For some corporations, a time comes when the people who own and run things voluntarily decide to close the business. If you’ve reached that point with your California corporation, you’ll need to take care of multiple tasks—including what is called dissolving and winding up your business.
Dissolving the Corporation
Your corporation is registered with the State of California. Officially ending its existence as a state-registered business entity, and putting it beyond the reach of creditors and other claimants, begins with a formal process called “dissolution.” While a corporation may be involuntarily dissolved through a court decree, this article covers voluntary dissolution by a corporation’s shareholders. Also, while there are special procedures for dissolving corporations that have not yet issued stock, are undergoing Chapter 7 bankruptcy, or have disposed of all assets and not conducted any business for the last five years, those procedures are not covered in this article.
California’s General Corporation Law (“GCL”) provides for voluntary dissolution if shareholders holding shares with at least 50 percent of the voting power vote for dissolution. Unlike many other states, California’s corporation dissolution statutes do not clearly and specifically require action by the board of directors before the shareholders vote. However, it is common practice, and other parts of the GCL suggest, that your board of directors must submit to the shareholders a proposal to dissolve and call a meeting of the shareholders to vote on dissolution. You should review your articles of incorporation and bylaws, and speak to a lawyer, to make sure you are following the proper dissolution procedures for your particular corporation. In cases where there is a shareholder meeting, you are required to give ten days advance notice of the meeting to each shareholder entitled to vote on dissolution. If you use this method, make sure to properly record both the board’s proposal and the shareholders’ votes.
The GCL also allows you to avoid a formal meeting and vote if shareholders holding shares with at least 50 percent of the voting power provide their written consent for dissolution. The shareholders must sign a document, known simply as a “consent,” that states the corporation is dissolved. The consent then must be properly entered in the corporation’s records. You are not required to give advance notice of this action to dissolve to shareholders who do not provide consent or are not entitled to vote. However, where you do not have the unanimous written consent of all shareholders, you are required to give “prompt notice” of the action taken to dissolve to voting shareholders who did not consent. Dissolution based on written consent can be more efficient for small businesses where most or all of the voting shareholders are directors—and there is general agreement on dissolution.
Certificate of Election to Wind Up and Dissolve
If all outstanding shares of your corporation vote to dissolve, you do not need to file a Certificate of Election to Wind Up and Dissolve with the Secretary of State (“SOS”). However, if the vote for dissolution is less than unanimous, you do need to file the certificate with the SOS. Under the GCL, the certificate must provide the following information:
- a statement that the corporation has elected to wind up and dissolve
- the number of shares voting for the election and that the election was made by shareholders representing at least 50 percent of the voting power; and
- if the certificate is executed (signed) by a shareholder or shareholders, a statement that the subscribing shareholder or shareholders were authorized to execute the certificate by shareholders holding shares representing at least 50 percent of the voting power.
A blank certificate form (Form ELEC STK), along with instructions, is available for download from the SOS website. You can submit the certificate by mail or in person. There is no fee for certificates that are mailed in, but there is a $15 special handling fee for documents hand-delivered to the SOS office in Sacramento. You may find it makes sense to file your Certificate of Election to Wind Up and Dissolve at the same you file your Certificate of Dissolution (see below).
Following approval of dissolution, your corporation continues to exist only for the purpose of taking care of certain final matters that, collectively, are known as “winding up” the company. Under the GCL, your board has full power to wind up and settle the affairs of the corporation. Key winding up tasks include paying, or making adequate provision to pay, all known corporation debts and liabilities, and then distributing remaining assets, if any, to persons entitled to those assets. (If the corporation does not have sufficient assets, than payment or provision for payment for debts and liabilities must be made as far as the assets allow.) To be clear, your corporation’s first obligation is to discharge liabilities. This includes paying all business taxes and creditors. Only then may the corporation distribute remaining assets to shareholders or others entitled to those assets.
