Business people dissolve a corporation in California for one or more reasons. Some of the major reasons for making the move include:
- A low cash flow. You need a healthy cash flow to operate. Therefore, many business owners will dissolve their corporation if they don’t have a sufficient cash flow.
- Poor management or accounting practices. Besides relying on a business attorney for your business, you also need to depend on the services of a good accountant. Otherwise, you may be faced with the dissolution of your business.
- Increased competition. Sometimes, businesses find they are up against stiff competition. When this happens, they may decide it is best to stop operating.
- Economic pressures. The stress caused by the recent pandemic led to the closure and dissolution of many businesses.
- Problems with liability. If you have been sued or liability claims have been filed, you may find it no longer feasible to operate.
- Bankruptcy. If you get in over your head with expenses, sometimes it is best to file bankruptcy and begin again.
- Fail to plan ahead. Some businesses run into problems with their business operations because they fail to plan ahead or create contingency plans.
- Inside disputes. In some business dealings, partners or executives may dispute a practice or disagree on how things should be done. That is why you need to include an operating agreement among your documents when you incorporate. While an operating agreement does not need to be filed with the state, it will set out the rules for handling disputes.
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What It Means to Dissolve a Corporation in California
A dissolution is a process where a business closes its doors permanently. Corporate Code 1900(a) of the General Corporation Law in California governs the process for dissolution.
When you incorporate your business you need to file articles of incorporation and other paperwork with the Secretary of State. To dissolve your company, you also need to go through the California Secretary of State.
Dissolving a Corporation in California
To dissolve a corporation in California, you need to proceed as follows.
1. Present a Proposal to Shareholders for Dissolution
To begin dissolution of your business, you and your Board of Directors need to call a meeting of shareholders and submit a proposal of dissolution. If at least half of your business’s voting shares elect to dissolve and wind up the corporation, you can go forward and file a “Certificate of Election to Wind Up and Dissolve” with the Secretary of State in California.
You do not have to hold a shareholders’ meeting if over 50% of your voting shares give you written consent for dissolution. Instead, you only need to file a Certificate of Dissolution.*
*If everyone agrees to dissolve the business, a Certificate of Dissolution is filed with the Secretary of State, recording:
- The recorded date of dissolution.
- A statement that shows that the election to resolve was passed.
- Signatures of the majority of the company’s directors.
- A statement saying the corporation has been dissolved.
- A statement confirming the corporation has been wound up.
- A statement that makes provisions for paying unknown debts.
- An affirmation that a final tax return has been filed with the franchise tax board in California to clear the company of further tax obligations.
Once a corporation is dissolved, its further tax and legal obligations end and its name can be used by another business.
2. Settle or Wind Up the Company’s Business
When you dissolve a corporation in California, you need to wind up the corporation or settle its business affairs. This is done by:
- Liquidating the assets
- Collecting accounts receivable to pay off debt and tax liabilities for your business
When you reach this part of the distribution process, you must stop doing business.
Take Care of the Taxes First
Make it a priority to take care of the federal taxes during winding up that have been taken out of the employee payroll, including the income tax withholding, medicare tax, and social security. During the winding up phase,, your corporation has to file a final income tax return with the state and IRS.
You must state you are filing a final return. After you stop operating, you should keep your tax returns for at least 7 years.
While an accountant can help you with taking care of taxes and accounting, I can guide you in each step for dissolution.
Pay the Outstanding Debts
After you pay your federal taxes, you will need to pay your corporation’s outstanding debts, These obligations usually include:
- The outstanding rent
- Any bank charges
- Utility bill charges
- Payments to vendors
Serve a Notice of Dissolution
During step 2, it is also a good idea to serve your shareholders and creditors a Notice of Dissolution. Doing so will allow them to show why your company should not be declared as wound up and dissolved.
If a creditor does provide a claim within this period, you can prevent the claimant from receiving further payment from your company’s assets.
Distribute the Remaining Assets
Once you take care of the taxes and paying creditors and vendors, you can distribute the remaining assets to your shareholders. You cannot do this until you pay off all your debts first.
3. File an Annual Statement of Information with the Secretary of State to Dissolve a Corporation in California
To comply with state law and dissolve a corporation in California, you must, as a final measure, file an Annual Statement of Information. You need to do this for the dissolution to be officially approved.
At this time, you will also need to close out your company’s bank accounts and cancel the business credit cards. To play it safe, leave one checking account open to cover any unknown debt that may arise.
What To Do Next
Do you still have questions about how to dissolve a corporation in California? If so, that is quite understandable. That’s why you need to consult with an experienced and capable legal firm. Contact me or my staff anytime, 24/7.
Book a call to speak to us here: https://mollaeilaw.com.
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