Closing a Corporation Through Dissolution by Shortening the Term
Under the Revised Corporation Code of the Philippines, a corporation is assumed to have an unlimited life. This means that the company will continue even if an owner decides to leave the business. The life of the company will only end if the owners decide to stop the business or if the business fails.
Moreover, if the owners will run a company only for a specific period, they should state this period in the articles of incorporation. However, certain events will change business conditions and the owners may decide to lengthen or shorten the company’s life. This change can be made through the modification of the articles of incorporation.
This article will discuss the concept of dissolution, particularly dissolution by shortening the term. We will talk about why companies do this. Additionally, we will learn about how to process this action in the Securities and Exchange Commission.
Reasons for Dissolution by Shortening the Term
Dissolution is the process of ending the operations of a company. The business ends because of different reasons. It could either be voluntary or involuntary. Voluntary dissolution is the ending of company affairs by the own will of the owners. One way of voluntarily ending the business is through dissolution by shortening the term.
There are many possible reasons why companies would decide to shorten their business life. First, it could be that the company is created for a specific reason, and the purpose of it is already achieved. For example, owners would create a company to earn income until they migrate abroad. If their move abroad is already finalized, the owners may decide to close the business.
Moreover, not companies are successful in running their operations. It could be possible that the owners have realized that their business is not going as intended. And they have assessed that they would incur greater losses if they continue the business. Which is why they willingly shorten the term of their company.
How to Dissolve a Corporation
Shortening the company life term is the most common voluntary dissolution in the Philippines. To do this, the company needs to go through a formal process to legalize the close of business. The first step is to shorten the corporate term in the articles of incorporation.
The secretary would have to call a meeting to vote for this decision of shortening the company term. The majority of the board of directors should vote for this action. Additionally, ⅔ of the stockholders representing outstanding capital should vote to agree on this decision.
Once the action to dissolve gets the required vote, the company must submit a copy of the changed articles of incorporation to the SEC for approval. Further, the company must publish the facts of the company closure in a newspaper once a week, in three continuous weeks.
Upon approval of the SEC of the modified articles of incorporation, the decision to shorten business life is now legal. Once the shortened term expires, the company is deemed automatically dissolved. After this day, the company will have to go through the winding-up process.
Winding Up of Business Activities
After the company’s dissolution, the company arranges its affairs to finally close the business. This process is what we call corporate liquidation. In this stage, the company stops to exist for its primary purpose. Instead, it exists to wind up business activities. Simply, it is the process of preparing for the closure of the business.
In this winding-up stage, the company sells its assets to pay its debts. This process usually takes years to complete. After this, the company distributes extra cash and properties to the owners. Once the company finishes all its affairs, the company is finally closed.
Key Takeaways
A company can willingly decide to close its business through dissolution by shortening the term. Companies usually do this to avoid losing more earnings in the long run. The close of business must be legal. Therefore, the company must go through all the necessary steps to have a valid company closure.
Moreover, closing a business does not mean an end to the possibility of being successful in another venture. It means you have to learn from past mistakes and take on another challenge.
Do you need professional assistance in starting anew? 3E Accounting Services is here to help. We have a team of incorporation specialists in the Philippines to help you with your company’s needs. Contact 3E Accounting today to meet our team of experts.
