In business, as in life, nothing lasts forever. Inevitably, fate or circumstance leads to the sale or cessation of a business. The process for selling or terminating the business depends on what type of business it is and the circumstances that prompted the decision to take either action.
For Los Angeles-area corporations, legal termination begins with dissolution. But how is it done? Keep reading to learn more.
Different types of corporate dissolution in California
In California, corporate dissolution is generally classified as voluntary or involuntary. The difference is that a court order is necessary to facilitate involuntary dissolution. On the other hand a corporation’s shareholders usually carry out voluntary dissolution.
Having said that, there are different procedures for corporate dissolution in certain circumstances. These procedures are used when:
- Corporations have not yet issued stock
- Corporations are going through Chapter 7 bankruptcy
- Corporations have gotten rid of all assets and remained inactive for the past five years
Voluntary dissolution of inactive corporations
Even if it is inactive – or was never technically active – any corporation registered with the Secretary of State’s Office in California will have certain financial obligations until it is officially dissolved. Depending on the type of business, these may include franchise fees and state taxes.
If your corporation distributed shares while it was active….
Follow these steps to dissolve an inactive corporation that distributed shares while it was active:
- Hold a board meeting to vote on dissolution or take any other actions to facilitate dissolution as set forth in the articles of incorporation. Be sure to have someone take notes so there is a record of the proceedings.
- Make sure any outstanding taxes or other debts are paid.
- File all required forms with the Secretary of State’s Office.
- Submit the final current-year tax return to the Franchise Tax Board (“FTB”). Do not forget to check the “final return” box on the first page of the application/return. You can also write the word “final” on it. Do not do any corporate business here after the last day of the final taxable year.
If you created the corporation within the last 12 months…
Here are a few tips to follow for dissolution of an inactive corporation you created within the past year (12 months):
- Turn to your articles of incorporation for guidance regarding board meetings, votes on the issue and so forth. If a meeting and/or vote are required make sure someone documents the process in writing.
- Make sure there are no outstanding financial obligations and take care of any you come across.
- Get the “Short Form” Certificate of Dissolution, or Form DSF STK, from the Secretary of State’s website. Once you’ve completed it, file it with the same office.
- Complete and file the appropriate tax return with the FTB.
Voluntary dissolution of active corporations
Under California’s General Corporation Law (“GCL”), voluntary dissolution of a corporation is allowed when shareholders with a clear majority (at least 50 percent) of the voting power approve it.
In this context, it is worth noting that relevant California laws do not clearly mandate that the board of directors acts prior to the shareholder vote. That being stated, boards routinely provide proposals for dissolution to shareholders for their consideration. If you do have a shareholder meeting, you must give 10 days advance notice of the meeting to everyone eligible to vote on dissolution. You should also be sure to document the board’s proposal and the shareholders’ votes.
As per the GCL, you don’t have to hold an official meeting and vote as long as shareholders with no less than 50 percent of the voting power approve the dissolution in writing. Specifically, they must sign a document called a “consent” stating the corporation is dissolved. That’s not all. To be valid, the consent must be entered in the corporation’s records correctly.
Keep in mind that you do not have to provide advance notice of this action to dissolve to certain shareholders. Specifically, you do not have to give it to shareholders who are ineligible to vote, or those who do not give consent. However, without unanimous approval, you must give “prompt notice” of the action taken to dissolve to voting shareholders who did not approve.
To be safe, go through your articles of incorporation and bylaws and consult a lawyer to confirm you are following the correct procedures for your particular corporation.
The Certificate of Election to Wind Up and Dissolve
As long as there is a unanimous vote for dissolution, there is no need to file a Certificate of Election to Wind Up and Dissolve with the Secretary of State. Otherwise this paperwork must be filed. In accordance with the GCL, the certificate must contain the following:
- A statement indicating the corporation has chosen to wind up and dissolve
- Relevant information about the vote taken; and
- If a shareholder or shareholders signed the certificate, a statement indicating that the shareholders with at least 50 percent of the voting power authorized him/her/them to sign it.
You can get a blank certificate form (Form ELEC STK), and instructions on the SOS website. Once you have completed it you can submit the certificate by mail or in person.
Once the dissolution is approved, the corporation only exists as long as it takes to wrap up or “wind up” any remaining loose ends. These are usually financial matters such as:
- Notifying relevant creditors and claimants that the corporation is voluntarily winding up
- Paying, or making sufficient arrangements to pay, all known corporation debts and liabilities
- Distributing any remaining assets to eligible recipients
Filing the Certificate of Dissolution
The next step is to file a Certificate of Dissolution with the Secretary of State. It should include:
- A statement indicating the corporation has been completely wound up
- A statement indicating the corporation’s known debts and liabilities have been paid, or sufficient provisions for payment have been made; or alternatively that the corporation does not have any known debts or liabilities
- Details pertaining to the provisions for payment of outstanding financial obligations
- A statement confirming the corporation’s known assets have been distributed to eligible persons
- A statement indicating the corporation is dissolved.
You can get a Certificate of Dissolution form (Form DISS STK) and instructions from the Secretary of State website. By using this form as recommended you also will be asserting that you have filed or will file a final franchise tax return for the corporation. You can submit the Certificate of Dissolution by mail or in person.
Clearly this is an important – and potentially complicated – process. If you have questions or concerns – or you need help dissolving your Los Angeles area corporation, contact the Law Office of Parag L. Amin P.C., today.