Corporations, like just about everything else, can have a beginning and an end. You and the other directors of the corporation can choose to terminate the corporation, and then you will have to complete the “winding up” tasks to complete the process.
Approving the Dissolution of the Corporation
Here are the steps that need to occur:
- The board of directors meets and adopts a resolution of winding up (terminating) the corporation. After a majority of the board of directors approves of the resolution, they’re then required to give at least 10 days advance notice to shareholders, which will meet to decide the matter.
- Unless your bylaws say otherwise, a two-thirds majority of the shareholders must approve of the winding up of the corporation. If your corporation has tiers or classes of shares that are set to vote separately, then you need a two-thirds majority for each class of the shareholders.
- Make sure that you properly record the resolution of the board of directors to dissolve, and to note the votes of the shareholders.
- An alternative method is to just have all the shareholders sign the “consent” document for the dissolution of the corporation. A business lawyer can help you draw up this consent document. This is the more convenient approach if the directors are also the only shareholders, and everyone agrees to the dissolution.
- Since most of the shareholders are on board, your corporation can now fill out and file the certificate of termination with the California Secretary of State.
- Meet all the tax obligations with the IRS and the state of California.
- Close your corporate business accounts.
- Cancel any pertinent permits and licenses you acquired for your corporation.
- Notify all your creditors, vendors, and customers regarding the dissolution of the corporation. You may want to consult an attorney to help you notify anyone who has claims against your corporation.
This is a step you need to take before you can file your certificate of termination with the California Secretary of State.
First, file a request for a certificate of excise tax clearance from the California Department of tax and fee. This is to show that your corporation is in good standing and that it has paid all the required taxes.
Once you’ve received the tax clearance, you can then attach it to the certificate of termination that you will send to the California Secretary of State.
Make sure you also deal with your federal tax requirements as well. For most corporations, that means checking the “final return” box on the IRS Form 1120. For S-corporations, it’s on the IRS Form 1120S.
The Certificate of Termination
After the tax clearance, in the state of California, you’ll now fill and file for a certificate of dissolution or a Short form dissolution certificate if your corporation was formed in the last 12 months. When you fill up this form, make sure you supply all the necessary information before you submit the form to the California Secretary of State:
- Corporation business name
- Type of business entity
- Date of the corporate formation
- Corporate file number, issued to your corporation by the Secretary of State
- The name and address of each member of the board of directors, along with the officers
- The Authorized dissolution method
- Reason for dissolving the corporation
- The effective date for the termination of the corporation
- The certificate of excise tax clearance
- Number of votes that led to the dissolution (for vs against)
- The name and signature of the person properly authorized to file the certificate of termination on behalf of the corporation
- There are no fees for filing a certificate of dissolution in California or the short form dissolution certificate as the case may be.
- However, you’ll be required to pay a fee of $15 counter drop off fee if you submit the files in person or mail the files with no fee to the address:
Secretary of State
Business Programs Division
Business Entities, 1500 11th Street
Sacramento, CA 95814
The state of California will take about 8 weeks to process your filing for dissolution after receiving your files. However, you can pay a fee of $350 for 1-day expedited service. Keep in mind that these timetables are for “normal” times. Under more uncommon circumstances (like pandemics, for example), it may take a longer time to complete the whole process.
What if the dissolution occurs before any shares are issued?
If this is the case, the responsibility falls on the incorporator, who signed and filed the formation documents. The other steps are all the same, except for the steps involving shareholders.
Your main priority when dissolving your corporation is to discharge all your liabilities. That means you have to pay off your creditors and pay all the relevant taxes.
Once these tasks are done, you can then distribute the remaining corporate assets to the shareholders.
Avoiding the Hassles of Reinstatement
One of the first rules concerning the dissolution of your corporation is that everyone who votes for it has to be sure. There should be no flip-flopping on the issue because that leads to further hassles when you begin the tedious task of reinstatement.
It’s like incorporating your business all over again, with fees to pay for. In addition, you’ll have to pay for late reports, and California charges huge interest rates on these fees. The longer you wait to pay, the bigger the fees get.
The same hassles result when your corporation fails to comply with rules, such as not maintaining a registered agent or failing to file and pay the yearly franchise tax report within 60 days. The state itself can dissolve your corporation without your approval, and you’ll need to apply for reinstatement if you want to continue your business.
This guide is a simple overview of what can be a complicated matter—especially with creditors and people with claims against your corporation. It’s best that you get assistance from an experienced California business lawyer to make sure you do everything right.