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CalAttorney2
CalAttorney2, Attorney
Category: Business Law
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Experience:  I am a businesses law attorney, with experience advising and representing owners and investors.
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Here is my hypothetical: I need help with the corporate

Customer Question

Here is my hypothetical:
I need help with the corporate dissolution process. I have an S corp that needs to be dissolved and a new one started. I am the sole owner of the S corp/ sole officer. I am in bankruptcy right now, chapter 7 personal bk, and I also owe corporate debts (some of which are also personally guaranteed and included in my personal bk).
First, I want to confirm that if I am the sole owner of the corporation, that I do not need to file a Certification of Election to Wind Up and Dissolve, as I can just prepare and sign a “unamimous written consent to dissolve.” Is there anything else I need to draft/ prepare and sign?
Second, I understand that I am supposed to, after I have approved my company to be dissolved, that I need to pay off what I can to my creditors. As mentioned, most of my debt is personally being discharged in my ch. 7, but to the extent that my company is still liable, how do I go about paying them if I owe a lot more than what my company is worth. I probably have a total of about $4500 worth of machine equipment/ corp assets. I probably owe over $270k in unsecured debts total (personal and corporate).
Third, and this may go hand in hand with the second question above, but, I also understand that I am supposed to “give notice” to my creditors about my intention to dissolve. What needs to go into this ‘notice’, what specific pieces of information, and how much time do I have to give the creditors to either respond or wait until I actually file the Certificate of Dissolution? Do I give notice to them of my $4500 worth of assets to be divided up among them? Do I not mention anything about my assets and just give notice that I intend to dissolve? Can they object to this somehow? How am I supposed to make arrangements to pay my creditors what I owe to them if I barely have nothing right now anyway, plus there are a lot of creditors that I have. Am I responsible to call each one of them up and tell them what I have in assets? OR is that what the notice letter is for?
Submitted: 1 year ago.
Category: Business Law
Expert:  CalAttorney2 replied 1 year ago.

Dear Customer,

The Certificate of Election still needs to be filed with the Secretary of State (that document triggers the final tax filing and final bill from the Secretary of State, as well as indicating that the Corporation is dissolved).

Following that, you will then begin the "wind down" process (the part where written notice is sent to all creditors).

This article gives you a good overview: http://www.nolo.com/legal-encyclopedia/how-dissolve-corporation-california.html

The complication in your hypothetical is that your sole shareholder is also filing for bankruptcy protection - this means that during the bankruptcy, the corporate shares become part of the bankruptcy estate, oftentimes the personal bankruptcy will overlap the dissolution in this regard and a carefully crafted dissolution/bankruptcy plan can resolve this matter in its entirety).

You will want to ensure that the shares are declared appropriately on the individual debtor's bankruptcy schedules in such a way (strategically) that they can maximize your post-discharge position. This means that not all debtors will declare them the same way as some debtors are trying to preserve their business, while others are trying to get away from it.

If you are a sole-shareholder declaring personal bankruptcy, you should be represented by bankruptcy counsel - this is not a simple consumer bankruptcy where I would still recommend counsel, but you can reasonably be expected to struggle through it on your own "pro per" and perhaps save a few dollars with only minimal risk to the post-discharge positioning.

Customer: replied 1 year ago.
Thanks. Almost everything I researched says I did not habe to file the certificate of election, and cert of dissolution, only the dissolution if I'm a sole shareholder, but if you say so, I will follow that.I am familiar with nolo, I don't think this article gives me specifics on the content and notice period for the notice letter. Do you know what that is? That is what I need, or a sample one compliant in CA would be great.I have a bk attorney but he knows nothing about corp dissolution. I know my corp is protected in the bk under bk exemptions as it is worth about 4500.How do I go about settling out with the creditors or would I not be required to if the asset of my company is protected in the bk.Can you confirm the timeline for this, ie, file cert of election, give notice, then wait a certain amount of time? then file dissolution? I plan on reopening another corp once this is dissolved...
Expert:  CalAttorney2 replied 1 year ago.

