What should you do with your legal entity when you startup fails?

Disclaimer: this post focuses exclusively on US C-corps. #startups #legal

An army of lawyers is attacking a small startup, an oil painting, style of Picasso

During the last couple of years, a lot of people have opened their Delaware C-corps for startups or not. I doubt that at least 50% of them are still working on the things that got them to start these entities in the first place.

We all know it — startups are not only about “starting them” or “succeeding”, they are also about “failing” and “shutting down”. Sometimes before you’ve even properly begun. And that’s okay.

But what should you do with the open C-corp when you don’t need one anymore?

Earlier this year I needed to find the answer to this question, and so I did, sharing my findings with the broader community.

Disclaimer

Obviously, all of this should not be taken as legal advice and blah-blah-blah. I’m also not an expert on the topic and didn’t triple-check all of the numbers and stuff. Take this information with the grain of salt and be sure to do your own background check (with lawyers or friendly founders).

Alright, back to it. When you don’t need your C-corp anymore, what do you do?

Some googling (and founders’ forum posting) can tell you the following info:

1. You can continue upkeeping the company and maybe buy out the shares of the unwanted partner in case you’d want to start a new startup in the future using the same entity (also, changing its name). The upkeep of the company is around at least $1k/year, since you need to pay the Franchise tax (usually $450 for most startups, and the deadline is the 1st of March) as well as the Income tax, which you are not able to declare yourself, so you’ll pay at least an extra of $500 per year for a CPA (the deadline is the 15th of April).

2. You can try to sell your company to someone, but most likely no one will be interested, because truth be told, opening a company is easier than doing anything related to selling one.

3. Or you can liquidate the company. The liquidation itself is $500+, but probably better not to do this yourself, and in total, you’ll spend some extra on taxes, liquidation, and lawyers.

What isn’t immediately visible, is that there is a 4th option. It’s not exactly “public” so it’s hard to find a lot of information about it.

What’s the 4th option?

You can stop using the company or any associated bank accounts as well as stop paying taxes.

Yes, do nothing.

How it works in Delaware (other states might have other rules) — after 2 years the state moves your company into the “non-active” or “void” state, which is technically almost the same as a “liquidated” company, but not quite. It’s still there, but no one cares about it more than about the records of the database.

If you need the company at some point in the future, there will be an opportunity to revive it (with some penalty, of course, but it should cost no more than ~$1-1.5k).

I’ve validated this via Quora (posts like this, see screenshots below) and a couple of forums.

But also, most importantly, with a few legal/accounting firms, including the well-respected Silicon Valley legal firm Grayver Law with more than 300 startups currently being serviced.

According to Leonard Grayver, the firm’s partner, there are no extra risks of just “forgetting” about your company unless you have a super active history/creditors associated with it. Meaning if the company is clean or “almost” clean, you would be fine.

If you used your company extensively, then you probably have an extra couple of thousand in your pocket to spend on lawyers and liquidation fees and this post is not for you.

Leonard also shared with me that he personally knows of at least 50 such cases of “forgotten” companies, which should give you a perspective on the commonality of this option.

After completing my personal research, I have also found a few such cases among my acquaintances.

Well, now you know — and can now make a more informed decision on what to do with your C-corp if your startup failed.

Feel free to reach out to me in case you want more details — happy to assist fellow founders.