How To Dissolve A Delaware Corporation In Only 3 Steps

When it comes to the decision about ceasing your Delaware corporation, it should be considered carefully and made by all important members of the company.

Don’t know where to begin as it’s your first time to dissolve a company? Here is a simple and easy step-by-step guide on how to dissolve a Delaware corporation. We cover the most common questions about the related issues.

1. What is the dissolution of a Delaware corporation?

Dissolving a corporation means officially closing the corporation with its name removed from the register. It is the end of the legal existence of your corporation. After the dissolution is valid, other groups can make use of the company name.

There are two ways to dissolve your Delaware corporation. You can let your company become void by refusing or neglecting Delaware franchise taxes, then it will be canceled by the state and subject to a tax fine. Another way to close your company is to voluntarily dissolve by holding a vote among shareholders and filing a dissolution certificate to the Secretary of Delaware.

The Court of Chancery is the jurisdiction for the dissolution proceedings and any application during the process. Such proceedings will also include filing the petition for the dissolution.

As a business owner, you definitely don’t want to end your company. But when the time has come, you have to make the decision. Below are main reasons why you should dissolve your Delaware corporation:

• Avoid bankrupt status for private dissolution;
• Don’t need bankruptcy protection;
• Avoid late claims;
• Protect directors from personal liability to claimants;
• Restart the business with another legal entity such as Delaware Limited Liability Company (LLC).

After the dissolution, the Delaware state gives your corporation a period of time to complete the winding up. It is the process to handle the final matters after filing the dissolution. In other words, it is an act of turning assets into money, known as a liquidation process, to pay off creditors and make distributions to shareholders.

2. How to dissolve a Delaware corporation?

The dissolution of a general Delaware corporation includes three main steps.

Step 1: Hold a shareholder meeting 

To start the dissolution process, you will need to hold a meeting to gather all shareholders for making a vote. The vote will decide on whether or not the corporation will be cancelled. The Board of Directors must adopt the resolution of the corporation dissolution before the vote.

The final result is based on the majority of shareholders’ written opinions. If a majority of shareholders agree to dissolve corporation by their written consent, the dissolution decision is approved. Then, we move on to the next steps of the dissolution process.

Step 2: Pay all franchise taxes and file annual reports 

Under the Delaware Code, all corporations must complete filings and payment for Delaware Franchise Tax and Annual Report, following the calendar year. You must submit the related fees and filing documents to the Secretary of State for the dissolution.

For companies owing franchise taxes to Delaware state for one year, it will get voided and lose its good standing status in Delaware. An amount of penalty will be applied to the corporation depending on the amount of tax owed by the corporation. By this way, the corporation can automatically get cancelled by the state.

The state will stop issuing any certificate for voided corporations. The company, however, can continue business activities like doing contracts and agreements during voided periods.

Step 3: File Certificate of Dissolution 

Filing a dissolution certificate is the final step to complete the dissolution process. There are two forms of dissolution certificate in Delaware. You can choose to file long form, known as standard form, or short form depending on your company situation. Each form has its own conditions and requirements.

The filing for short form is much cheaper than long form, but only qualified corporations can use the short form for filing dissolution certificates. Below are conditions that a corporation must meet to use the short form for the dissolution, according to section 391 of Delaware Code:

• The corporation has no assets and has stopped all business transactions;
• The corporation is required to pay a minimum amount of franchise taxes annually since the first year of its incorporation;
• The corporation paid franchise taxes and fee dues until the end of the year when the certificate of dissolution is filed.

In accordance with section 275 of Delaware Code, the required information for both long form and short form are as follows:

• Corporate name;
• Formation date said on certificate of incorporation;
• Names and addresses of all directors and officers;
• The authorized date of dissolution;
• A statement of final result authorized by all shareholders with their written consent and Board of Directors.

The filing fee will be different depending on the dissolution form and its length. Look at this table to see Delaware pricing system for filing the dissolution:

 

A certified copy of each form costs $50. The filing process usually lasts from 2-3 weeks. The State, however, offers expedited services for different needs:

• Same day fee: $200;
• 24-hour fee: $100;
• 1-hour fee: $1000;
• 2-hour fee: $500.

A cover letter is required to be included in the filing with your contact information including name, address, and telephone or fax number.

