Dissolution of a California corporation is the process of closing a legal entity. It is one of the steps taken when a business winds up and ceases to exist. Once dissolution is accomplished, the corporation (or limited liability company) will no longer exist as a legal entity. If you are thinking of closing up your San Diego corporation in the near future, an experienced San Diego corporate attorney can provide advice and counsel. There are two main advantages of officially terminating a corporation:

• Stops the annual imposition of taxes by the California Franchise Board; and
• Begins the running of the four-year statute of limitations for potential post-dissolution personal liability of shareholders for certain corporate obligations — see Cal. Corp. Code, §2011.

The main disadvantage — the reason that many owners will simply let the corporate existence lapse — is the paperwork and the need to formally dissolve a corporation and file all the final corporate tax returns.

The first step in the dissolution process is to have the owners/shareholders vote to dissolve the company. Depending on your corporation’s bylaws, a vote of the board may be needed or a special meeting of the shareholders might have to be called. If there is unanimous consent from every owner, then the second step is to file dissolution papers with the California Secretary of State’s office. Various information is supplied and a fee is paid. Among the statements that must be made and attested to is that all corporate tax returns have been or will be completed. If there is a disagreement and some shareholders want to continue operation of the corporation, dissolution can still proceed as long a majority of shareholders have voted to dissolve. In California, the Secretary of State has a couple of different forms to potentially file regarding a corporate dissolution. An experienced corporate attorney can assist in determining the best way for your business to proceed and file the proper items for dissolution.

Part of the process of dissolution is to ensure that all assets (if any) are distributed and all debts (if any) are paid. This involves notifying creditors, landlords, and service providers and paying any amounts due. For example, if the corporation has $10,000 in cash-on-hand and $5,000 in accounts payable, then the accounts should be paid and the remaining $5,000 should be distributed to the shareholders per their ownership percentages. If, for example, there is $10,000 in accounts payable, then the shareholders will receive no distributions upon dissolution — all cash-on-hand will go to pay the corporation’s obligations. If the shareholders receive distributions and there are still debts and obligations, the creditors can seek recovery from the shareholders individually. A substantial amount of debt exceeding assets might require the official filing of a corporate bankruptcy to protect the shareholders.

Contact San Diego Corporate Law Today

For more information, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard has been named a “Rising Star” for four years running by SuperLawyers.com. Mr. Leonard’s law practice is focused on corporate, securities, contract, and intellectual property law for small and medium businesses in the San Diego metro area. Like us on Facebook.

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