In today’s fast-moving business landscape, even the most stable companies can find themselves facing the need to restructure. Whether prompted by financial distress, a strategic pivot, or mounting regulatory pressures, restructuring decisions carry significant legal, financial, and tax implications. For business leaders and investors, understanding the available tools—from corporate dissolution to bankruptcy to distressed asset acquisitions—is essential to preserving value and minimizing risk.
Voluntary and Involuntary Corporate Dissolution
- Voluntary Dissolution
Voluntary dissolution begins with internal governance. Board and shareholder approvals are typically required, in accordance with the company’s bylaws and articles of incorporation. Once internal approval is secured, the company must file Articles of Dissolution with the Secretary of State and notify stakeholders, including creditors, employees, and customers. A proper wind-down includes settling outstanding debts, closing bank accounts, canceling business licenses, and distributing remaining assets to shareholders.
- Involuntary Dissolution
Involuntary dissolution, on the other hand, is typically court-ordered. Common triggers include shareholder disputes, legal violations, or prolonged mismanagement. In some cases, failure to comply with state tax obligations or annual reporting requirements may also result in administrative dissolution by the state.
Liquidation and Asset Distribution
When a company dissolves or liquidates, its assets must be sold and distributed according to legal priorities. Liquidation can occur through an orderly process or a forced sale, which each approach affecting the value received for assets. The proceeds are then distributed in a strict order: first to secured creditors, followed by unsecured creditors, and finally to shareholders. Ensuring transparency and proper documentation is critical to mitigating post-liquidation disputes.
Understanding the Tax Implications of Dissolution
Failing to plan for tax consequences can complicate an otherwise orderly dissolution. Businesses must file final federal and state tax returns, settle any outstanding tax liabilities, and obtain clearance from the IRS if necessary. State-specific tax requirements also apply and vary widely. Engaging tax professionals early in the process helps avoid costly surprises and ensures compliance with all relevant obligations.
Bankruptcy as a Restructuring Tool
Bankruptcy provides a formal framework for companies seeking either to reorganize or to liquidate under court supervision. The two most common bankruptcy options for businesses are:
- Chapter 7, which involves full liquidation of the business
- Chapter 11, which allows for reorganization under court-approved plans
Businesses can initiate these proceedings voluntarily, or be forced into bankruptcy by creditors under certain conditions. Valuing a distressed company during bankruptcy is a complex but vital exercise. Valuation hinges on two central concepts:
- Premise of Value: Whether the business is a going concern or subject to liquidation
- Standard of Value: such as fair market value or investment value
Valuation methodologies include the market approach, discounted cash flow (DCF) analysis, and cost-based models, each of which must be adjusted for distress factors, operational risk, and macroeconomic conditions.
Acquiring or Investing in Distressed Assets
Acquiring distressed assets can be a strategic move for opportunistic investors, particularly through bankruptcy proceedings. Buyers can often obtain assets ‘free and clear” of certain liabilities, and have the right to assume or reject executory contracts. Court supervision also provides transparency and protection during the acquisition process.
Outside of bankruptcy, distressed asset deals can offer more flexibility and speed, but come with greater risks due to the lack of judicial oversight and more complicated diligence. Buyers must carefully assess potential liabilities and structural issues before proceeding.
From a structuring standpoint:
- Asset Purchases allow buyers to selectively acquire desired assets while avoiding unwanted liabilities. They may also offer favorable tax treatment through basis step-ups.
- Equity Purchases enable business continuity and retention of valuable tax attributes but risk inheriting legal and financial liabilities.
Practical Considerations for Investors and Buyers
Not all underperforming companies are equally distressed. A key distinction exists between “stressed” businesses—those facing temporary pressure—and truly “distressed” ones that are insolvent or near collapse. Buyers must carefully assess working capital needs, cost structures, and integration plans post-acquisition.
Legal and financial advisors play a critical role in protecting buyer interests throughout this process—from identifying red flags to structuring transactions that limit exposure.
Conclusion
There is no one-size-fits-all solution when it comes to corporate restructuring. The right approach depends on a company’s liabilities, goals, and long-term outlook. Whether dissolving, reorganizing through bankruptcy, or acquiring distressed assets, strategic legal guidance is essential. Businesses and investors should consult professionals early to evaluate their options and safeguard their interest in a complex and often high-stakes environment. Contact an experienced attorney today.
Contributions to this blog by Michael Touma.