In the first part of this two-part blog post, we reviewed key matters that a companies should focus on when thinking about winding down a company. In this second part we continue to review wind-downs, including the key procedural steps involved.
11. Distribution Waterfall
Once a company has a good handle on the remaining assets, what is owed to creditors, SAFE and Noteholders, and projected dissolution and wind down costs, a company should put together a distribution waterfall. This waterfall is typically a spreadsheet that allocates the remaining assets amongst the various stakeholders, based on seniority. This might include secured creditors, unsecured creditors/vendors, employee past wages, past taxes due, amounts due to unconverted SAFE and unsecured Noteholders, and amounts set aside for projected dissolution costs and final filings. To the extent any distributable assets still remain after taking into account these amounts, such distributable assets would be allocated to the shareholders post dissolution. For some companies, the shareholders might include both common and preferred shareholders (typically investors in the company). As explained further below how distributions to shareholders are treated depends on whether preferred shares exist, the amount being distributed, and the type of preferred shares (participating vs non-participating preferred).
12. Shareholder Distribution and Liquidation Preference
As noted above, some companies have both common and preferred shareholders. Preferred shares are typically purchased by investors as an investment, and have special rights above and beyond common shares. In particular, preferred shareholders typically are “senior” to common stockholders with respect to any assets otherwise distributable to shareholders (after taking account amounts due to creditors, amounts due for wages and taxes, and SAFE/Noteholders). Each series of preferred stock has a specific per share “liquidation preference” that is defined in a company’s Certificate of Incorporation, and is expressed as a price per share. It is usually equal to the price paid for such shares. For non-participating preferred stock (the typical type of preferred stock issued in venture capital deals), the holder of the preferred stock gets to choose between converting into common stock (and getting a pro-rata share of any proceeds alongside other common holders), or retaining the preferred stock and receiving the per share liquidation preference that such series of preferred is entitled to. Which option the preferred stockholder chooses will depend on which provides for the better economic outcome – in situations where the proceeds from the sale of the company are greater than the per share liquidation preference, the preferred stockholder will choose to convert; in situations where the overall proceeds are less than the overall liquidation preference, the preferred stockholder will typically elect to receive the liquidation preference (although in situations where there are different series of preferred stockholders with different liquidation preferences, the calculations can get complicated). You should expect that your legal counsel will calculate the distribution waterfall with respect to preferred vs common, as that will significantly impact what the common holders actually get, if anything, in a dissolution scenario. Please note, though, that in a typical dissolution scenario where the company has not successfully sold, its typical that the common stockholders walk away with nothing.
13. Dissolution Approvals; Plan of Dissolution
After a company has determined the distribution among the various stakeholders, the first legal step is filing a Certificate of Dissolution. For purposes of this discussion we’ll assume the company is C-corp incorporated in Delaware – while the specific steps for other types entities or for C-corps in other states might be slightly different, the overall process is similar. For a Delaware C-corp., the Board and Shareholders must adopt and approve a plan of liquidation and dissolution and approve the filing of a Certificate of Dissolution. In addition, depending on the lender/secured creditor, notice and/or approval of dissolution might also be required from such lender/secured creditor. Also, the Company’s Certificate of Incorporation may also have provisions that require approval from preferred shareholders. These approvals would include details regarding how the company intends to wind down and the proposed final distribution waterfall.
14. Delaware Franchise Taxes
As noted above, companies should budget for the payment of past taxes, including income taxes, franchise taxes, property taxes, and payroll taxes. However, as part of the dissolution of a Delaware entity, prior to the actual filing and acceptance of a Certificate of Dissolution by the Secretary of State of Delaware, a company must be in good standing and filed and paid all past and current Delaware Franchise Taxes and information statements. In many cases, companies (especially those that are in distress and that are trying to conserve cash) may have ignored or forgotten to file information statements and/or pay Delaware franchise taxes. In such cases, Delaware assess late fees for late filings – companies must pay such past fees, late fees, and pay the final franchise tax (for the year in which the dissolution occurs) before acceptance of such Certificate of Dissolution, which can add up and be expensive – thus we caution companies to try to determine whether they are current and pay such fees ahead of the actual filing of the Certificate of Dissolution in order to properly determine the final dissolution costs and budget, and the correct final distribution waterfall.
