When Can a Corporation Dissolve in California?
Dissolving a Corporation
The process by which a corporation ceases to exist is called dissolution. Dissolution can occur at any time by a vote of fifty percent of the corporation’s shareholders.
There are a number of reasons why a corporation’s shareholders might want to dissolve the corporation. However, California law places certain restrictions on dissolution to ensure that it is not abused. One major restriction is that a corporation cannot use dissolution to avoid paying its debts or obligations.
Obligations Upon Dissolution
When a corporation dissolves, it generally must stop conducting all business, and liquidate its assets to pay off creditors and shareholders. When a corporation’s assets are liquidated they first must be used to pay off any outstanding debts the corporation owes, including those owed to shareholders. Only after all outstanding debts have been paid can the corporation distribute assets to its shareholders.
What if a Corporation Cannot Satisfy its Debts?
A corporation cannot distribute its assets, nor may it dissolve, until its officers have paid or made provisions for all known debts and obligations. Under Corporations Code section 1905, to make provisions for a debt, another person or entity must either assume the debt, or personally guarantee its payment. If there is no assumption or guarantee, the corporation cannot dissolve and may have to consider bankruptcy.
If a corporation is insolvent, its officers and directors may also owe additional duties to the corporation’s creditors. Attempting to dissolve the corporation to defeat a creditor’s claim may constitute a breach of fiduciary duty.
Getting Legal Help
Brown & Charbonneau, LLP represents individuals as well as large and small companies in cases involving all forms of business disputes. If you are involved in a business dispute, or would like to learn about your rights and how to protect them, we can provide you with the information you need. Contact us or call today at 714-505-3000 to schedule a consultation and learn more about how we can help you.
Brown & Charbonneau, LLP is a top-rated business litigation, corporate, real estate and family law firm in Irvine, California. We are honored to be named by Best’s Lawyers® as one of the Top Law Firms in the US, including the specialty area of commercial litigation. As an AV-rated law firm, we are proud of our 10.0 Superb Client Rating from Avvo. Our top-reviewed Southern California attorneys have also earned specializations from the State Bar of California, as Certified Trial Specialists, and are included amongst the elite attorneys to be named Super Lawyers®.
- General Business & Corporate
- Business Litigation & Contract Disputes
- Civil Litigation
- Partnership & Shareholder Disputes
- Fraud Claims
- Breach of Fiduciary Duty Claims
- Real Estate & Construction Disputes
- Trade Secrets, Non-Competes & Unfair Competition
- Employment Disputes
- Personal Injury & Elder Abuse Cases
- Trial Specialist
- Family Law
Our website is full of valuable information and resources. Our goal is to provide as much information as possible to assist all our clients in making fully informed decisions. Just click any area of interest.
Brown & Charbonneau, LLP publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our “Contact Us” form, which can be found on our website at www.bc-llp.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.