Steven E. Springer
TERMINATING A CORPORATION IN CALIFORNIA: WINDING UP
Before a corporation may begin termination, the shareholders must either vote for dissolution or sign a consent to dissolve. If they vote to dissolve, the corporation must file a Certification of Election to Wind Up and Dissolve with the state of California. Next, the winding up process begins.
When the corporation’s dissolution has been approved, it continues to exist for a time, but only for the purposes of winding up its affairs. The board of directors thus has the power only to wind up, and not to conduct business. Winding up means settling a corporation’s affairs and includes giving notice to creditors, paying the corporation’s debts, and distributing assets.
The corporation’s first obligation is to pay all known liabilities and includes all known creditors and any tax liabilities. After all debts have been paid, the corporation distributes the remaining assets to shareholders or those who are entitled to them. If the assets are insufficient to pay off all debts, the corporation must pay the debts as best it can.
California law does not require a corporation to obtain tax clearance before dissolving. However, it does have to file a final franchise tax return and pay any associated liabilities.
If the corporation is party to any lawsuit or legal action, the lawsuit continues even though the corporation is going through dissolution and winding up. If a lawsuit results in a judgment against the corporation, the other party can collect from the corporation’s undistributed assets, or, to a limited extent, from the shareholders if assets have been distributed to them.
After a corporation’s dissolution has been approved, it must give notice to shareholders and creditors that it is commencing winding up. Notice must be given to all known creditors and claimants whose addresses are on the corporation’s records, and to all shareholders who did not vote for dissolution.
Certificate of Dissolution
After the winding up process is complete, the corporation then files a Certificate of Dissolution with the Secretary of State. The certificate must state the following:
- The corporation has been completely wound up;
- All known debts and liabilities have been paid or provided for, or paid as fully as the corporation’s assets provide, or that the corporation has no known debts;
- If there are debts, what provision has been made for payment;
- The corporation’s assets have been distributed correctly, or that there are no known assets; and
- The corporation is dissolved.
To know if the corporation has been officially dissolved, call the Secretary of State at 916-657-5448 or visit their website. It may take several weeks for the corporation’s status to be updated.
Dissolution and winding up are not the only steps taken when terminating a California corporation. Hence, speaking with an experienced Morgan Hill business law attorney to help you through this complex process is important. Please contact The Law Offices of Steven E. Springer or call 408-779-4700 to schedule a free 20 minute consultation with a business law attorney, in Morgan Hill, San Jose or Fremont.