How to Dissolve a Corporation in California

California shares many similarities with other states when it comes to dissolving a corporation. However, a general understanding of corporate shutdown isn't enough; founders must ensure compliance with state-specific guidelines to avoid heavy legal and financial penalties, some of which can come back to haunt years after the company's legal existence ends. 

In this blog, you will learn all the steps, big and small, related to voluntary corporation dissolution in California.

Step 1: Hold a Board Meeting and Obtain Shareholder Approval

A board meeting is the first step in the formal dissolution process and aims to discuss the corporation's fate.

All board members should be notified about the meeting date – usually in writing – several days in advance. The exact timeline depends on the corporation's bylaws.

The quorum (the minimum number of directors required to be present to make the proceedings valid) must be met during the meeting. Again, the exact number varies according to each company's bylaws. Then, if there are enough votes, the board passes a formal resolution to recommend dissolution to the shareholders. Specific resolutions may include::

• The intent to dissolve the corporation.

• Authorization to begin the dissolution process.

• Appointment of individuals responsible for winding up the corporation's affairs.

The board also formally approves a plan to wind up the company, pay off debts, and distribute remaining assets to shareholders according to the corporation's bylaws and relevant state laws (more on that in Step 5).

The meeting minutes should accurately reflect the discussion and resolution. These minutes are important legal documents that the secretary of the meeting signs and retains in the corporate records. Once all of this is complete, you can proceed to obtain shareholder approval.

Under California law, a corporation can voluntarily dissolve if shareholders holding at least 50% of the voting power vote in favor of the dissolution. But that’s not necessarily the case; the corporation’s articles of incorporation or bylaws may specify a different voting requirement.

According to the California Corporations Code, businesses should notify eligible shareholders about the meeting via written communication at least 10 (and up to 60) days before the scheduled date. If in-person meetings are not feasible, these shareholders can vote to dissolve via written consent (without a meeting).

Once the required number of shareholders (or their representatives) are at the meeting, the board presents the resolution and explains the reasons for dissolution. All present shareholders can discuss and ask questions before the vote. If a majority vote is reached, the dissolution process begins.

Note that, depending on the bylaws, these meetings can also be conducted electronically, such as via video or conference call.

Like the board meeting, you should document the results in the meeting minutes, note the number of shares represented, votes for and against the resolution, and any abstentions. 

Step 2: File a Certificate of Election (If Required) 

After obtaining board and shareholder approval to dissolve the corporation, it's time to file the necessary documents with the California Secretary of State. Suppose not all shareholders unanimously agree to dissolve the corporation. In that case, you must file a Certificate of Election to Wind Up and Dissolve either before or with the Certificate of Dissolution.

If you need to file a Certificate of Election, it must include the following details:

• The Corporation's Decision to Dissolve: Clearly state that the corporation has elected to wind up and dissolve.

• The Voting Details: Confirm that at least 50% of the voting power agreed to the dissolution.

• The Authorization: The certificate must be signed by a high-ranking officer (like the President or Secretary), a majority of the current directors, or a shareholder authorized by those holding 50% or more of the voting power.

Step 3: Notify Creditors and Settle Debts

Step number 3 in closing your corporation is to notify creditors and settle outstanding debts. Notifying creditors is a legal requirement that ensures all known and potential creditors are aware about the imminent shutdown. There are two methods of notifying creditors.

1. A direct notice: Send a written notice to all known creditors informing them of the corporation’s dissolution. Include the following details:

• The corporation's name and contact information.

• The effective date of dissolution.

• Instructions on how and where to submit claims.

• The deadline for submitting claims, typically within a certain number of days from the notice date (e.g. 120 days).

Here is an example of what a creditor notification letter might include:

[Corporation Name]

[Address]

[City, State, Zip Code]

[Date]

[Creditor’s Name]

[Creditor’s Address]

[City, State, Zip Code]

--

Dear [Creditor’s Name],

This letter is to inform you that [Corporation Name] has elected to dissolve and is in the process of winding up its affairs. As part of this process, we are notifying all known creditors to submit any claims against the corporation.

Please submit your claim, including the amount owed and the basis for the claim, to the following address by [deadline date]:

[Corporation Name]

[Address]

[City, State, Zip Code]

If you have any questions, please contact us at [phone number] or [email address].

Sincerely,

[Your Name]

[Your Title]

[Corporation Name]

2. A public notice: Although not required by law, publishing a notice of dissolution in a newspaper of general circulation in the county helps notify unknown creditors.

Next, you must settle your organization's outstanding debts, including accounts payable, loans, leases, and other financial liabilities. Start by verifying each debt to ensure accuracy and then determine the order of priority.

Typically, this involves paying secured creditors first, followed by unsecured creditors. If the company lacks the resources to pay off these debts, negotiate with creditors to settle the debts for less than the full amount owed (possible solutions include lump-sum payments or payment plans).

Once that is done, maintain detailed records of all payments made to creditors (for transparency reasons). 

