Dissolve a California Corporation
What does it mean to dissolve a California Corporation? Dissolution is the formal procedure for ending the life of your California corporation. In other words, when you dissolve a California Corporation, you are simply shutting the corporation down. This procedure is governed by California’s General Corporation Law which enables a corporation to be dissolved either voluntarily or involuntarily (Corp. Code 1900(a)).
When you decide to dissolve a California corporation, among other things, you will need to notify the Secretary of State by filing a series of forms. The forms needed to dissolve a California corporation can be found on the CA Secretary of State’s website, along with instructions, information regarding filing fees, and mailing addresses. A brief overview of the steps you need to take in order to voluntarily dissolve your corporation is provided below.
Step 1: File the Certificate of Election to Wind Up and Dissolve
It is customary for your board of directors to begin the process of dissolving your corporation by submitting a proposal to dissolve the corporation to its shareholders and then calling a shareholders meeting to vote on that proposal.
If at least 50% of your corporation’s voting shares vote to dissolve and wind up the corporation, the resolution may be recorded and entered into your corporate records and you can then file a Certificate of Election to Wind Up and Dissolve (Form ELEC STK) with the CA Secretary of State.
Alternatively, you can avoid the meeting of shareholders if more than 50% of your voting shares provide written consent to dissolve the company. Furthermore, in the event that all voting shares vote to dissolve your corporation, you can skip Certificate of Election to Wind Up and Dissolve and will only need to file a Certificate of Dissolution (explained below).
Step 2: Winding Up Your California Corporation
To wind up your corporation means to settle its affairs by liquidating assets, collecting accounts receivables, and using these proceeds to pay off your corporation’s tax liabilities and corporate debt. Apart from those tasks essential to “winding up” your corporation, it must cease doing business as soon as this phase of the dissolution process begins.
When you are winding up your corporation, priority should be given to federal taxes that have been withheld from employee paychecks, including:
- Income tax withholding
- Social Security
- Medicare tax
Assuming that your corporation had employees, the final payroll tax and employment tax must be filed in a reasonable amount of time. If your corporation fails to pay its payroll taxes, the IRS can hold your shareholders personally liable and satisfy the corporation’s tax liability.
Your corporation must then file a final income tax return with the IRS and the state indicating that it will be the final return filed by your corporation. Afterwards, it is recommended that you keep all of your corporation’s tax documents for at least 7 years after the cessation of your business.
After its federal taxes have paid, your corporation’s other debts must be paid. This will typically include but not be limited to:
- Outstanding Rent
- Bank charges
- Payments owed to suppliers
- Utility Bills
At this time, you will also be required to serve all of your creditors and shareholders with a Notice of Dissolution in order to give them the opportunity to show why your corporation should not be declared wound up and dissolved. In addition, you may be required to publish a notice of dissolution in a local newspaper every week for a minimum of three consecutive weeks.
Providing adequate notice will limit the time your creditors have to bring a claim against your corporation. If your creditors fail to submit evidence of a claim within the allocated period of time, the claim may be barred from receiving any payment from your corporation’s assets.
Distribution of Assets when you Dissolve a Corporation in California
Once your corporation’s financial obligations have been completely satisfied, your board of directors can distribute the remaining assets amongst your shareholders, according to the corresponding rights and classification of their shares.
Corporations are forbidden to distribute assets to its shareholders if it is unable to pay off all of its debts. The directors of your corporation may bring upon themselves both civil and criminal liability for authorizing a distribution of assets before your corporation has completely satisfied its financial obligations. Likewise, any shareholders who may have received an improper distribution of assets may also be held liable.
Step 3: File an Annual Statement of Information with the California Secretary of State
As a matter of ongoing compliance, California corporations are required to file an annual Statement of Information (Form SI-200) with the CA Secretary of State. Before the dissolution of your California corporation will be approved, any outstanding Statement of Information must be filed.
Step 4: File a Certificate of Dissolution
When your California corporation is completely wound up, a Certificate of Dissolution (Form DISS STK) must be signed and file with the CA Secretary of State.
Your Certificate of Dissolution must contain the following information:
- The effective date of your corporation’s dissolution.
- A statement verifying that a resolution to dissolve the company was passed, or an attached a Certificate of Election to Wind Up and Dissolve.
- The signatures of a majority of your corporation’s directors.
- A statement confirming that your corporation has been dissolved
- A statement confirming that your corporation has been wound up
- A statement that provisions have to be made to pay any unknown debts.
- Affirmation that a final Corporation Franchise or Income Tax Return (Form 100, S100 for S-corporations) has been or will be filed with the California Franchise Tax Board for tax clearance.
After the Certificate of Dissolution has been filed all of your corporation’s legal rights and privileges will be terminated. Furthermore, your business’ name will then be available for others to claim.
Step 5: Close Out Your Corporate Bank Accounts
After your corporation had been wound up and dissolved, you can close out your corporation’s bank accounts and cancel credit cards. It is advisable, however, that you leave a checking account open, or that you make other provisions to pay any unknown debts that may arise.
Step 6: Out-of-State Registrations
If your corporation was authorized to carry out business in other states, you will need to file separate documents with the secretary of state of each respective state in order to terminate your rights to carry out business there. If you fail to file these documents in any one of these states, your corporation will be held liable for any annual fees and taxes that it accrues in that state.
Consult with an Experienced California Business Lawyer
There is often an inclination to take shortcuts when shutting down a business enterprise in order to get it over with as soon as possible. However, this can be extremely dangerous given that personal liability and tax issues can result from not handling these requirements with the same amount of care and competence with which your business was established. At Odger’s Law Group, we are business lawyers who specialize in business and corporate law in the San Diego, California area. Call us today at 858-869-1114 to find out what we can do for you and your business!