Closing an S-Corporation in California involves following certain steps to ensure that the process is completed properly and in accordance with applicable law to cease operations, terminate its legal existence, and stop transacting business as a business entity.

Dissolving an S Corporation in California is a compound task that requires attention to several key elements. It involves not only a legal process best handled by an experienced corporate attorney, which involves drafting documentation to be filed with regulatory authorities, but also a tax and accounting process best handled by a trusted accountant, which includes finalizing financial statements and taking care of any remaining tax obligations.

Additionally, it requires considerable legwork by the business owner, encompassing tasks such as notifying all interested parties of the company’s decision to dissolve, settling outstanding liabilities, and ensuring the orderly distribution of the company’s assets. This multifaceted procedure is crucial to ensure the smooth and legally compliant closure of the S Corporation.

This article will introduce you to the necessary steps, including filing the necessary paperwork, settling any debts, and fulfilling tax obligations. These steps are crucial to avoid potential legal and financial consequences.

Understanding how to close an S Corporation correctly will help protect your interests and ensure a smooth termination of your S Corporation in California.

Legal Dissolution of a California Corporation

Dissolving an S Corporation in California involves a step-by-step legal procedure. This process requires careful attention to detail to ensure compliance with California state laws and avoid any potential penalties.

This section will outline the stages involved in the legal dissolution of a California S Corporation, ranging from board approval to filing the necessary forms with the California Secretary of State. Understanding these steps will equip you with the knowledge needed to navigate this complex process with confidence.

Authorizations of the Board of Directors and Shareholders

The process of dissolving an S Corporation in California begins with obtaining the necessary authorizations from the Board of Directors and shareholders.

First, a meeting of the Board of Directors must be convened to discuss and vote on the proposed dissolution. In this meeting, a resolution to dissolve the corporation is drafted and a majority vote is required for the resolution to pass.

Subsequent to the approval of the board of directors, a meeting of the shareholders is held. For the dissolution to proceed, a majority of the outstanding shares must vote in favor of the dissolution.

It is imperative to properly document these meetings and decisions, as they form an integral part of the dissolution process and may be required for future legal and tax purposes.

Certificate and Notice of Election and/or Certificate of Dissolution

Upon receiving the required approvals of the board of directors and shareholders of the California S-Corp for dissolution, the next crucial step in the process involves drafting and filing the necessary documents for dissolution of a California domestic stock corporation with the California Secretary of State. This includes submitting the Certificate of Election to Dissolve and the Certificate of Dissolution.

Certificate of Election to Dissolve

A Certificate of Election to Dissolve on California Secretary of State Certificate of Election to Dissolve Form ELEC STK may not be required for the dissolution of all California S Corporations, however, it can be beneficial to file this document even when not strictly required if there is any delay or rejection of the certificate of dissolution.

Certificate of Dissolution

The Certificate of Dissolution, on the other hand, is mandatory for all S Corporations seeking dissolution. This certificate, on California Secretary of State Certificate of Dissolution Form DISS STK must be filed with the California Secretary of State and serves as an official record of the intent to dissolve.

Short Form Dissolution Certificate

A Short Form Dissolution Certificate, available on California Secretary of State Short Form Dissolution Certificate Form DSF STK, offers a streamlined version of the dissolution process compared to the filing of a Certificate of Election to Dissolve and Certificate of Dissolution for eligible S Corporations. The short form certificate consolidates the regular paperwork into a single form, expediting the dissolution procedure.

The short form certificate is only applicable to corporations that meet specific criteria, such as not conducting any business after the filing of the articles of incorporation, having no debts or liabilities, and obtaining the consent of all shareholders to dissolve. Thus, it’s a simpler and quicker alternative for S Corporations that qualify, reducing the complexity of the dissolution process.

Drafting a Plan of Distribution

Drafting a Plan of Distribution is an essential part of the dissolution process of an S Corporation in California. This plan outlines how the remaining assets of the California S-Corp will be distributed following the settlement of all debts and obligations. It is crucial to ensure that all creditors are paid before any distribution to shareholders is made. The Plan of Distribution must be approved by the board of directors and shareholders.

File Internal Revenue Service Form 966

Upon the initiation of the dissolution of a California S-Corp, it is required to notify the Internal Revenue Service about the change in the status of the business entity. This notification is executed through the filing of the Corporate Dissolution or Liquidation form on Internal Revenue Service Form 966.

