How to Dissolve a S Corporation in California: Step-by-Step Guide

Dissolving an S Corporation in California involves a series of legal and administrative steps to ensure your business is formally closed. Whether your company is no longer profitable, has fulfilled its purpose, or you’re ready to move on to new ventures, it’s essential to follow California’s laws to avoid penalties or liabilities.

In this guide, we’ll walk you through the entire process of how to dissolve a S Corporation in California, including filing required forms, paying outstanding taxes, and notifying stakeholders. By following these steps, you can smoothly close your business and comply with state regulations.

Step 1: Hold a Shareholder Meeting and Approve the Dissolution

Before dissolving an S Corporation, the board of directors and shareholders must approve the decision.

How to Conduct the Meeting

Call a Formal Meeting: Notify shareholders and directors of the proposed dissolution.
Vote on Dissolution: California requires a majority vote from shareholders to approve the closure of the corporation.
Document the Decision: Record the meeting minutes, including the vote and resolution to dissolve the S Corporation.

Why It’s Important: Proper documentation protects the corporation and its owners from future disputes and legal challenges.

Step 2: File the Certificate of Election to Wind Up and Dissolve

Once the shareholders approve the dissolution, you must file the Certificate of Election to Wind Up and Dissolve (Form ELEC STK) with the California Secretary of State.

Steps to File Form ELEC STK:

Download the Form: Access the form from the California Secretary of State’s website.
Complete the Required Information:
- Corporation name
- Statement confirming shareholder approval of the dissolution
- Signatures of authorized individuals
Submit the Form: You can file online, by mail, or in person.

Filing Fees:

California does not currently charge a fee to file Form ELEC STK.

Step 3: File the Certificate of Dissolution

After filing the election to dissolve, the next step is to complete and submit the Certificate of Dissolution (Form DISS STK). This form finalizes the corporation’s decision to dissolve and confirms that all corporate affairs have been settled.

Steps to File Form DISS STK:

Fill Out the Form: Include the following details:
- Corporation name and Secretary of State file number
- Confirmation that all debts, liabilities, and taxes have been paid or discharged
- Statement that the corporation’s remaining assets have been distributed to shareholders
- Signatures of corporate officers or directors
Submit the Form: File online, by mail, or in person through the California Secretary of State’s office.

Important Note: If your corporation has not conducted business and has no assets or liabilities, you can file a Short Form Certificate of Dissolution instead.

Step 4: Settle Debts and Notify Creditors

Before the corporation can fully dissolve, it must settle all outstanding debts, pay taxes, and notify creditors of its closure.

Key Steps:

Pay Off Outstanding Debts: Resolve debts with suppliers, lenders, and service providers.
File Final Tax Returns: Submit your final California and federal tax returns.
- Mark the returns as “Final.”
- Pay any outstanding taxes due to the IRS or California Franchise Tax Board (FTB).
Notify Creditors: Send formal written notices to all creditors, informing them of the dissolution and the timeline for submitting claims.

Why This Matters: Settling debts and notifying creditors ensures compliance with California law and protects shareholders from future liability.

Step 5: File Final Tax Clearance and Obtain Tax Clearance Certificate

To finalize the dissolution process, your S Corporation must obtain a Tax Clearance Certificate from the California Franchise Tax Board (FTB).

How to Obtain the Tax Clearance Certificate:

File Form 100S (California S Corporation Franchise Tax Return):
- Indicate this is the corporation’s final tax return.
- Pay any outstanding state taxes, fees, or penalties.
Pay the $800 Minimum Franchise Tax: California law requires corporations to pay the annual minimum franchise tax for their final year, even if no business activities occurred.
Wait for Confirmation: Once the FTB processes the final return and confirms that all taxes are paid, the tax clearance will be issued.

Step 6: Distribute Remaining Assets to Shareholders

After settling all debts and taxes, distribute any remaining corporate assets to the shareholders based on their ownership percentages.

Steps for Asset Distribution:

Liquidate Assets: Sell off any physical or financial assets owned by the corporation.
Settle Final Expenses: Use the proceeds to cover any last expenses or fees.
Distribute Remaining Funds: Transfer any remaining assets to shareholders proportionally.

Document the Process: Keep detailed records of asset distributions for tax and legal purposes.

Step 7: Close Business Accounts and Licenses

As part of dissolving your S Corporation, close all remaining business-related accounts and licenses.

Checklist for Closing Accounts:

Cancel Business Licenses and Permits: Notify local and state agencies to terminate active licenses.
Close Bank Accounts: Shut down all corporate bank accounts and credit lines.
Terminate Contracts: Notify vendors, suppliers, and landlords of the corporation’s dissolution.
Close Payroll Accounts: If you have employees, close state and federal payroll tax accounts.

By tying up these loose ends, you ensure that the corporation’s legal and financial obligations are fully concluded.

Conclusion

Dissolving an S Corporation in California requires careful attention to legal and administrative details. From obtaining shareholder approval to filing the necessary forms with the California Secretary of State and Franchise Tax Board, following the correct steps ensures a smooth and compliant dissolution process.

By settling debts, notifying creditors, and closing accounts, you protect yourself and other shareholders from future liability. If you’re unsure about any step, consulting a business attorney or tax professional can help you navigate the process effectively.

Ready to move forward? Start the dissolution process today and ensure your S Corporation closes the right way!