Tuesday, June 05, 2007

Dissolving a Corporation in California

There are many reasons to formally dissolve an inactive corporation:

  • No more $800 minimum franchise tax fee;
  • No more filing of tax returns
  • No more annual filings with the California Secretary of State
  • No more annual meetings of the shareholders and board of directors

The voluntary dissolution of a domestic stock corporation is initiated by an election to dissolve. The election to dissolve may be made by the vote or written consent of at least fifty percent of the outstanding shares of the corporation, by the board of directors if no shares have been issued or in limited circumstances, by a majority of the incorporators if no directors were named in the original Articles of Incorporation and none have been elected.

To dissolve, the corporation must file a Certificate of Election to Wind Up and Dissolve prior to or together with a Certificate of Dissolution. However, if the election to dissolve is made by the vote of all the outstanding shares, only the Certificate of Dissolution is required.

Although Tax Clearance certificates are no longer needed, the corporation is required to file any outstanding and/or final returns with the California Franchise Tax Board. In addition to the services of legal counsel, a CPA or other tax professional should be retained to assist with preparing the closing tax returns.

When dissolving a corporation, the directors signing the Certificate of Dissolution must certify one of the following to be true:

  • The corporation's known debts and liabilities have been actually paid;
  • The corporation's known debts and liabilities have been paid as far as its assets permitted;
  • The corporation's known debts and liabilities have been adequately provided for by their assumption;
  • The corporation’s known debts and liabilities have been adequately provided for as far as its assets permitted; or
  • The corporation never incurred any known debts or liabilities.

Failure to adequately provide for the debts of the corporation could result in personally liability of the shareholders. The services of legal counsel are very important in avoiding this type of personal responsibility.

About the Author: Carl H. Starrett II has been a licensed attorney since 1993 and is a member in good standing with the California State Bar and the San Diego County Bar Association. Mr. Starrett practices in the areas of bankruptcy, business litigation, construction, corporate planning and debt collection.

1 comment:

Anonymous said...

Hi Carl,
I owe money to my 2nd & 3rd mortgage lender, who was a friend and is now foreclosing on me. When I signed the deeds, he was a california corporation. Corporation has been dissolved and he had been asking for cash payments. Now that I'm in BK he has filed foreclosure and wants a huge settlement out of court for himself or he will foreclose. Is this legal for him to collect as himself as beneficiary and not as corporation? Thanks