How to Dissolve a Corporation in Delaware
If you've decided to dissolve your Delaware corporation, it's important to follow the right steps to avoid any legal or financial issues.
This guide provides a clear, step-by-step approach to helping you through a voluntary dissolution process. The goal is to ensure that all requirements are met and the closure is as smooth and trouble-free as possible.
Step 1: Board of Directors & Shareholders Agree to Dissolve the Corporation
A corporate dissolution in Delaware starts with the board of directors adopting a resolution to dissolve. Then, all eligible shareholders must vote on the matter (to ensure that those invested in the company support the decision). The corporate dissolution process formally begins once the majority favors dissolution.
Note: Shareholders entitled to vote have the option to provide written consent in lieu of attending a formal meeting.
The board needs to properly notify its shareholders by sticking to the following guidelines:
Send written notice to shareholders before the meeting, as specified in the Certificate of Incorporation..
Include the purpose, date, time, and place of the meeting (and instructions for remote access if that’s an option).
Deliver the notice via U.S. mail, courier service, or email.
You should document the board’s resolution and the shareholder vote in the corporation’s official records. Make sure to keep detailed minutes of the shareholders’ meeting, including all discussions and the vote results.
If you’re using the written consent method, collect all written consents, document them, and store them properly.
Step 2: Settle State Taxes and Submit the Annual Franchise Tax Report
Once the shareholders agree to dissolve the corporation, the next step is to settle all financial obligations with the state, i.e., pay outstanding taxes and file the necessary annual reports.
Settle State Taxes
1. Franchise Taxes:
Franchise taxes are the annual fees charged to companies for the right to do business in different states. Delaware offers two methods to calculate these taxes: the Authorized Shares Method and the Assumed Par Value Capital Method (The Delaware Division of Corporations page shows how).
It's wise to calculate your taxes using both methods to see which results in a lower tax bill. Ensure all franchise taxes are paid up to the date of dissolution, including taxes for the current year and any past-due amounts (otherwise, you can't legally dissolve the company).
2. Other State Taxes:
Beyond franchise taxes, settle all other state taxes, including state income taxes if your corporation earned income, payroll taxes if you have employees, and sales taxes if you've collected sales tax. Each of these must be paid up to date to avoid any issues during the dissolution process.
File Annual Franchise Tax Report
In addition to paying taxes, you must also file your final annual franchise tax report, which details your corporation's status and financials.
This report must include key information like your corporation's name, principal office address, the names and addresses of directors and officers, and the number of authorized shares. Gather this information ahead of time to avoid bottlenecks.
The fastest and most efficient way is to file the franchise tax report online through the Delaware Division of Corporations' website. When submitting the report, you'll also need to pay the associated filing fee, which is detailed on the Division's website.
Unlike some states, Delaware doesn't require a tax clearance certificate to file the Certificate of Dissolution. However, ensuring all taxes and fees are paid is crucial to avoid potential legal complications.
Finally, maintain records of all your tax payments and filings, including receipts, confirmation emails, and copies of filed reports. These documents are essential for legal and tax purposes, so you should keep them for a few years after your corporation shuts down.
Step 3: File a Certificate of Dissolution
Step number 3 is to file the Certificate of Dissolution. In the state of Delaware, this certificate is of two different types: a standard form and a short form.
Use the short form if your corporation has no assets, has stopped all business activities, and has paid the minimum franchise tax (for each year since its incorporation). The short form has a $10 filing fee.
The standard form, on the other hand, is for corporations that don’t meet the above requirements and has a $204 filing fee. Whichever form you end up using, you will need to submit the following details within the Certificate of Dissolution:
The corporation’s name
The date of incorporation
The exact date when the dissolution was authorized
The names and titles of current officers and directors.
To file the certificate, mail the completed form, cover memo, and filing fee to the Delaware Department of State. Some preliminary steps and fee payments can often be submitted online, speeding up the process. Ensure that an authorized officer of the corporation signs the form.
After filing, you will receive a confirmation from the Delaware Department of State. It is important to keep this confirmation and verify that the corporation's status is updated to "dissolved" in state records.
Note that the corporation can continue existing for up to three years post-dissolution to wrap up any remaining business, such as legal actions, debt settlement, and asset distribution.
