There comes a time in the life of many entrepreneurs when they have to make the difficult decision of either forging on or throwing in the towel. More than half of new businesses don’t make it past the first two years. It is nothing to be ashamed of to say a venture just cannot go on. No matter what, you’ll always be a winner to us :) 

If you do, in fact, come to the decision to close your corporation, please don’t just pull a Michael Scott…

The decision to close your corporation necessitates a few important legal steps to ensure you don’t have liabilities follow you. 

Considerations When Shutting Down Your Corporation

Each state has different rules on what is needed to close down a corporation. Below are a few important considerations to pay attention to when closing down your corporation. 

Dissolution refers to the termination of a corporation’s existence under California state law. In California, a corporation may dissolve voluntarily or involuntarily, through administrative or judicial means. Dissolving a California corporation is a multi-step, multi-state-agency process that has requirements with both the Franchise Tax Board (FTB) and the California Secretary of State (SOS).

There are many benefits of formally dissolving a corporation. Including:

  • Ensuring that taxes, fees, and penalties do not continue to accrue against the corporation. A corporation is subject to:
    • a $250 penalty if it fails to file its annual statement of information; 
    • a minimum $800 annual franchise tax
  • Ensuring that shareholders are protected against personal liability for known and unknown liabilities.
  • The corporation is not considered a sham corporation for piercing the corporate veil.

To avoid legal challenges to the dissolution, the corporation should carefully follow all requirements and procedures set out in California law, the articles of incorporation, and the bylaws and keep detailed records of the dissolution decision and process, particularly any notice provisions and votes on a resolution.

Here’s a step by step guide to voluntarily dissolve a corporation that has commenced business and issued shares: 

  • Obtain Shareholder’s approval of the dissolution. The corporation must give written notice of the shareholders’ meeting to vote on dissolution to all shareholders entitled to vote. The shareholders must then approve the dissolution by the required voting percentage. You will also need to prepare a separate board resolution approving the dissolution and a plan of dissolution to define and document the dissolution and winding-up process.
  • Winding up your corporation. This means to settle the corporation’s affairs by liquidating assets, collecting accounts receivables, and using these proceeds to pay off your corporation’s tax liabilities and corporate debt, such as outstanding rent, bank charges, payments owed to contractors, utility bills…etc. You must give notice to shareholders and creditors on the commencement of winding up. Carefully review all active agreements to resolve assignment of rights and delegation of duty issues.
  • Fulfill Franchise Tax Board (FTB) requirements.
    • File all delinquent tax returns and pay all tax balances, including any penalties, fees, and interest.
    • File the final/current year tax return. Check the applicable Final Return box on the first page of the return, and write “final” at the top of the first page. All tax returns remain subject to audit until the statute of limitations expires.
    • Cease doing or transacting business in California after the final taxable year.
  • Make sure an annual statement of information was filed with the California SOS. Before the dissolution of your California corporation will be approved, any outstanding Statement of Information must be filed.
  • Filing a certificate of election to wind up and dissolve. This document must be filed with the California SOS after the corporation has elected to dissolve. There are no filing fees for this document. Note that you won’t need to file the certificate of election to wind up and dissolve if all outstanding shareholders voted to approve the dissolution.
  • Filing a certificate of dissolution. This document must be filed with the SOS after the corporation has completed the winding-up process. There are no filing fees for this document. This must be filed within 12 months of the filing date of the corporation’s final tax return.

Consult with an Experienced California Business Lawyer Today!

It is a common tendency to take shortcuts when closing down a business. However, this can be extremely risky due to all the personal liability and tax issues that can result from not handling the related requirements appropriately. To avoid legal challenges and liabilities arising from the dissolution, the corporation should carefully follow all requirements and procedures set out in the Cal. Corp. Code, the articles of incorporation, and the bylaws and keep detailed records of the dissolution decision and process, particularly any notice provisions and votes on a resolution. Carbon Law Group has business lawyers who specialize in business and corporate law in California. Schedule an appointment to find out what we can do for you and your business!

