TERMINATING A CORPORATION IN CALIFORNIA: DISSOLUTION
Aug. 19, 2015
Sometimes, the people who run a corporation decide to end the business. However, they cannot simply walk away. There are legal obligations involved in dissolving a business that is registered with the state. In most cases, when a corporation ends, the shareholders must first dissolve and wind up the business.
Corporations in California must be registered as business entities in the state. When the shareholders decide to terminate the corporation, they must go through a formal process known as dissolution in order to protect the business from the reach of creditors.
In order to voluntarily dissolve the corporation, the shareholders who hold shares with at least 50 percent of the voting power must vote for dissolution. California law does not explicitly require the board of directors to take any action before the vote, but commonly the board will call a meeting and submit a proposal to dissolve the corporation. If a meeting is held, the board must give at least 10 days’ notice to all shareholders who are eligible to vote.
Each corporation may have different procedures for dissolution written into its corporate bylaws, and the board and shareholders must follow those procedures if they differ from the state’s laws.
If there is no meeting and vote, then the shareholders holding shares with at least 50 percent of the voting power may instead sign a consent. A consent is a signed, written document, stating that the corporation is dissolved. The board does not have to give notice that the shareholders will sign a consent to any shareholders who either do not sign the consent or do not have voting power. But it must give notice of the signing to shareholders who can vote but who did not sign the consent.
CERTIFICATION OF ELECTION TO WIND UP AND DISSOLVE
If the vote to dissolve the corporation was not unanimous among all shareholders with voting rights, then the shareholders must file a Certification of Election to Wind Up and Dissolve with the Secretary of State. The Certificate must include the following information:
A statement that the corporation is winding up and dissolving;
The number of shares voting for dissolution, and a statement that the vote was made by shareholders holding shares with at least 50 percent of the voting power; and
If the certificate was signed by a shareholder, a statement that the shareholder was given the authority to sign by shareholders holding shares with at least 50 percent of the voting power.
After all this is done, the shareholders must still wind up the corporation, which means settling the corporation’s affairs—paying taxes and liabilities and distributing the corporation’s assets. Finally, the corporation must file a Certificate of Dissolution.
Figuring out how to correctly dissolve a corporation or other business entity is a complex and sometimes confusing process, but it is essential that it be done correctly. Please contact The Law Offices of Steven E. Springer or call 408-779-4700 to schedule a consultation with an experienced Morgan Hill business law attorney, in Morgan Hill, San Jose or Fremont.