The lifetime of a limited liability company (LLC) is determined not only by objective external circumstances, such as a court decision, but also by the desire of the participants who formed the LLC.
For example, the Articles of Organization of some companies specify that they will operate for a designated time period, after which the company will be dissolved.
However, even the companies that are not intended to be temporary do not always exist forever. At some point you may want to dissolve a California LLC, and it is important to do this according to the law of the state of California, which clearly regulates this issue.
There is a formal process for businesses based in California with clear requirements. If you follow them, you can save time, money, and nerves and avoid the unpleasant consequences.
In this article we will talk about the steps that LLCs in California need to follow to be officially dissolved without any penalties or problems. We will also look at the California LLC dissolution process and the difference between the dissolution of domestic and foreign LLCs.
Dissolving a Domestic California LLC
A domestic LLC is a company formed and registered with the state where all of its business activities are concentrated.
When closing relevant legal entities, it is important that the procedure be followed exactly in accordance with state law. Otherwise, the Secretary of State may administratively suspend or seize a domestic entity. Owners of a business that is not properly closed risk a $250 fine and will continue to be liable for the LLC’s tax obligations.
If you decide not to conduct business through this entity, you should take care of filing the correct paperwork and following the procedure.
First of all, note that once you decide to close LLC California, you cannot always get down to business right away. Your business has to be active first. If the state has suspended the company operations, you must restore your business by filing the appropriate paperwork and paying the fee.
In most cases, the process of closing an LLC in California involves the following steps:
1. Check the Operating Agreement and Articles of Organization
Generally, the Articles of Organization or Operating Agreement include a procedure for closing. If the LLC members have not established rules for formally dissolving the company, you should consult with an attorney who knows state law. The professional will tell you what steps it requires for dissolution, and in particular describes how the vote should happen to comply fully with state requirements.
2. Take a Formal Vote on Dissolving the LLC
The closing of an LLC must be approved by all of its members. To do this, the owners must vote on whether to dissolve the company, following the procedure specified in the Operating Agreement. If the LLC documents do not establish the voting procedure and the percentage of members necessary for approving the dissolution of the LLC, then the general rules will be applied.
For example, the California’s LLC Act states that a majority of members of the company must approve the dissolution. This means that 50 percent or more of the owners must vote in favor.
Regardless of the outcome, the results of the vote must be recorded in the meeting minutes.
3. What and where to file
Filing with the California Secretary of State is a key step in closing a business. Depending on the specifics of your company and the results of the vote, there are 3 options.
1) You can use the simplified closing procedure if the LLC meets all of the following criteria without exception:
- Your LLC has been open for less than a year;
- It has never been in business;
- At least 50% of owners have voted to dissolve;
- The company has distributed its assets;
- Any payments from investors have been returned;
- No debts or liabilities;
- All necessary final tax returns have been filed with the California Franchise Tax Board.
Complete a Short Form Cancellation Certificate listing the LLC’s name, as well as the LLC’s 12-digit California Entity Number and the signature of the applicant. There is no fee for this filing and the processing time is about 5 business days.
2) If the LLC does not meet the requirements for a Short Form, but the members do unanimously vote, then the closing of a company will be accomplished by filing a Certificate of Cancellation. It is available on the Secretary of State’s website.
To complete it, you will need the following information:
- LLC name;
- Secretary of State filing number;
- Whether the dissolution was approved by all owners;
- The indication that the LLC has filed or is going to file a final tax return;
- Signatures of the participants.
As with the Short Form, you can file a Certificate of Dissolution at no charge. It must be done within 12 months of filing your final tax return.
3) The third option is applied if the vote to dissolve the LLC was not unanimous and the business does not comply with the conditions for filing a Short Form.
Then your company must prepare a Certificate of Dissolution, indicating the nature of your dissolution, and a Certificate of Cancellation. After filling out the documents, you must submit them to the California Secretary of State using one of the methods below:
By mail
Download the required forms to your computer, complete them following the instructions, and print them out. Send the finished materials to the address:
Secretary of State
Business Entities Filings Unit
PO Box 944260
Sacramento, CA 94244
There is no processing fee.
In person
If you prefer to deliver papers in person, you can deliver them directly to the Secretary of State’s office located at the address:
Sacramento Office
1500 11th Street
3rd Floor
Sacramento, CA 95814
Although you will need to pay a $15 counter drop-off fee for in-person delivery, the documents will have priority service over those sent by mail.
The processing time depends on the workload of the Secretary of State’s office. Usually you need to wait about 5 business days.
4. Send a Notice to Your Creditors
In the process of dissolving the LLC, the owners must mail a notice to your business’s creditors about the time they should submit bills, invoices, and claims to close the liability.
5. Wind Up the Business
Once the dissolution documents are approved, an LLC continues to exist with the only purpose of finally closing its business. During this stage, you are not allowed to conduct any commercial activities.
As a rule, closing a business involves a whole range of activities. This includes disposing of assets and paying off debts, as well as resolving lawsuits and canceling licenses and permits.
In addition, if you have a third-party registered agent, you should notify them that the LLC has begun the dissolution process.
Finally, in most cases, you will also need to file a form disclaiming the use of the fictitious name.
6. File Final Tax Returns
Since California’s annual $800 minimum franchise tax is assessed as long as the LLC is registered with the IRS, you must follow these steps when closing the business:
- File a final state tax return on time by indicating that it is a final return;
- After the last day of the year in which you file your tax return, stop conducting business completely;
- Within 12 months of filing the final return, send the LLC closing papers to the Secretary of State.
To summarize, closing a business in California is a process consisting of several sequential steps. To avoid difficulties and additional penalties, you should fully comply with all of the steps discussed and follow the state’s laws.
Dissolution for Foreign LLCs in California
As for a foreign LLC in the state of California, the rules of the dissolution process have their own specifics.
The main difference is that to close such a company, you need the Certificate of Cancellation. Therefore, no foreign LLCs are required to have a Certificate of Dissolution, regardless of whether your withdrawal from this state was a unanimous decision of the LLC members.
Involuntary Dissolution in California
There are few reasons why a business may be dissolved by the state, but they are all quite significant. In most cases, it is the result of a serious violation of the law, or a mistake made by the LLC’s ownership group, in its Articles of Organization or Operating Agreement.
Thus, California has the right to involuntarily dissolve your LLC if:
- The court determines that there is no feasible way for the business to continue operating as outlined in the Articles of Organization;
- The owners have engaged in fraud;
- The LLC is no longer conducting business;
- Administratively dissolution of your LLC can protect the rights or interests of its members.
If the way you operate your LLC raises questions with the state, the company will receive a warning notice about a possible involuntary dissolution. There is a 60-day period to challenge the notice. After that period, the business will be closed against your will without the possibility of reinstatement.
Trying to continue operating as a non-compliant entity after administrative dissolution will lead to inevitable legal difficulties. You should be careful with the rules and regulations in this state to avoid extreme measures being applied to the LLC.
In Conclusion
If you no longer want to conduct business with your LLC in California, you should ensure that the process of dissolving or withdrawing goes smoothly. Following the proper procedure required by the state will help avoid potential legal complications or financial penalties, making closing your business quick and easy.