If you are already familiar with the NOLO guides, you may also want to review some of those available from the Secretary of State or the FTB (such as this one: https://www.ftb.ca.gov/forms/misc/1038.pdf).

Here is another guide that may provide a little more "step by step" help: http://www.publiccounsel.org/tools/publications/files/dissolution.pdf

It is important to differentiate how the corporate structure works:

  • The shares (and share value) are part of the personal bankruptcy. If the corporation is insolvent (has more debts than assets), the share value is going to be negative.
  • The corporation itself is not part of the personal bankruptcy - so while you can discharge the personal guarantee of a particular loan, the personal bankruptcy does nothing to discharge the corporate obligation.

Creditors get 120 days written notice. During which time creditors can initiate a court proceeding to force a distribution of assets in civil court.

(Most corporations deal with this through liquidation and payment of whatever debts they can identify - you don't get to keep assets when you close an insolvent corporation).

Customer: replied 1 year ago.
Got it. Thanks again,Is there any issue with me dissolving this corporation and then opening up a new a new one?I'm aware that the corp is still on the hook for the debts I'm getting rid of personally, thats why I'm dissolving... but I need my equipment for my new corp. Couldn't I just pay the creditors the equivalent of their value so I don't have to liquidate?
Expert:  CalAttorney2 replied 1 year ago.

There is nothing wrong with opening a new corporation.

But as far as you buying the equipment from the corporation to start your new one with, and then using those proceeds to pay your creditors, you are opening yourself to a claim of "fraudulent conveyance" or "fraudulent transfer." Rather than selling your corporate assets on the open market, you are trying to sell them to yourself, the creditors do not have to accept this, and you do run a significant risk of opening yourself to new personal liability (that you have just gone to considerable trouble to discharge through your bankruptcy).

Customer: replied 1 year ago.
Really, I can't settle out with them? I thought it was like the equivalent of redeeming the property in bk...instead of selling it, just paying the creditors the equivalent of what they would have received had I liquidated it... I would imagine they would consent to something like this...
Expert:  CalAttorney2 replied 1 year ago.

If you can get all of your creditors to agree to it, that is one thing.

But you cannot unilaterally trade your cash value for the assets and declare it sufficient.

Customer: replied 1 year ago.
Ok thanks. So last question is, do I give notice of what my offer to settle is on my notice of dissolution to the creditors, the 120 day notice?
Expert:  CalAttorney2 replied 1 year ago.

Your offer can be included, but this is a negotiation - not to be confused with the actual notice to creditors.

I don't know how many creditors you are working with here, or how willing they are going to be to negotiate with you on this matter - unfortunately, it only takes one creditor to hold things up - but this is a negotiation issue as opposed to a notice issue.

The backdrop that you are working against is that the corporate assets are sold (liquidated) on the open market, and the proceeds are then used to pay creditors pro-rata.

Customer: replied 1 year ago.
then do I write two letters?
Expert:  CalAttorney2 replied 1 year ago.

You can do it all at once. Expect it to take more than one series of letters.

The important thing is that you ensure you meet the criteria for the wind down (see the link I provided above for dissolution - http://www.publiccounsel.org/tools/publications/files/dissolution.pdf). Understand that you are going to necessarily complicate matters by trying to negotiate the transaction in this manner, but you can certainly attempt it.

Customer: replied 1 year ago.
This link isn't working... can you copy and paste the contents for me.So what do you think I should do? Sell all the assets and then pay everyone?
Expert:  CalAttorney2 replied 1 year ago.

Dear Customer,

That is not a short link, it is a fairly substantial article, please try pasting the url into your web browser.

I cannot advise you as to which course of action is best for you, we can only provide you with information on this forum - a local attorney can give you formal legal advice and instruction. There are complications to buying the assets of your corporation, it is not "illegal" but it will be more complicated than liquidating them.

Customer: replied 1 year ago.
Also, the the other link above frI'm public counsel us for a non profit dissolution, this is a for profit company
Expert:  CalAttorney2 replied 1 year ago.

I provided you with the link because it gives a very helpful discussion of notice (the part of the wind down procedure that you had questions about). This is applicable to your for profit corp.