Notice to Creditors and Other Claimants
Under the GCL, after dissolution has been approved, you are required to mail written notice that the corporation is commencing a voluntary winding up to all known creditors and claimants whose addresses appear on the records of the corporation, as well as to all shareholders (except those who voted in favor of dissolution). You should consult with a business attorney to ensure that your notices include all legally required information.
Certificate of Dissolution
After you have finished winding up your corporation, you must file a Certificate of Dissolution with the SOS. The certificate must include:
- a statement that the corporation has been completely wound up
- a statement that the corporation’s known debts and liabilities have been actually paid, or adequately provided for, or paid or adequately provided for as far as the corporation’s assets permitted, or that the corporation has incurred no known debts or liabilities
- if there are known debts or liabilities for payment of which adequate provision has been made, a statement of what provision has been made, setting forth the name and address of the corporation, person, or governmental agency that has assumed or guaranteed the payment, or the name and address of the depositary with which deposit has been made or any other information that may be necessary to enable the creditor or other person to whom payment is to be made to appear and claim payment of the debt or liability
- a statement that the corporation’s known assets have been distributed to the persons entitled thereto or that it acquired no known assets; and
- a statement that the corporation is dissolved.
A Certificate of Dissolution form (Form DISS STK), including instructions, is available for download from the SOS website. When using the SOS form—which is recommended—you also will be affirming that a final franchise tax return has been or will be filed for your corporation.
You can submit the Certificate of Dissolution by mail or in person. As with the Certificate of Election to Wind Up and Dissolve, there is no fee for a Certificate of Dissolution that is mailed in, but there is a $15 special handling fee for documents hand-delivered to the SOS office in Sacramento. Fees apply if you want certified copies of your filings. As mentioned above, you may find it makes sense to file your Certificate of Election to Wind Up and Dissolve and your Certificate of Dissolution at the same. It can take the SOS at least eight weeks to process your filings, but processing times can vary. Various forms of expedited processing are available for additional fees.
Be aware that your business name will become available for use by others after dissolution.
NOTE: In limited circumstances, a corporation may file a Short Form Certificate of Dissolution (Form DSF STK). This option is only available if:
- your articles of incorporation were filed within the last 12 months
- your corporation has no debts and liabilities (other than tax liability)
- any existing tax liability will be satisfied on a taxes paid basis or the tax liability will be assumed
- a final tax return has been or will be filed with the Franchise Tax Board
- your corporation has not conducted any business
- your corporation has not issued shares, and if the corporation has received payments for shares from investors, those payments have been returned to those investors
- the majority of the directors (or incorporators, if directors were not named and none have been elected) authorized the dissolution and elected to dissolve the corporation; and
- the assets have been distributed to the persons entitled thereto or no assets have been acquired.
California does not require that you obtain tax clearance before allowing you to file to dissolve to your corporation. However, as mentioned above, on your Certificate of Dissolution you must affirm that you have filed or will file a final franchise tax return for your corporation.
For federal tax purposes, check the “final return” box on your IRS Form 1120 (for traditional corporations) or IRS Form 1120S (for S corporations).
An S corporation is a corporation that has filed an election with the IRS to have business income, losses, deductions, and credits pass through to individual shareholders for federal tax purposes. Only the shareholders, and not the corporation, pay federal taxes on income from the business. Potential tax issues aside, the process for dissolving and winding up an S corporation is generally the same as dissolving and winding up a traditional corporation.
Is your corporation registered or qualified to do business in other states? If so, you must file separate forms to terminate your right to conduct business in those states. Depending on the states involved, the form might be called a termination of registration, certificate of termination of existence, application of withdrawal, or certificate of surrender of right to transact business. Failure to file the additional termination forms means you’ll continue to be liable for annual report fees and minimum business taxes.
You can find additional information, such as forms, instructions, mailing addresses, and filing fees, on the SOS website.
For information on dissolving and winding up corporations formed in other states, check Nolo’s 50-state series on dissolving corporations.
Final Note: Dissolving and winding up your corporation is only one piece of the process of closing your business. For further, general guidance on many of the other steps involved, check Nolo’s 20-point checklist for closing a business and the Nolo article on what you need to know about closing a business.