Clients have repeatedly come to me asking—what do I need to do to dissolve my company.   Given the economic turbulence more founders will be considering pulling the plug.  The following are the required steps.

  1. File your annual statement with the Secretary of State (“SOS”)

This is not technically a part of the dissolution process.  However, the SOS will not process dissolution paperwork if your company has not filed the required annual statement.

  1. File and pay your taxes with the Franchise Tax Board (“FTB”)

The FTB and SOS communicate with each other so if your company has not filed and/or paid its taxes to the FTB it will be not be able to dissolve.  Once you make the filing and pay your taxes only then will the FTB notify the SOS of the change.  This notification can take some time especially under the current slowdown.

  1. Pay any fines or penalties to the FTB

There are two main reasons why the FTB imposes fines and penalties: late or no annual filings and failure to file tax returns.  A phone call from a company officer is usually all that is required to determine what the problem is.  Once any fines or penalties are paid to the FTB, then the FTB will notify the SOS of the fact and you will be able to begin the dissolution process.

  1. Obtain board and shareholder approval

In most cases, board of director and shareholder approval will be required to dissolve the corporation.  In the case of LLCs, the exact procedure will be specified in the operating agreement or in the corporations code.   One of the main issues that has to be addressed by the board is how will the debts and liabilities be handled in the wind down process.

  1. File dissolution paperwork with the SOS

With board and shareholder approval, the company can file dissolution paperwork with the SOS.  In general, a company will have to indicate what arrangements have been made to handle the debts and liabilities.  The choices are:

  • There are no debts or liabilities, or
  • The debts and liabilities will be paid in full or as far as the assets permit, or
  • The known debts and liabilities have been adequately provided for in full or as far as its assets permitted by their assumption

Finally, the mere filing of dissolution paperwork will not protect officers and directors from liability for actions prior to dissolution.  This means that creditors are free to sue officers and directors even after the company has been dissolved.