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 Delaware 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 Delaware. 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, or may have its charter voided for failing to pay franchise tax, this article covers voluntary dissolution by a corporation’s stockholders. Also, while there are streamlined procedures for dissolving corporations that have not yet issued stock, not yet started doing business, or have only two stockholders who each own 50% of the company’s stock, those procedures are not covered in this article.
Delaware’s General Corporation Law (“GCL”) provides for voluntary dissolution through a stockholder vote at a stockholder meeting. Before the vote, your board of directors must adopt a resolution to dissolve, submit it to the stockholders, and call the stockholder meeting to vote on the matter. You are required to give ten days advance notice to each stockholder entitled to vote on dissolution. A majority of the outstanding stock entitled to vote must approve the dissolution. If you use this method, make sure to properly record both the board’s proposal and the stockholders’ votes.
The GCL also allows you to avoid a formal stockholder meeting and vote at if stockholders entitled to vote on dissolution provide their written consent. There are two ways written consent can operate to approve dissolution. First, dissolution is approved if all stockholders entitled to vote provide their consent. No action by the board of directors is necessary in cases of unanimous stockholder consent. Second, unless your certificate of incorporation provides otherwise, dissolution may be approved by the consent of the majority of shares otherwise required under the GCL when stockholders vote at a stockholder meeting. (This generally would mean stockholders with a majority of voting shares must provide their consent.) In cases where consent is not unanimous among all voting stockholders, “prompt notice” of the action to dissolve the corporation must be given to all stockholders entitled to vote who did not consent. Regardless of whether all stockholders or only a necessary majority are providing consent, the required number of stockholders 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. Dissolution based on written consent can be more efficient for small businesses where most or all of the voting stockholders are directors—and there is either unanimous agreement on dissolution, or, where not prohibited by the certificate of incorporation, at least some degree of majority agreement on dissolution.
Note that dissolution, alone, does not abate actions, suits, or proceedings begun by or against your corporation prior to dissolution or, generally speaking, for a period of three years after dissolution.
Certificate of Dissolution
After stockholders approve the dissolution of your corporation, you must file a certificate of dissolution with the Department of State (“DOS”). For corporations that are voluntarily dissolving after having issued shares and starting doing business, there are two different certificates of dissolution available: the standard form and the “short form.” You can use the short form only if your corporation meets three requirements:
- it has no assets and has stopped doing business
- for each year since its incorporation in Delaware, it has been required to pay only the minimum state franchise tax; and
- it has paid all franchise taxes and fees due through the end of the year in which your certificate of dissolution will be filed.
To complete the standard certificate of dissolution, you must provide:
- the name of your corporation
- the date dissolution was authorized; and
- a statement that the dissolution has been authorized by the board of directors and stockholders of your corporation, in accordance with the appropriate sections of the GCL, or that the dissolution has been authorized by all of the stockholders of your corporation entitled to vote on a dissolution, in accordance with the appropriate section of the GCL
- the names and addresses of the directors and officers of your corporation; and
- the filing date of your corporation’s original certificate of incorporation with the DOS.
To complete the short form certificate of dissolution, you must provide the same information as in the above list. However, the short form also includes statements that the corporation has no assets, has ceased transacting business, has been required to pay only the minimum franchise tax for each year of its existence, and has paid all franchise taxes and fees through the end of the year in which the certificate of dissolution is filed. The key benefit of using the short form is that there is a much lower filing fee.
Blank templates for both the standard certificate of dissolution and the short form are available for download from the DOS website. The filing fee for the standard form is $204 for a one-page document and $9 for each additional page. The filing fee for the short form is $10. Filings are usually processed in 2-3 weeks. Various forms of expedited processing—one hour, two hours, same day, 24 hours—are available for additional fees. The DOS asks that you include a cover letter with your filing that provides your name, address, and telephone or fax number.
NOTE: Before filing your certificate of dissolution, you are required to pay all state taxes due for your corporation through the effective date of dissolution and file all applicable annual franchise tax reports. You can get information on your corporation’s status regarding these taxes and reports by contacting the Franchise Tax Section within the Corporations Division of the DOS. You should include a separate check to pay any taxes due with your certificate of dissolution. Check the DOS website or call the DOS for further details.
Be aware your business name will become available for use by others after dissolution.
Following 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. It may be appropriate to designate one or more officers and/or directors to handle the winding up.
Under the GCL, key winding up tasks include:
- prosecuting and defending suits, whether civil, criminal, or administrative
- disposing of and conveying corporation property
- discharging the corporation’s liabilities; and
- distributing any remaining corporation assets to stockholders.
Regarding the last two listed items, Delaware’s law is quite clear: Your corporation’s first obligation is to discharge liabilities and obligations. This includes paying all business taxes and creditors as well as paying or otherwise resolving all claims against your corporation. Only then may the corporation distribute remaining assets to stockholders.
Notice to Claimants
One other key task is giving notice of the dissolution to persons with claims against your corporation. Giving notice is optional. However, doing so will help limit your liability and also allow you to more safely make final distributions to stockholders.
Under the GCL, you give notice by both sending a written document directly to known claimants and publishing the same notice in a newspaper. The notice must state:
- that all such claims must be presented in writing and must contain sufficient information reasonably to inform the corporation or successor entity of the identity of the claimant and the substance of the claim
- the mailing address to which such a claim must be sent
- the date by which such a claim must be received by the corporation or successor entity, which date shall be no earlier than 60 days from the date thereof
- that such claim will be barred if not received by the date referred to in the notice
- that the corporation or a successor entity may make distributions to other claimants and the corporation’s stockholders or persons interested as having been such without further notice to the claimant; and
- the aggregate amount, on an annual basis, of all distributions made by the corporation to its stockholders for each of the three years prior to the date the corporation dissolved.
There are additional rules regarding giving notice, such as exactly where it must be published and how it must be sent to known claimants. There are also intricate rules for how and when to respond to claims. Because many of these rules can be hard to understand, you should strongly consider getting assistance from a business attorney when giving notice to claimants.
You do not need clearance from Delaware’s Division of Revenue (“DOR”) before you can file to dissolve to your corporation. However, as mentioned above, the DOS does require you to be paid up with all state taxes and to be up to date with all annual franchise tax report filings. In addition, you will need to notify the DOR of the dissolution on your final corporate income tax return by checking the box labeled “Out of Business” and indicating the last day the corporation was in business.
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 stockholders for federal tax purposes. Only the stockholders, 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.
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.