Ending a business is rarely an easy decision. But following the proper procedures to formally close it down should be a no-brainer. Formally dissolving your business entity will end its legal existence, but it also reduces the individual liability of a business's members or shareholders. Failing to end a business formally can leave you open to creditors, lawsuits, and ongoing state filing requirements, penalties, and taxes.
Dissolving an LLC or Corporation
Dissolving a business in California involves a number of steps. But first, you should review the company bylaws, articles of incorporation, or operating agreement with a skilled business lawyer to determine any formal requirements for ending the business. At a minimum, to dissolve a Limited Liability Company or Corporation in California, you will need to:
- Take a vote of the members.
Under California's General Corporation Law (GCL), a business can dissolve if shareholder with 50% of the voting power vote for voluntary dissolution. You should review your corporation's articles of incorporation and bylaws with your lawyer to ensure that you follow the proper procedures. Your corporation's required procedures may include a vote by the corporation's board of directors and a dissolution proposal.
Dissolving an LLC may be governed by the LLC's operating agreement. If it isn't, under California's LLC Act, you can dissolve an LLC if 50% or more of the voters vote in favor of dissolution.
- File a certificate with the Secretary of State.
To dissolve the business, you must file a form with California's Secretary of State. The form should include:
- A statement that the business is voluntarily dissolving,
- The number of shares voting and how the vote split, with at least 50% or more in favor of dissolution,
- A statement that 50% of the voting power of the business authorized the filing.
For a corporation, you will file a Certificate of Election to Wind up and Dissolve. For an LLC, you will file a Certificate of Dissolution. However, if the vote to dissolve the business is unanimous, you don't have to file the form.
- Notify your creditors.
After the members or shareholders approve the business's dissolution, the business must notify all of its creditors, claimants, and shareholders. This notice gives the people you do business with the chance to submit final bills and claims before the business closes.
- Wind up the business.
After filing the certificate with the California Secretary of State, your business exists only to take care of final matters, close accounts, notify creditors, and settle the business's affairs. The first obligation of your business is to satisfy all known liabilities, including taxes and debts. Only after the business discharges all debts may you then distribute assets to shareholders or members of the business.
- File final certificates.
After winding up the business, you will formally end the business by filing another form with the California Secretary of State. You will file a Certificate of Dissolution for a corporation, and for an LLC, you will file a Certificate of Cancellation. Both forms include a statement about the payment of, or intent to pay, final tax returns.
- File final tax returns.
While California doesn't require that a business file its final tax returns before dissolving, you do need to file a statement indicating that the business has filed or will file its final tax returns. However, you can file your final business tax return before filing the certificate of cancellation or dissolution.
As you can see, ending a business can be just as legally complex as starting a new one. If you're contemplating the dissolution of your business, you should discuss your plans with a skilled California business attorney.