What Are the Steps to Dissolve C and S Corporations in California?

Question from JT, What Are the Steps to Dissolve C and S Corporations in California?

Answer from AI:

Overview

In California the procedural steps to wind up a corporation are the same for a C‑corp and an S‑corp. The main differences lie in the tax filings and the way any remaining assets are taxed after the corporation is dissolved. Below is a step‑by‑step guide that covers the common requirements and highlights the points that vary between the two entity types.

Common Dissolution Steps

1. Board and shareholder approval

   • The board of directors must adopt a resolution to dissolve.
   • For a stock corporation, shareholders must approve the dissolution by a vote meeting the statutory quorum (usually a majority of the outstanding shares).

2. File the dissolution documents with the Secretary of State

   • Form DISS – Certificate of Dissolution (or Form DISS‑ST if the corporation has no assets or liabilities).
   • The filing must include the corporation’s name, California file number, the effective date of dissolution, and the name/address of the designated “winding‑up agent.”
   • A filing fee (currently $30) is required.

3. File a final Statement of Information

   • Submit the most recent Statement of Information (Form SI‑100) within 90 days of dissolution, indicating that the corporation is no longer active.

4. Notify the California Franchise Tax Board (FTB)

   • File the corporation’s final California tax return (Form 100 for C‑corps, Form 100S for S‑corps).
   • Mark the return as “final” and pay any outstanding franchise tax, income tax, or penalties.

5. Close the corporate tax accounts

   • Cancel any sales‑use tax permits, employer accounts, and other state tax registrations.

6. Settle debts and distribute assets

   • Pay all creditors in the order required by California Corporations Code § 2115.
   • After debts are satisfied, distribute any remaining assets to shareholders.

7. Federal tax filings

   • C‑corp: File a final federal corporate income‑tax return (Form 1120) and indicate it is the final return.
   • S‑corp: File a final Form 1120‑S and also file Form 966 – Corporate Dissolution or Liquidation with the IRS to notify the agency of the termination.

8. Maintain records

   • Keep corporate records, tax returns, and dissolution paperwork for at least seven years in case of future audits.

Specific Points for a C Corporation

• Tax liability: The corporation pays tax on any gain realized when assets are sold or distributed. Shareholders may also face capital‑gain tax on the amounts they receive.
• Form to file: Use Form 100 (California) and Form 1120 (federal). No special S‑corp election paperwork is needed.

Specific Points for an S Corporation

• Pass‑through taxation: The corporation itself generally does not pay income tax; instead, each shareholder reports their share of income, loss, and deductions on personal returns.
• Final federal filing: In addition to the final Form 1120‑S, you must file Form 966 to terminate the S‑corp election.
• Shareholder reporting: Any distribution of cash or property is reported on the shareholders’ Schedule K‑1 (Form 1120‑S) and may generate capital‑gain or loss on their individual returns.

Helpful Resources

• California Secretary of State – Corporations Division (instructions for Form DISS and filing fees).
• California Franchise Tax Board – Corporate Tax Information (guidance on final returns and tax clearance).

When to Seek Professional Help

The dissolution process involves precise filing deadlines, tax calculations, and potential liability for shareholders. Mistakes can lead to penalties or unintended tax consequences. It is strongly advisable to consult a licensed California attorney or a qualified tax professional to review your specific situation, ensure all statutory requirements are met, and confirm that the asset distribution complies with both state law and the corporation’s governing documents.