Step 4: Notify Your Creditors
Notifying creditors regarding the company shutdown is optional in Delaware. Still, by establishing clear deadlines for submitting claims, you protect yourself from potential litigation down the line.
Under Delaware law, a notification is valid if it includes all of the following:
Statement of Dissolution: Clearly state that the corporation is in the process of dissolving.
Claim Submission: Inform readers that they must submit their claims in writing, including the amount owed and the basis for the claim.
Mailing Address: Provide a specific address where creditors can submit their claims.
Deadline for Claims: Specify the deadline (the deadline cannot be earlier than 60 days from the date of the notice).
Consequence of Missing Deadline: State that your corporation will not entertain any claims made after the deadline.
Distribution Information: Include a statement that the corporation or its successor may distribute remaining assets to other creditors and shareholders without further notice to the claimant.
Send notices to known creditors via registered or certified mail. To notify unknown creditors, the notice should also be published in a newspaper of general circulation in the county where your corporation's principal office is located.
The following is a creditor notification template you can take inspiration from:
[Corporation Name] [Corporation Address]
NOTICE OF DISSOLUTION
To Whom It May Concern:
This notice is to inform you that [Corporation Name] is in the process of dissolving. As such, we are notifying all known creditors and claimants of this dissolution.
If you have a claim against [Corporation Name], you must submit your claim in writing. Your claim should include the amount owed, the basis for the claim, and any supporting documentation. Please send your claim to the following address:
[Mailing Address]
All claims must be received by [Deadline Date, at least 60 days from the date of this notice]. Any claims received after this date will be barred.
The corporation or its successor may distribute the remaining assets to other creditors and shareholders without any further notice.
Sincerely,
[Authorized Officer’s Name]
[Title]
Step 5: Settle Debts and Distribute Remaining Assets to Shareholders
After notifying creditors, it's time to settle any outstanding debts and distribute the remaining assets to shareholders. Start by reviewing and validating each claim. Pay off valid claims if possible, and if not, distribute the assets according to their priority under state law. Also, document all payments, including the amount, date, and recipient.
Once these debts are settled, note what's left of the corporation's assets. Then, distribute these remaining assets to shareholders based on their ownership stakes.
Ensure that asset distribution is fair and proportional. Like the debt settlement process, you should record all the necessary details, including who received what and when.
By carefully settling debts and distributing assets, you fulfill the corporation's financial obligations and ensure each shareholder gets their fair share.
Step 6: Close Bank Accounts and Cancel Licenses & Permits
The final step in dissolving your corporation is to tie up any loose ends. This includes closing bank accounts, canceling licenses and permits, and other state registrations.
Begin by reconciling all transactions (to ensure everything is in order) and distributing any remaining funds from your corporate accounts to shareholders. Then, contact your bank to close these accounts and request a written confirmation.
Next, cancel any business licenses and permits your corporation holds, including state, local, and special permits. Reach out to the relevant authorities to complete this process and request confirmation of cancellation.
If your corporation is registered to do business in other states, you must terminate these registrations. File the necessary withdrawal forms with the appropriate state agencies and include any required documentation and fees. Again, make sure to get confirmation that the registrations have been terminated.
Notify the Delaware Division of Revenue to ensure all state tax filings are complete and that there are no outstanding tax obligations (including any employment and payroll tax obligations at the state level).
Finally, notify the IRS by filing Form 966 (Corporate Dissolution or Liquidation) and your final federal tax returns. Ensure all federal tax obligations, including employment and payroll taxes, are settled. Keep records of all these actions for at least seven years.
By thoroughly closing all accounts, canceling licenses and permits, and terminating out-of-state registrations, you ensure the corporation's operations are properly concluded.
Conclusion
Having reached the end of this guide, you now know the steps involved in legally shutting down a Delaware corporation. However, even by following everything to a T, you'll still need the help of professionals. In this regard, you have two options.
The first is opting for traditional service providers like lawyers and accountants. They'll get the job done, but you can expect to pay potentially tens of thousands of dollars in legal fees and might have to wait more than a year for your corporation's legal existence to end.
Or, you could choose option 2 (which is working with us!). This option delivers results quicker, involves far less headache, is legally sound, and, most importantly, costs considerably less than the first option.