How and When to Wind-Up Your California Corporation
Winding-up and dissolving a California corporation is governed by the provisions of California Corporations Code Sections 1900 through 1907. How that process takes place depends largely on whether the corporation has ever done business or issued shares or whether a “voluntary order for relief under Chapter 7 of the federal bankruptcy law has been entered.” Note that the statute does not say that a corporation has been “discharged” under federal bankruptcy law, only that an “order for relief” has been entered; this is because under the United States Bankruptcy Code, discharges are never entered in a Chapter 7 filed by a corporation.
In many instances, corporations are formed by well-meaning people with the intent to open a thriving business either alone or with others. For whatever reason, although the corporation files its Articles of Incorporation, it fails to follow through on the formation process, never issues any stock to shareholders, and never gets off the ground. In that instance, the incorporator will want to dissolve the corporation within twelve months of its formation so that the incorporator does not incur any tax or other liability for forming the corporation. All that is required under these circumstances is for a majority of the directors, if any have been appointed, or the incorporator to sign a Certificate of Dissolution making certain representations, including, among others: (i) that the corporation has no debts or liabilities; (ii) any tax liability will be assumed by the incorporator; (iii) a final franchise tax return has or will be filed with the California Franchise Tax Board; and (iv) that the corporation has not conducted any business from the filing of the Articles of Incorporation. Once that Certificate of Dissolution has been filed, the corporation is dissolved, the Secretary of State notifies the Franchise Tax Board of the dissolution, and the corporation is done.
If, however, the corporation does issue shares, appoint a board of directors, conduct business in California, and its directors determine that it is in the best interests of the corporation to wind-up and dissolve, at least fifty percent (50%) approval of the shareholders owning the issued and outstanding voting shares of the corporation must be obtained. This ordinarily occurs when the directors believe that continuing the operation of the corporation is unlikely to result in profits sufficient to continue its operations, or it may occur in a Close Corporation as a result of disagreements between the owners of the business. Whatever the reason, what is generally required is a meeting of shareholders at which the shareholders cast a vote approving dissolution. Assuming a sufficient number of shareholders vote to dissolve the corporation, an officer of the corporation must sign a Certificate of Dissolution verified by majority of the directors then in office.
The vote of the shareholders to dissolve sets into motion and authorizes the officers and directors of the corporation to sell the assets of the corporation, provide for all of the debts and liabilities of the corporation, provide for payment of all outstanding tax obligations of the corporation and lastly, if any money is left, distribute the remaining money to the shareholders in proportion to their percentage of ownership. It is important to note that at least one officer, director, or shareholder of the corporation will be required to assume any outstanding tax liability upon dissolution, meaning that a corporation that owes taxes cannot be dissolved to absolve that liability.
Anytime the board of directors of a California corporation contemplates dissolving the corporation, the expert advice of an attorney is absolutely essential. Both before a decision to dissolve is made and following that decision, the shareholders, directors, and officers of the corporation must perform certain tasks in a specified order and pursuant to law. Failure to follow the laws concerning corporate dissolution could result in personal liability for certain debts being enforced against those involved in the corporation. Michael Leonard, Esq. of San Diego Corporate Law is that attorney. To schedule a consultation with Mr. Leonard to discuss the dissolution of a corporation, or any business-related matter, you can visit San Diego Corporate Law or call (858) 483‑9200.