Step 4: Handle Tax Obligations

After notifying creditors and settling debts, you must ensure your corporation complies with federal and state tax laws by filing final tax returns. Here's a breakdown of the main things you'll need to address:

Filing Final Tax Returns

Federal Tax Returns

File a final federal corporate income tax return using IRS Form 1120. Mark the box indicating this as your final return and include all income, deductions, and credits for the corporation's final tax year. If your corporation has employees, ensure final employment tax returns are filed (such as Form 941 for quarterly federal tax returns), and all employment taxes are paid.

State-Level Tax Returns

File the final state corporate income tax return using California Form 100. Mark it as a final return and report all income, deductions, and credits for the corporation's last tax year. Ensure all estimated tax payments due to the California Franchise Tax Board (FTB) are made, including any remaining balance for the corporation's final year of operation.

Sales and Use Tax Returns

If your corporation collects sales tax, file the final sales and use tax return with the California Department of Tax and Fee Administration (CDTFA). This return should report all sales and tax collected up to the date of dissolution.

Payroll Tax Returns

File final payroll tax returns with the IRS and the California Employment Development Department (EDD). This includes forms like DE 9 and DE 9C for state payroll taxes.

While filing these final tax returns, it's also important to:

• Identify All Taxes Owed: Compile a list of all federal, state, and local taxes your corporation owes. This includes income taxes, employment taxes, sales taxes, and any other relevant taxes.

• Maintain Records: Keep detailed records of all tax returns filed, payment receipts, and correspondence with tax authorities. These records are crucial for legal purposes and for providing transparency to shareholders and other stakeholders.

Additional Tax-Related Tasks

Here are a few extra tax-related tasks you should keep in mind:

California Franchise Tax Board (FTB) Annual Taxes:

• Ensure all annual minimum franchise taxes are paid. In California, a corporation must pay a minimum franchise tax of $800 each year it exists, even if it has no business activity.

Final Withholding Taxes:

• If your corporation withheld state income tax from employee wages, file the final withholding tax returns and pay any withheld taxes to the California Employment Development Department (EDD).

Closing Sales Tax Permit:

• If the corporation collected sales tax, ensure the sales tax permit with the CDTFA is properly closed. This task involves filing a final return and notifying the CDTFA of the closure.

Step 5: Distribute Remaining Assets

After settling all outstanding corporate debts and liabilities, we move into the final stages of closing a corporation in California, i.e., distributing assets. Remember that asset distribution among shareholders – according to their rights and interests – is only possible if assets remain after paying off the corporation's debts. 

Start by developing a detailed distribution plan (in line with the corporation’s bylaws and relevant state laws), including asset types and values, and obtain approval from the board of directors. Your plan should outline:

• The assets to be distributed.

• The valuation of each asset.

• The proportion each shareholder is entitled to is based on their share ownership and any applicable preferences.

Update shareholders regarding your plan and provide necessary forms or instructions for receiving their assets. Then, begin the distribution by transferring assets, issuing payments, and assigning intellectual property ownership as needed. 

Step 6: File the Certificate of Dissolution & Final Documents

The final step in dissolving a corporation in California is to file the necessary documents with the California Secretary of State, after which your corporation officially comes to an end.

You need to file the Final Certificate of Dissolution (Form DISS STK) with the California Secretary of State. Include the following details:

• The corporation's name

• The Secretary of State file number

• The date when the dissolution was authorized

• Statements confirming that all debts and liabilities have been paid or adequately provided for

• Confirmation that the corporation’s remaining assets have been distributed to the shareholders

Verify and include the current filing fees with your submission. You can file the final dissolution forms by mail or in person at the Secretary of State’s office.

Final Notifications and Compliance

Notify the relevant state agencies to ensure all final tax obligations and accounts are closed:

• California Franchise Tax Board (FTB): Submit the final corporate tax return, marking it as a final return, and include any final payments due for state taxes.

• California Employment Development Department (EDD): If the corporation has employees, notify the EDD to close out payroll tax accounts.

• California Department of Tax and Fee Administration (CDTFA): If the corporation collected sales tax, inform the CDTFA and file any final sales tax returns.

Cancel Business Licenses and Permits

You should cancel any business licenses, permits, or registrations obtained from state or local agencies to prevent future liabilities or obligations related to those permits.

Maintain Records

Keep detailed records of all documents filed and notifications made, including copies of the dissolution forms, tax filings, creditor notices, and final distribution documentation. According to various laws (like California Revenue and Taxation Code Section 19504, California Corporations Code Section 1500, etc.), you must maintain these records for several years in case of any future inquiries or audits.

Once the Secretary of State processes the dissolution forms, you will receive a confirmation that serves as official documentation that the corporation is legally dissolved.

Conclusion

By reaching the end of this blog, you now know how corporation dissolutions work in California. Still, we recommend partnering with professionals who can ensure a smooth corporation shutdown and help you avoid legal and financial pitfalls common with DIY company shutdowns.

By working with SimpleClosure, founders like yourself can escape the inevitable mental and physical toll associated with shutting down a corporation. The whole process is quick, affordable, legally compliant, and requires minimal effort on your part.

Get in touch today, and let’s get talking!