Going Out of Business: Revocation or Dissolution?, 1020 RIBJ, RIBJ, 69 RI Bar J., No. 2, Pg. 7
| Position | Vol. 69 2 Pg. 7 |
September, 2020
Introduction
For decades prior to July 1, 2020, when many or most domestic business entities formed under the laws of Rhode Island (including business corporations (“Corporation(s)”), limited liability companies (“LLC(s)”), among others) would reach the end of their operations, whether by being sold in a sale of assets or just going out-of-business, they would usually file final federal and state tax returns and pay any taxes then due. At that point, many such entities would merely cease to file the required annual reports with the Rhode Island Secretary of State (“SOS”). After the failure to file annual reports, the SOS would revoke the charter of the organization. Such passive “death by default” was thought during these earlier times to involve little adverse consequence; it was free of any filing fees or efforts and it was clearly the easiest way to bring “closure” to an entity’s life cycle. The other alternative to bringing the entity’s operations to a close was to comply with the more rigorous statutory SOS procedures prescribed for formal dissolution. These SOS dissolution processes also involved an interaction with the Rhode Island Department of Revenue Division of Taxation (“DOR”). The entity was required, as a prerequisite to filing articles of dissolution with the SOS, to obtain a certificate or letter of good standing (“LOGS”) from the DOR, a process that was rigorous, time-consuming, sometimes onerous, and expensive if professional assistance was employed by business clients.
Not only would lay business people decide on their own to take the easy way out by means of submitting to revocation and forego formal dissolution, it was not uncommon during those earlier years for highly regarded lawyers and accountants to inform their clients to decline to spend the effort, time and money pursuing formal dissolution since there was a belief that such a passive strategy was unlikely to result in any significant adverse consequences. The historical aversion to taking the formal dissolution route may have been eroded in recent years. An entirely anecdotal, casual and amateur “spot check” of accounting professionals recently conducted by the author found a spectrum of views on foregoing formal dissolution running the gamut from the old “business as usual-go the easy revocation route” to “it would be malpractice” not to advise formal dissolution.
The
business decision to take the path of least resistance to
submit to revocation appears to have been well established
and widespread. Historically, there have been many more
revocations than dissolutions. For example, according to
records obtained from the SOS, in 2019, for all inactive
entities registered with the SOS there were a total of 5,886
revocations compared to just 1,379 formal dissolutions. A
breakdown by form of entity for 2019 reveals that: for
Corporations there were 1,048 revocations as opposed to 351
dissolutions, and for LLCs there were 3,064 revocations as
opposed to 910 dissolutions. A breakdown for 2015 indicates
an unbalance of revocations to dissolutions for Corporations
and LLCs of similar or greater proportion.
Discussion of Statutory Provisions
There follows a discussion of the ramification of revocation versus dissolution just for Corporations and LLCs under the law applicable today (in addition to the law applicable prior to July 1, 2020). The purpose of this article is to focus on the current and past procedures for revocation and dissolution applicable specifically to Corporations organized under the Rhode Island Corporation Law, R.I. Gen. Laws 7-1.2 -101 et seq. (“BCA”) and LLCs organized under the Rhode Island Limited Liability Company Act, R.I...
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