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When Can a Corporation Dissolve in California?

Dissolving a Corporation

Dissolving a CorporationThe 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.

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