To dissolve a Delaware corporation, you must formally terminate its legal existence with the state. This includes board and stockholder approvals, a Certificate of Dissolution filed with the Delaware Division of Corporations, paid franchise taxes, and a proper wind-up of business activities that includes notifying creditors and distributing remaining assets. By following all of these steps, the corporation will no longer exist and will not accrue tax bills.
In this article, we discuss why it's important to properly dissolve a Delaware corporation and provide the steps to help you do so.
Key takeaways
Dissolving a Delaware corporation requires both board and stockholder approval before filing with the state.
Delaware won't accept a Certificate of Dissolution until founders pay all outstanding franchise tax and update annual reports.
The wind-up period after filing provides three years to notify creditors, settle debts, and properly distribute remaining assets.
Why does proper dissolution of a Delaware corporation matter?
Many US startups and venture-backed businesses choose to incorporate in Delaware because of its well-developed corporate law and the Court of Chancery's experience with business disputes. According to state data, about 300,000 new businesses incorporate there each year.
Franchise tax accrues on every corporation in Delaware, regardless of their active status. Once a business is ready to dissolve, the state requires it to follow a standard dissolution process. If a business skips this process, it will continue to accrue tax, penalties, and interest.
After a certain period, Delaware can involuntarily revoke the corporation's charter. This can be a more inconsistent process than a proper dissolution, which can follow a founder into their next venture or complicate later attempts to reinstate the business.
What is the step-by-step process for dissolving a Delaware corporation?
Correctly dissolving a Delaware corporation includes four main steps. It's important to follow them in order.
Get board and stockholder approval
Delaware provides two paths to authorise dissolution. The one a business chooses depends on how the business decides to pursue dissolution:
Board-initiated dissolution: The board adopts a resolution finding dissolution advisable and sends the question to stockholders for a vote. The dissolution must be approved by a majority of the outstanding shares entitled to vote, unless the certificate of incorporation sets a higher bar.
Stockholder-initiated dissolution: If every stockholder entitled to vote signs written consent, the corporation can dissolve without a prior board resolution. This route is common at smaller, closely held corporations where the board and the cap table consist of the same people.
No matter which path a business takes, it must capture the chosen path in board minutes, a written resolution, and either a vote tally or a signed unanimous consent. The business must do this because the state requires proof. The Certificate of Dissolution must state the date dissolution was authorised and the method used to authorise it. If a business skips proper documentation, it might be unable to file the Certificate of Dissolution.
Settle Delaware franchise taxes
Delaware won't accept a Certificate of Dissolution until the corporation's franchise tax account is current. This includes tax due for the current year – calculated through the date of dissolution – plus any taxes still owed from prior years.
Delaware calculates franchise tax using the Authorised Shares Method, which is based on how many shares the corporation is authorised to issue. It also uses the Assumed Par Value Capital Method, which is based on total gross assets and issued shares. The state applies the method that produces the smaller tax bill. However, the corporation must file the return to get that benefit because it does not happen automatically.
The state also requires a final annual report that covers the period up to dissolution and is filed with the final tax payment. Corporations without current annual reports from prior years must update those first. With blocking dissolution, the state treats an unfiled report the same as unpaid tax.
File a Certificate of Dissolution
Once the corporation authorises dissolution internally, it must file a Certificate of Dissolution with the Delaware Division of Corporations. The certificate must include the corporation's name, date dissolution was authorised, method of authorisation, and a statement that confirms all franchise taxes are paid or will be paid.
If a corporation dissolves shortly after incorporation without beginning business or issuing stock, it can use a simplified certificate. Operating corporations typically use the full Certificate of Dissolution rather than the short form.
Standard filing costs US$224, and Delaware offers expedited processing tiers for businesses that need the dissolution finalised quickly. Confirm the Division of Corporations' current fee schedule before filing, as rates can change.
Wrap up the business and notify stakeholders
Delaware gives dissolved corporations a three-year wind-up period to settle their affairs. Proper use of this time can protect the business and its directors from future claims.
Follow these important steps to wind up business operations:
Notify known creditors directly: Delaware's claims procedure involves dissolved corporations sending written notice to known claimants. It allows at least 60 days to submit claims before a deadline that blocks late filing.
Publish notice for unknown claimants: Businesses can publish a newspaper notice or similar public filing, which can prevent claims from creditors unknown to the corporation. This follows the same statutory notice window.
Settle or resolve obligations: Debts, leases, vendor contracts, and pending litigation must be resolved or funded before assets move to stockholders.
Distribute remaining assets: Once liabilities are covered, distribute remaining assets according to the articles of incorporation and any liquidation preferences. Delaware law requires debts and reserved obligations to be addressed before assets are distributed to equity holders. Directors who authorise distributions before settling obligations can be held personally liable if creditors demand payment in the future.
Close the Employer Identification Number (EIN): The corporation sends a letter to the US Internal Revenue Service (IRS) – along with a copy of the Certificate of Dissolution – to formally close the business's tax account.
Withdraw foreign qualifications: If the corporation registered for business in other states as a foreign entity, it needs a separate withdrawal filing. Otherwise, the other states can continue to charge fees and taxes indefinitely.
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FAQs about dissolving a Delaware corporation
The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accuracy, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent lawyer or accountant licensed to practise in your jurisdiction for advice on your particular situation.