Steps to Be Completed by the Business Owner During Dissolution of a California Corporation

In addition to the legal and accounting dissolution processes, there are tasks that the business owner must undertake personally when dissolving a California S-Corp. These include, without limitation, notifying all creditors and claimants, settling all business debts, and liquidating and distributing assets as set forth below.

Prepare a List of Shareholders Identifying Liquidation Preference

Preparing a list of shareholders identifying liquidation preference serves to clarify the order of priority for distributing the remaining assets after all debts and obligations have been settled.

Prepare a List of Creditors Identifying the Specific Nature of the Debt

Preparing a list of creditors identifying the specific nature of the debt provides a clear picture of all outstanding debts the California S-Corp owes, offering crucial insight for the Plan of Distribution. By identifying the nature and amount of each debt, the corporation can prioritize repayment in accordance with legal requirements, generally in the order of secured creditors, unsecured creditors, and equity holders.

Mail Notice of Election to Shareholders and Creditors

Mailing a notice of election to both shareholders and creditors is a pivotal step in the dissolution process of a California S-Corp. This notice serves to inform shareholders and creditors of the California S-Corp of the intent to dissolve, thereby giving them a chance to address any outstanding issues.

Collect and Liquidate Assets

Collecting and liquidating assets involves gathering all of the assets of the California S-Corp and converting them into cash held in the bank accounts of the California S-Corp to settle any outstanding debts and obligations of the corporation and to distribute any remaining assets amongst the shareholders. The process of liquidation must be carefully conducted to ensure that no assets are overlooked and all debts are paid off in full.

Recall Share Certificates

Recalling share certificates, which are physical evidence of share ownership in a California S-Corp, allows the California S-Corp to ensure that all shares are accounted for and that no shares remain in circulation after the dissolution and that all shareholders receive their distribution of assets.

Accounting and Tax Dissolution of a California Corporation

EDD Form DE-6 and DE-7 Preparation and Filing (As Determined by an Accountant)

The preparation and filing of California Employment Development Department Forms DE-6 and DE-7, as determined by an accountant, is necessary for reporting the wages paid to employees and providing information about the payroll of the California S-Corp prior to dissolution, thereby preventing any potential tax liabilities or legal complications post-dissolution.

Pay Known Debt and Liabilities (As Determined by an Accountant)

Paying known debt and liabilities, as determined by an accountant, involves settling all financial obligations, which could range from bank loans and bonds, to bills from suppliers, wages owed to employees, and taxes. Ensuring all these known debts and liabilities are paid is a legal obligation that protects the California S-Corp from any future claims by creditors.

File Final Tax Returns (As Determined by Your Accountant)

Filing final tax returns, as advised by your accountant, ensures that the California S-Corp fulfills its final tax obligations, thereby preventing any potential tax liabilities or legal complications after dissolution.

A final tax return is filed with the Internal Revenue Service for federal income tax liability, and the California Franchise Tax Board for California income tax liability, of the California S-Corp.

A final tax return with the California Board of Equalization may also be required for sales tax liability if the California S-Corp and similar filings with any state tax agencies.

If the California S-Corp has not paid its $800 annual franchise tax to the Franchise Tax Board prior to dissolution, this should be paid as well.

It is also worth noting that if a California S-Corp has delinquent tax returns or is otherwise in suspended status, it may not be possible to complete the legal corporate dissolution until the delinquent tax returns are filed and all tax balances are paid before it may become a dissolved California corporation.

Distribute Assets to Shareholders (As Determined by Your Accountant)

The distribution of assets to shareholders, as determined by your accountant, is the final stage in the dissolution process of a California S Corporation. After all known debts and liabilities have been paid, any remaining assets are then distributed among the shareholders.

Let San Diego Corporate Law Handle Your Legal Dissolution

Do not navigate the complex and intricate process of a California S Corporation dissolution alone. The experienced corporate attorneys at San Diego Corporate Law are here to provide the guidance and expertise you need. With our thorough understanding of legal dissolution, we will ensure a smooth, legally compliant, and timely process. Contact us today and let us handle the legal portion of dissolving your business entity allowing you to focus on the accounting and other steps to dissolve your California S-Corp.