In an old yet still iconic corporate governance “case of the century,” a shareholder derivative litigation in connection with Walt Disney Company’s hiring and subsequent termination of Michael Ovitz, we see that skimping on board minutes pertaining to important corporate decisions can result in extraordinarily costly and painful litigation. A California for-profit corporation needs to perform certain critical tasks to maintain its good standing with state and federal authorities, avoid penalties, and preserve its separate existence as a legal entity. One of these tasks is to maintain “good” meeting minutes. But what distinguishes the “good” meeting minutes from the “bad” ones?  Corporate meeting minutes are an official and permanent record of the actions taken by a corporation’s governing body. Board minutes reflect the discussions held, authorizations granted, and actions taken by the board of directors. The California Corporations Code requires a corporation to keep minutes of the proceedings of the board of directors (Cal. Corp. Code § 1500). Most other states are like California, and have laws on the books that require corporations to keep meeting minutes with other corporate documents and records. Yet, a handful of states leave the responsibility for recording and retaining minutes up to the corporations, some of these states include Delaware and Nevada. While there is no single correct method of drafting and taking meeting minutes, there are certain things that your corporate meeting minutes should include to make them among the “good” ones that will give you the most legal protection if and when a problem arises. Good corporate board meeting minutes are more than a general accounting of board discussions; they serve as an official and legal record of the meeting of the board of directors. The corporate secretary should presume that minutes of board meetings may be produced in litigation. Therefore, it is critical that the secretary ensures that the meeting minutes contain the elements that satisfy the legal test for privilege or confidentiality. One of the key purposes of corporate minutes is to provide direct evidence of the facts described in them, such as:
  • Delegation of authority from the board of directors to corporate officers.
  • Corporate approval of the actions taken, such as approval of transactions with third parties.
  • Satisfying the business judgment rule and offering documentation to support directors’ duty of care by indicating the information that was presented to the directors and that they discussed the matters fully.
Generally, for a corporation’s board of director meeting minutes, the following items are typically known in advance and must be included in the minutes:
  • the date, location and start time of the meeting;
  • the type of meeting (regularly scheduled or special or executive session);
  • whether the meeting is in person or telephonic;
  • a preliminary list of directors expected to be present at the meeting;
  • whether a quorum of directors is to be present;
  • the name of the person serving as secretary of meeting;
  • approval of the minutes of the previous meeting; and
  • the matters to be discussed or approved at the meeting. 
Furthermore, a corporation’s board of director meeting minutes should also include important corporate actions, such as:
  • approving or ratifying major contracts;
  • transferring or assigning personal obligations to the corporation;
  • electing officers;
  • electing directors;
  • hiring key employees;
  • approving or ratifying significant loans or other indebtedness; and
  • qualifying the corporation to do business in other jurisdictions;
  • updating any organizational changes in the management or ownership of the business, including:
    • principal business office;
    • new business offices;
    • directors;
    • committees;
    • officers; and
    • shareholders
Here are some common meeting minute mistakes you should avoid:
  • Forgetting to take attendance and making sure that a quorum is present
The organizational documents of the corporation such as the Articles of Incorporation and By-Laws specify the minimum number of board members that must be present for a board meeting to have a quorum. Or if they are silent, then the relevant state law determines the number of board members required for a quorum. A quorum is the minimum number of directors required at a meeting for the decisions voted on to be valid. If the quorum is not reached, the vote cannot take place at the meeting then the decision cannot be taken and the status quo will be maintained. Taking attendance and making sure that a quorum is present at all meetings is important because without a quorum, the board would only be authorized to take few, if any, actions related to the corporation. Decisions made at meetings without a quorum are subject to challenges.
  • Inaccurate or incomplete record of corporate decisions
As mentioned above, one of the key purposes of corporate meeting minutes is to provide direct evidence of important corporate actions. Meeting minutes that do not accurately reflect the vote of the board of directors have failed their essential purpose. Meeting minutes need to accurately reflect the issue and decision under discussion, at the very least, they should capture the same wordings of resolutions accurately. Therefore, it is important as a standard procedure to have the board review and approve of the minutes of the previous meeting at the beginning of the next meeting. 
  • Failing to record executive sessions
Executive session is a portion of the meeting that is closed to non-directors. California Corporations Code Section 8320(a)(2) requires each corporation to keep minutes of the proceedings of its members, board and committees of the board. Thus, it is required that executive sessions are properly recorded like any other board of director meetings. Executive session is an important tool to help preserve attorney-client privilege in the case of litigation that involves alleged or improper activities and major business transactions. Proper and accurate records of these sessions are particularly important because of the topics that are often involved in these sessions, which include litigations and crisis management. Executive session allows directors to speak openly about relevant issues of these sensitive topics that relate to the CEO or other staff members. At Carbon Law Group we can help you to draft and review legally competent corporate meeting minutes of your business. If you have any questions about how to draft corporate meeting minutes for your corporation, do not hesitate to reach out to us. You can use this link to schedule an appointment to speak with an attorney today. This blog article is published for educational purposes only. Its sole purpose is to give you general understanding of the law and not to provide specific legal advice. By using this website you understand that no attorney client relationship has been established between you and the publisher. Please contact an attorney licensed in your state for competent legal advice.