15. Certificate of Dissolution
Subject to receipt of the requisite Board, Stockholder and other consents, the company can move forward with filing the Certificate of Dissolution.
There are two forms of Certificate of Dissolution: a “short form” (currently a $10 fee) and a standard form (currently a $204 fee). Fees and forms can be found on the Delaware Secretary of State website: https://corp.delaware.gov/disso09/
The short form is available if the business is no longer active, there are no assets, and the entity has only paid the minimum DE franchise tax over the course of the life of the Company. If your company can’t meet the above criteria, it can file using the standard form, which is slightly more expensive.
The filing of the Certificate of Dissolution will trigger additional notice requirements and time periods to complete the dissolution process as discussed below. As such, the filing of the Certificate of Dissolution is in some sense, the initial “start”, not the “end”, of the legal dissolution process.
16. Filing of Certificate of Surrender (states outside of Delaware)
For most companies incorporated as a C-corp in Delaware, their actual principal place of business is outside of Delaware. For companies based in California, in addition to the filing of a Certificate of Dissolution in Delaware, the company would also need to file a Certificate of Surrender in California (forms available on the California Secretary of State website): https://bpd.cdn.sos.ca.gov/corp/pdf/foreign/corp-surc.pdf.
Currently there is no fee to make such filing in California, but to receive a Certificate of the filing there is currently a $5 fee.
17. Notice Period; Advertisements; 228E Shareholder Notice
As noted above, once the Certificate of Dissolution is accepted by the Secretary of State of Delaware, that “starts” the official dissolution process. After filing of the Certificate of Dissolution, the next steps depend on whether the dissolution will be court supervised, which provides additional protection but is costly. We are assuming here that the company will not follow a court supervised process and instead will wind up the affairs of the company independently.
Under the non-supervised dissolution process, the company needs to pay out all claims during the 3 year post-dissolution process, and make provision for the future payment of any known or unknown claims that are likely to arise in the 10 years following the dissolution.
In order to properly make provision for any claims that may arise, the Company should consider whether or not to send a formal notice to claimants or publish a notice of dissolution. While taking these steps does not necessarily provide protection against future claims, it may provide evidence that the board satisfied its fiduciary duties and was reasonable in its evaluation of what claims were likely to arise.
Finally, post approval of the plan of dissolution and distribution and filing of the Certificate of Dissolution, to the extent not all stockholders approved such plan and filing, a notice will need to be circulated to all shareholders.
18. Distributing Remaining Assets
Once the Certificate of Dissolution has been filed, the company can start to pay out all remaining claims, and then make any remaining distributions the various stakeholders.
In some cases, because there may be ongoing dissolution expenses (such as payment of the accountant for the filing of final tax returns, payment for advertisements, additional vendor costs, that crop up), some companies budget a certain amount to be set aside to satisfy such expenses, and may end up doing distribution in one or more tranches.
With respect to such distribution, communication is important with stakeholders and shareholders, and it’s often a good idea to include the waterfall so that each stakeholder understands what they are entitled to and how the amounts were calculated.
19. Final Taxes and Tax Return
After the Certificate of Dissolution is filed, the IRS must be notified, and eventually a final stub-year income tax return to the IRS will be filed. The company should wait until after all claimants have been paid before doing final returns to ensure the final tax filings and financials are accurate prior to filing.
20. Post Dissolution and Distribution; Shut down of Bank Account
As noted above, while the filing of the Certificate of Dissolution “starts” the official dissolution process, it does not “end” the process. In fact, post filing, the entity legally still stays in existence for a period of three years for the sole purpose of prosecuting and defending lawsuits, settling and closing the business, selling or disposing of property, and discharging liabilities and distributing assets.
While all remaining cash and assets are being distributed, the company can keep the bank account open to pay final amounts, deal with claims, etc. Typically, the closing of the bank account is the final step after all potential cash has been received, no further assets exist, and all taxes are paid.
Inceptiv
Latest posts by Inceptiv (see all)
- Nine Things You Can Do to Prepare to Sell Your Company - March 4, 2026