3. What should be done after obtaining the dissolution certificate?

After the dissolution, a corporation has 3 years in existence under Delaware law. During this period, the corporation can publish notices to claimants, do the winding up, and tax clearance.

Winding up. As mentioned earlier in this blog, winding up is considered as the settlement stage with creditors in the dissolution process of a Delaware corporation.

The act of winding up can be voluntary, also known as a court-supervised process, or compulsory depending on the financial situation of the corporation.

A company is forced to be wound up by the Court of Chancery when it is not able to pay debts to its creditors. The situation is considered as ending like bankruptcy. In this case, creditors may not receive enough money owed by the company.

The voluntary winding up, on the other hand, is when the corporation can establish and comply with a plan. It actively sells assets for distribution to creditors. By this way, the company can avoid bankruptcy and in some cases, discharge shareholder’s liability from the company’s debts. The remaining assets, then, can be distributed to shareholders.

Tax clearance. All state taxes do not need to be submitted for dissolution filing, but the taxes are required to be paid before franchise tax dues. If your corporation conducts any business in Delaware, remember to check the “Out of Business” box and indicate the last day of your business operation.

An S corporation passes income, losses, deductions, and other credits through to shareholders for federal tax purposes.

Notices to claimants. One important thing that needs to be done is to publish notices to claimants, persons, or organizations who claim against your corporation.

Delaware Law sets some specific rules for statements of such notices as follows:

• The statement must be in written form, a document or a public notice in a newspaper, with all reasonable information addressed to the claimant;
• The statement must include the mailing address to which the claim must be sent;
• The deadline for receiving the claim from the claimant must be included in the notice and no earlier than 60 days from the date the notice is sent;
• If the claim is not received by the deadline, the claim will be barred;
• The notice must list the total amount of all distributions to shareholders for each 3 years up to the date of corporate dissolution.

There are some cases in which the receivers of the notice forget about the deadline to submit their claims. In some other cases, your corporation can reject claims from the claimants.

In some ways, sending notices to claimants helps limit your company’s liability and protect the assets for the distributions to shareholders.

4. How to discontinue a corporation which hasn’t issued any shares or conducted business?

The corporation which hasn’t issued any shares or hasn’t started business will be dissolved by the state of Delaware with a certificate acknowledged by a majority of important members. The certificate was filed by a majority of the incorporators or directors, who are listed in the certificate of incorporation, to the Secretary of Delaware.

Below is the required information for the certificate:

• Either of the following statement:
  • A statement that the corporation hasn’t issued any shares and hasn’t done any business activities;
  • A statement that the corporation has started business but hasn’t issued any share, and all debts have been settled; or
  • A statement that the corporation hasn’t conducted business but has issued stock with stock certificates included.
• The date of incorporation that is listed in the certificate of incorporation;
• A statement that no capital has been paid;
• A statement that all rights and franchises are surrendered.

5. How to dissolve other types of corporations?

2-Stockholder Corporation. For a corporation with only 2 stockholders, if each stockholder holds 50% of stocks, one stockholder can file the petition for the dissolution to the Court of Chancery without written agreement from the other stockholder.

In such case, the Court gives the corporation 2 periods of time for decisions about the dissolution:

• Within 3 months from the filing date, the Court will produce a certificate stating all stockholders’ agreement on the discontinuance of the corporation;
• Within 1 year from the filing date, the Court will produce a certificate stating the completion of all distributions to stockholders.

The stockholders can extend either period by making an agreement and filing it to the Court of Chancery before these two periods end.

Non-stock corporation. The dissolution process of a non-stock corporation will be similar to a general corporation. A vote will be held among all members of the governing body of the corporation. If the corporation hasn’t started its business, it can be dissolved by the state in the same way as mentioned in the previous paragraph.

Foreign corporation. If your corporation is doing business in Delaware but it is registered outside the state, you must file a separate form to withdraw your right to do business in Delaware, along with the provision of filing fees. The corporation will be liable to annual report fees and minimum business taxes if it fails to withdraw.

6. Conclusion

For any business operator, it is crucial to understand the company situation and make the appropriate decisions about the corporation dissolution. Depending on your corporation type, the process of dissolution will be different.

This blog gives you detailed guidance on how to dissolve a Delaware corporation. Typically, the process can be more complicated, depending on each business circumstance. Consult us if you have more questions.