Forming your corporation is the first step to limit your personal liability and to ensure the protection of your personal property. However, we are often asked, “Is forming a corporation sufficient to achieve such protection?” or “Is it sufficient to resolve any issues that may arise between me and my partners down the line?”

The short answer is – NO.

After forming a corporation, there are several considerations that startup founders should take into account to mitigate their risk and to adopt a corporate structure that is in line with their expectations.

The below summary describes the initial documents necessary to ensure your corporation is legally compliant and to create effective asset protection mechanisms. Note: many of these principles can be applied to LLCs as well, but for the purposes of discussion here, we are focusing on corporations.

Director Resolutions

Director Resolutions are how you make important decisions for your corporation during the meetings of the Board of Directors. The basic initial resolutions include:

  • electing Directors and appointing Officers, such as the CEO, CFO, and Secretary;
  • approving Bylaws and Shareholders Agreement (discussed next);
  • obtaining authorization to open a separate bank account for your startup; and
  • issuing shares to shareholders of your corporation, etc.

Following such corporate formalities is essential to prevent your business creditors from reaching your personal assets. In the event of an audit or lawsuit, it provides evidence that you keep your personal and business assets separate, treat your corporation as a distinct entity, and cannot be personally liable for corporate actions.

Bylaws

Bylaws provide a governance structure and procedures for your startup. Adopting Bylaws is mandatory in California and many other states. The Bylaws address the following questions:

  • how to manage the corporation, and elect the Directors and the Executives;
  • how to make important decisions, such as approving major transactions; or
  • how to accept new investments or investors into your business, etc.

Adopting and following your Bylaws regularly is crucial in shielding shareholders’, directors’ and executives’ personal assets from corporate liabilities. This is why you should have well-structured Bylaws for your corporation that is is easy to understand and follow.

Shareholders Agreement

A Shareholders Agreement is helpful when your business has more than one founder or new investors join your startup. This Agreement memorializes the understandings and intentions of shareholders and can introduce significant protections for you and your partner(s), such as:

  • the right to buy existing shares before non-owners (Right of First Refusal);
  • the right to sell your shares back to the corporation (Put Option/Buy Back);
  • the right to buy newly issued shares before non-owners (Pre-emption Rights); and
  • the right to buy other owners’ shares in case they breach their duties (Buy-Sell Rights).

Having those provisions in place will allow you to tackle finance and governance disputes efficiently without impairing your regular business operations.

At Carbon Law Group we can help you to negotiate, draft, and incorporate these documents into your new business structure. This will shield your personal assets from your business creditors’ claims and will set clear paths for dispute resolution between you and your partners.

If you have any questions about how to draft governance documents for your startup or need assisting with setting up your corporation, do not hesitate to reach out to us. You can use this link to schedule an appointment to speak with an attorney today.

This blog article is published for educational purposes only. Its sole purpose is to give you general understanding of the law and not to provide specific legal advice. By using this website you understand that no attorney client relationship has been established between you and the publisher. Please contact an attorney licensed in your state for competent legal advice.

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