As fall hardens into winter and the leaves fade, so too must some Delaware C Corporations come to their natural end. However, no two companies are the same, and the proceedings will not be identical when it comes to winding down your operations. In some cases, a bankruptcy filing may be required (such as a Chapter 11 reorganization or a Chapter 7 liquidation) and in others, an assignment for the benefit of creditors (more commonly known as an ABC) is appropriate. We’re going to explore a different mechanism for ceasing to operate—a Delaware Corporate Dissolution—and some standard actions and considerations relating to it.
If it is time for your business to end, regardless of how you go about the dissolution, your company will no longer be in Good Standing in Delaware. There are three different categorizations of companies that are not in Good Standing in the state of Delaware. These are “void” companies, “forfeited” companies, and “cancelled” companies.
Failure to pay your annual Delaware Franchise Taxes will automatically brand your company as “void” in the state of Delaware. Some companies that never formally dissolved their C-Corp in Delaware decide to remain “void” forever. They do this, after consulting with their legal advisor, when their backlog of franchise taxes is extremely expensive, they do not foresee any revival of the business, and there are no assets to be distributed to shareholders.
Companies who have not properly maintained their registered agent service are deemed “forfeited” in the state of Delaware.
Cancelled Delaware C Corporations
If you have decided to discontinue your business, and you want to formally and officially cease it, freeing you to distribute any of its property, such as a patent or other IP, to stockholders, there are a few actions you can take to so that your company will legally be deemed “cancelled” in the state of Delaware. Once cancelled, its assets can be distributed and it is no longer responsible for any further franchise or registered agent fees.
How To Cancel Your Delaware C-Corp
While you are not required to shut down your company, if you fail to legally dissolve your business, you may expose yourself to trouble down the road as your corporation will be liable for incomplete Franchise Tax fees and Registered Agent fees.
Additionally, once a corporation has officially dissolved (either voluntarily or by operation of court order), it may prosecute and defend suits for a period of three years (unless extended by the court). Three years after dissolution, a corporation can no longer be sued or sue in its corporate capacity under Delaware law.
Typical steps that corporate officers must take in conjunction with their attorney and tax specialist to legally dissolve their company include:
- Gather Approvals - First, your company’s Board of Directors and Shareholders must vote and approve the dissolution of your business. You will need this decision documented as meeting minutes or a written consent.
- Structure a Plan - The Board will typically appoint a Director to supervise the company’s dissolution and an Officer to spearhead the liquidation process. You will want to follow your liquidation plan accordingly and allocate any remaining funds to applicable shareholders and creditors. You should be aware that, under Delaware law, companies need to settle all liabilities and pay all taxes before any assets can be distributed amongst shareholders.
- Finalize A Formal Claims Process (Optional) - You may want to provide at least 60 days notice to potential claimants of the dissolution (with the deadline to file those claims) together with any public notifications (in the newspaper, etc.) that are deemed appropriate. You will then need to review filed claims, designate the necessary offers or rejections, and inform the claimants. If you have an outstanding claim against your company, you will need to resolve all lawsuits before proceeding with your company’s dissolution. Providing notice to claimants is optional but helps to limit liability and affords you more protection as assets are distributed to shareholders.
- Pay All Corporate Taxes - You will be responsible for filing your last Annual Report and paying all Franchise Taxes. This payment cannot be processed if you have any outstanding taxes or reports from prior years of corporate operation. You will need to submit and pay all Annual Reports and Franchise Taxes up to and including the year in which the dissolution is filed. Some clients choose to file their dissolution in March, coinciding with the Delaware franchise tax due date because when you pay your franchise taxes, you are actually paying last year’s fees—so any taxes paid account for the preceding year. Additionally, franchise taxes are not pro-rated, which means that your entity will owe tax fees for the whole year, even if your company is only active on January 1st. If you file your dissolution on December 31st instead of January (or even later, i.e., March), you will avoid having to pay another year of franchise taxes. Be sure to also notify the Department of Revenue of each state that you filed a corporate tax return, that the company has dissolved.
- Inform the IRS - You will need to report your dissolution to the IRS in a timely manner so that they can terminate your company’s EIN.
- Alert the Delaware Secretary of State - You will want to file your Certificate of Dissolution with the Delaware Secretary of State. There are multiple templates for this document that are available on the Delaware website, each dependent on the circumstances of your business. At a minimum, you will need to provide the following information about your business: Corporate Name, Date of Incorporation, Date of Authorized Dissolution, Name & Address of all Corporate Officers and Directors, Signature of Officer authorized to sign for the corporation.
Please note that the Dissolution Certificate will require differing information depending on your unique circumstances.
Once your paperwork has been drafted and signed, you will want to submit this information along with a cover letter to the State of Delaware (and any other required documentation). To understand the submission fees and costs associated with this process, you will want to check Delaware’s Corporate Fee Schedule.
You will also want to withdraw and surrender all qualifications to do business in any other states where the company operated (this often includes filing a Certificate of Withdrawal if you filed for a Foreign Qualification in another state).
7. Wait To Hear From The State Of Delaware - Unless you have applied for an expedited process, the dissolution filing process in Delaware should take about two to three weeks.
Please note that, when considering dissolution options and steps going forward, it is important to consult with your legal counsel and tax advisors before taking any binding decisions.
We hope these steps will serve as a high level overview of what the dissolution process looks like for Delaware C Corporations. Once you have completed the necessary steps for dissolving your company, you will have said your last words and will be one step closer to moving forward and leaving your business behind.