At times, Corporations, the most common form of limited liability entity in use, no longer serve their purpose for the owners. A business can alter in its purpose or the owners may wish to retire or sell their assets. Tax laws may alter or the tax situation and exposure of owners may change. For whatever reasons, if that is the decision of the owners, they must then take various formal and practical steps to actually dissolve the entity legally so as to avoid future legal or tax problems.
Good accounting, tax and legal advice is normally recommended. To simply abandon the entity may create additional liabilities, both in terms of obligations to creditors and the taxing authorities as well as to employees and the fiduciary duty of the directors and officers must be taken into account.
This Article shall briefly outlines the steps to be taken in dissolving the corporation in California but the reader is advised to get professional advice in addition to reading this article.
STEPS TO DISSOLUTION:
California Corporation Code §1900 provides that a corporation may elect to wind up and dissolve voluntarily on the vote of at least 50% of the outstanding shares, or the board of directors may elect to dissolve the corporation but only if the corporation has not issued shares; or has disposed of all of its assets and has not done business for the past five years; or has been adjudicated bankrupt.
California Corporations Code section 1900.5 provides for a “short form dissolution” by the incorporator for corporations where no shares have been issued or directors named and that has been in existence less than 12 months and has conducted no business.
Following is the checklist of actions necessary to voluntarily dissolve a corporation in California under § 1900:
STEP 1 – OBTAIN SHAREHOLDER CONSENT TO DISSOLUTION
Obtain the consent of shareholders holding at least 50% of the outstanding stock to a resolution to dissolve. This consent can be obtained by noticing a special meeting of the shareholders for the purpose of passing a resolution to dissolve the corporation pursuant to Corporations Code §1903(a) or filing of a written consent of shareholders.
STEP 2 FILE CERTIFICATE OF ELECTION TO WIND UP AND DISSOLVE IF LESS THAN 100% SHAREHOLDER APPROVAL
If the election to dissolve is made by the vote of all the outstanding shares i.e. 100% vote to dissolve, then the Certificate of Election To Wind Up and Dissolve does not have to be filed with the Secretary of State, but a statement that the election to dissolve was made by a vote of all the outstanding shares must be included in the Certificate of Dissolution that is filed with the Secretary of State.
If at least 50% but less than all of the outstanding shares elect to dissolve than the corporation must file the Certificate of Election To Wind Up And Dissolve with the Secretary of State either prior to, or simultaneously with, the Certificate of Dissolution. There is no fee for filing a Certificate of Election To Wind Up and Dissolve and there is a sample form available on the California Secretary of State’s website.
STEP 3 WRITTEN NOTICE OF COMMENCEMENT OF DISSOLUTION TO CREDITORS AND OBJECTING SHAREHOLDERS
The board of directors of the corporation must mail written notice of the commencement of the voluntary dissolution to all shareholders except those who voted in favor of dissolution and to all known creditors and claimants who appear
on the records of the corporation.
STEP 4 CONSULT TAX ADVISOR REGARDING TAX CONSEQUENCES
AND NECESSARY TAX FILINGS REGARDING DISSOLUTION
Dissolution of a corporation requires the preparation of both State and Federal tax filings and as well as possible filings and payments regarding sales tax, employment taxes and any applicable city taxes. Following is a list of some of the tax issues one should discuss with one’s accountant:
- Final state and federal tax payments
- Final state and federal returns
- Final quarterly or annual employment tax form if applicable
- Issue final wage and withholding information to employees if applicable
- Report information from W-2’s issued if applicable
- Report capital gains or losses
- File final employee pension/benefit plan if applicable
- Issue payment information to any subcontractors
- Report information from 1099’s issued
- Report corporate dissolution or liquidation
- Report any business asset sales
- Report the sale or exchange of property used in your business
STEP 5 BOARD OF DIRECTORS TO ADOPT PLAN OF DISSOLUTION FOR SHAREHOLDER CONSENT TO FILE WITH IRS CORPORATE DISSOLUTION OR LIQUIDATION NOTICE
A plan of dissolution must be adopted by the shareholders and a copy certified by the Secretary of the corporation must be attached to IRS Form 966 which must be filed by a corporation within 30 days after the resolution or plan is adopted to dissolve the corporation. If the resolution or plan is amended or supplemented after Form 966 is filed, file another Form 966 within 30 days after the amendment or supplement is adopted.
STEP 6 BOARD OF DIRECTORS TO WIND UP THE AFFAIRS OF THE CORPORATION BY PAYMENT OR PROVISION FOR PAYMENT OF ALL CORPORATE DEBTS OR LIABILITIES AND BY DISTRIBUTION OF ASSETS TO SHAREHOLDERS
Corporations Code §§316(a), 2004 and 2005(a) provide that it is the responsibility of the directors or other appointed to wind up to determine that the corporation’s debts and liabilities have either been paid or adequately provided for before the distribution of assets to shareholders. Directors and shareholders may be held personally liable for unpaid corporate debts if corporate assets are distributed to the shareholders without payment or adequate provision for payment of corporate liabilities.
STEP 7 FILE CERTIFICATE OF DISSOLUTION WITH EITHER PREVIOUSLY OBTAINED TAX CLEARANCE CERTIFICATE OR REQUEST FOR TAX CLEARANCE CERTIFICATE
The Certificate of Dissolution must be signed under penalty of perjury by a majority of the directors then in office and must include the following statements:1) that the corporation has been completely wound up; 2) that the known debts and liabilities have been actually paid or one of the following statements: paid as far as its assets permitted; adequately provided for by assumption with name and address of assumer; adequately provided for as far as its assets permitted; or the corporation never incurred any known debts or liabilities; 3) the known assets have been distributed to the persons entitled thereto; or the corporation never acquired any known assets; 4) that a person or corporation or other business entity assumes the tax liability, if any, or the tax liability will be satisfied on a taxes paid basis; 5) that the corporation is dissolved and 6) if the election to dissolve was made by all of the outstanding shares then this statement must be included in the Certificate and the Certificate of Election To Wind Up And Dissolve does not need to be filed. An original and at least 2 copies of the Certificate should be submitted to the Secretary of State. The original will be filed and two copies will be certified without charge if submitted with the original.
A current and valid Tax Clearance Certificate issued by the Franchise Tax Board or a completed Request For Tax Clearance Certificate must be submitted to the Secretary of State with the Certificate of Dissolution. If a Request for Tax Clearance Certificate is submitted, the Secretary of State will forward the request form to the Franchise Tax Board. The dissolution will be conditional pending issuance of the Tax Clearance Certificate by the Franchise Tax Board. The date of conditional filing will become the final date of dissolution once the Tax Clearance Certificate is issued and forwarded to the Secretary of State. According to the Secretary of State, the corporate powers, rights and privileges cease upon filing of the Certificate of Dissolution, whether final or conditional, however, the corporate existence of a conditionally dissolved corporation continues until issuance of a Tax Clearance Certificate.
There is a tendency when it is time to close down a business to short cut the details to “get it over with.” This is perhaps understandable but very dangerous since personal liability and tax problems can result from not treating this process with the same degree of care and professionalism that one used to begin the entity. If done correctly, it is a relatively simple and quick process. If ignored, it can come back to haunt one in retirement or in the midst of a new business.
The great German poet Schiller put it well: Only those who have the patience to do simple things perfectly will acquire the skill to do difficult things easily.