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!

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