Most cannabis companies are not wound up properly, some cannabis companies (and their owners) suffer repercussions for this, and all cannabis companies (and their owners, and investors!) are well served by an orderly wind-up. This blog post will cover some basics on the cannabis business wind-up process.
First, though, I want to address a point of frequent confusion– “dissolving” and “winding up” a company are two different things. Dissolution occurs when a company representative files Articles of Dissolution, or similarly named paperwork, with the relevant Secretary of State. Dissolution may also ensue “administratively” by the State if a Company fails to pay taxes or fees. Dissolution is just one step in the wind-up process, and it often occurs early in that process. “Winding up”, conversely, is putting the whole thing to bed.
Step 1: Face the facts and get your affairs in order
There comes a point in the lifecycle of most cannabis businesses when it no longer makes sense to proceed. Most businesses eventually fail. According to BLS statistics aggregators, 20.8% of private sector U.S. businesses fail within a year, 48.8% fail within 5 years and 65.1% fail within 10 years. In the cannabis industry, I guarantee you those numbers are higher.
Sometimes it’s hard to admit defeat. In many cases, owners hang on longer than they should, exposing the company and its assets to greater and greater risk. Timing the wind-up is key, more so with bankruptcy out of the question for cannabis outfits. It’s easier to know when to bail if your recordkeeping is sound, data is current, and when company ownership is aligned in its thinking. (Most closely-held company agreements require unanimous owner approval to dissolve.)
Step 2: Vote and paper any decision
A cannabis company considering dissolution should properly notice a meeting, discuss the topic, vote, and paper any decision. The “paper” authorizing dissolution and windup would be a consent resolution or some variation of minutes. It’s important to follow company agreements to a T here; or, if the company lacks governance documents, to abide by statutory strictures in the relevant state. Where I sit in Oregon, for example, unless a corporation’s bylaws state otherwise, the corporation may be dissolved: a) on the written consent of all shareholders, or b) by the board, but only if the board proposes dissolution and a majority of shareholders agree.
Typically, the consent resolutions will cover some or all of the following:
- Recitals laying out the unfortunate milieu (this needn’t be gory, or too detailed)
- A resolution to dissolve the company
- A resolution authorizing certain key activities: e.g., the filing of Articles of Dissolution, closing of certain accounts
- A resolution appointing of a representative (usually within the company) who is authorized to oversee the final disposition of all company assets, obligations and other liabilities (known and unknown, matured and contingent), once operations cease
- A resolution to set aside a certain amount of cash for activities outlined above
These critical resolutions will be propounded by directors, or shareholders, or both, in a corporation. In an LLC, it is members, or members and managers, who do the deed. Again, see company agreements and/or statutes.
Step 3: Final payments and actions
Once the dissolution is approved and wind-up commences, ideally the business has enough cash lying around to pay down creditors and wriggle out of any ongoing obligations (e.g. buying out a lease, paying taxes eventually owed). Typically, the order of payments required in a windup is something like this:
- First, to the extent permitted by law, to creditors (including owner-creditors), in satisfaction of liabilities of the company
- Second, to owners of the company for any income tax liabilities, if the governance agreements required that
- Third, to owners of the company as distributions or dividends
- Fourth, to the establishment of any reserves deemed appropriate for winding up the company’s affairs
Again, company agreements are crucial to follow here. If the company lacks governance agreements, consult the relevant statutes at play.
Step 4: Tax returns
This is really part of Step 3, but taxes gets its own section because that’s typically the last thing a dissolved cannabis company does before closing any bank accounts and distributing final proceeds. There are different rules for when returns are due, depending on the type of company at issue:
- a dissolved corporation must file a final return by the 15th day of the fourth month after the date of dissolution
- a dissolved S corporation or partnership (most LLCs) must file a final return by the 15th day of the third month after the date of dissolution
Sometimes, a dissolved entity cannot file using official forms since the current year’s forms aren’t yet available. Still, early dissolvers must comply with filing instructions. Many of these companies choose to file an extension request at dissolution, taking into account the final return’s due date and when the current year’s tax forms will be available.
Conclusion
I hope you never have to wind up your cannabis company. Or if you do, I hope it’s because you sold all your assets to a well-heeled buyer, and it’s a simple dissolution where you file returns and ride off into the sunset. For everyone else, the best advice is: a) exit before things get too dire (if possible); b) follow the protocols set forth in relevant company agreements and/or relevant statutes (always); and c) seek help where needed. Best of luck.
