Legal Question in Business Law in California

Re: Dissolution of a Corporation

Your question requires answering in several parts.

First, a corporation does not dissolve as a result of one person "walking away" and having nothing more to do with it, whether that person is a founder, shareholder, officer, director or whatever. A corporation is dissolved only by its board of directors taking positive action to dissolve it, including filing papers with the Secretary of State. If a corporation's affairs are neglected (for example, if it fails to pay its franchise taxes), it may be suspended, but that is not the same as dissolution.

Next, when a corporation's official status is 'degraded' from active to suspended or even dissolved, its obligations are not ended thereby.

Three things might happen in that situation. First, if the corporation had assets when it stopped doing business, and those assets were distributed in any way to 'insiders' such as officers, directors or shareholders, the creditors can go after those parties who received the distributions. This is on a trust theory and has nothing to do with 'piercing the corporate veil.'

Second, if the corporation was more or less a sham, i.e. it was never capitalized, didn't keep records, and/or was treated as the 'alter ego' of one or more shareholders (affairs weren't kept separate), the corporate entity might be disregarded and the debts would be treated as personal to the shareholders. This is called 'piercing the corporate veil.'

Finally, if the corporation went out of business with debts owing, but neither made liquidating distributions to insiders nor operated without observing corporate formalities, the shareholders are probably safe from personal liability.

Other issues such as directors' breach of fiduciary duty, securities law violations, etc. might also arise but are beyond the scope of the bulletin-board reply forum.