding-up operations.
Because of the limited liability a C corporation gives its shareholders, a creditor is seldom able to satisfy its claims by seizing the shareholders' personal property. When a corporation dissolves, creditors are often unable to get payment, which is why many state dissolution statutes, including Arizona's, require the corporation to notify known creditors of the pending dissolution and give them at least 120 days to send in their claim. If the corporation rejects the claim, the creditor can then file a legal action against the corporation within a specified period before his claim is barred forever.