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Can I Dissolve My Corporation if I am Getting Sued? Maybe.

Upon electing to dissolve, the corporation enters into a wind-up period in order to pay or make provision for payment of its debts, distribute assets to the shareholder, and to file the certificate of dissolution. The board of directors are responsible for dissolving the corporation.

Upon dissolution, you must give notice to all creditors and claimants on record. It is the responsibility of the directors to determine that all the corporation’s known debts and liabilities have been paid for or “adequately provided.” This gives the corporation two options. Pay the debt or find someone to assume the debt or liability. The shareholders may assume liability for the dissolving corporation’s debts, but it is limited to the amount of corporate assets distributed to them upon liquidation.

After payment or provision for corporate debts, the assets are distributed to the shareholders accordingly. Without doing so, the shareholders could be held personally liable to the extent of these assets received. Just to reiterate, shareholders are not liable for these debts beyond the amount distributed to them, even if they assumed the corporate debts to allow the corporation to dissolve.

Business_Sued_Dissolve

Where there is a claim (lawsuit) before (or after) dissolution which has not been paid or provided for, claims may still be asserted against the dissolved corporation and will be liable to the extent of its undistributed assets, including available insurance. Claims exceeding the undistributed assets may be enforced against the shareholders to the extent they receive liquidation distributions. As this states California law, if your corporation is a foreign corporation, the law is split as to whether California or the home incorporating state is applied in event of such a claim–especially involving personal injury.

Upon dissolution, there a number of tax filings to be made with both the IRS and the state franchise boards. In California, if you file for dissolution in a taxable year and do no business after that same taxable year, you generally will not be liable for the $800 franchise tax for that year. Tax consequences are pretty straight forward and will be adequately handled by a competent CPA.

Need your corporation or LLC dissolved? It is usually a quick and easy process. Contact our firm at 1-800-991-6504 and we will do it for you.

Nasir Pasha, Esq.

Post by:

Managing attorney and co-host of podcast Legally Sound | Smart Business

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