How to Dissolve an LLC in California? (Step by Step Guide)
If you are the owner of a California limited liability company and have made the decision to dissolve it, you will need to take the necessary steps to legally terminate your business according to the rules set by the California Secretary of State.
With over a decade of practice as a business consultant specializing in LLCs, I’ll provide you with an in-depth guide on how to dissolve your California limited liability company.
The article is backed by extensive research and complemented by our panel of attorneys.
Quick Summary
- To dissolve an LLC in California, the process involves consulting the operating agreement, voting for dissolution among members, and filing necessary documents with the California Secretary of State.
- Notifying creditors about the LLC's dissolution is essential to protect members from personal liability.
- California's first-year business failure rate stands at 13.2% and 44.8% after five years.
- A notable aspect of the dissolution process is that there is no obligation to file a final tax return in California, but outstanding taxes must be settled with the California Franchise Tax Board.
6 Steps to Dissolving an LLC in California
The steps to dissolving a California LLC involve a systematic process to avoid personal financial liability and legal complications. Submit all legal documents and comply with the requirements of the California Secretary of State.
To avoid any issues, follow these steps to dissolve your LLC.
1. Vote to Dissolve the LLC
The formal process of dissolution begins with a notice to all the members of the LLC. At the meeting, the LLC members need to vote to dissolve the business entity. The resolution is only valid if a majority of all the members approve it.
In the absence of the document, state laws require at least a 50% vote of all members in favor of the dissolution.
If you and your fellow LLC members can't come to a consensus on how to dissolve the company, state law will dictate the process.
After our voting process, we ensured that all members signed a written consent form to dissolve our California LLC.
2. Notify Creditors About Your LLC's Dissolution
If you dissolve your California LLC, you are still liable for obligations incurred before dissolution. These include business debts or loans, lines of credit, credit card debt, and leases.
To protect our LLC members from personal liability, we notified creditors and lenders that our LLC was dissolving and settled all remaining debts and obligations.
We recommend giving them as much notice as possible - at least 30 days.
Be sure to include your contact information, your business name, and the dissolution date.
3. File Final Tax Returns and Obtain Tax Clearance
Under California's LLC Act, there is no obligation to file a final tax return upon dissolving your LLC.
In our experience, we had to pay any outstanding taxes owed by our LLC before the California Franchise Tax Board (FTB) closed our tax accounts.
To close your LLC's tax accounts, contact the California Franchise Tax Board, furnish your LLC's name, employer identification number (EIN), and the date of dissolution on the final tax return.
"Consult with a legal professional to navigate the dissolution steps and avoid future liabilities."
- Jon Morgan, CEO, Co-Founder and Editor-in-Chief of Venture Smarter
4. File Articles or Certificate of Dissolution
The next step in dissolving a California LLC is to file Articles of Dissolution [1].
File a Certificate of Cancellation if all members agree to close the business entity. If the vote is not unanimous, submit a Certificate of Dissolution instead.
Filing this form means you have obtained tax clearance, submitted your final franchise tax return, paid off creditors, followed your California LLC operating agreement, and distributed assets accordingly.
The Short Form Certificate of Cancellation is only available to those LLCs that fulfill these requirements. If you have, you must file the Short Form Certificate of Cancellation.
During our submission, we paid an additional \$750 for expedited processing and the SOS approved our documents within six hours.
There is no filing fee if you file the Certificate of Cancellation online or by mail. There is a \$25 filing fee if you file in person.
5. Distribute Assets
In the context of dissolving an LLC in California, distributing assets is a crucial step that comes after settling all the company's debts and obligations.
Begin by creating a comprehensive inventory of all the LLC's assets. This includes physical assets like property, equipment, and inventory, as well as intangible assets like intellectual property and outstanding receivables.
Allocate the assets of the LLC to its members based on their ownership interests or as outlined in the LLC's operating agreement.
Before distributing our LLC assets, we ensured that all debts and financial obligations of the LLC were paid. This included loans, creditor payments, and tax liabilities.
6. Close All Accounts and Cancel Licenses and Permits
Closing all accounts and canceling licenses and permits is the final step in winding down an LLC in California. This step is essential to prevent future liabilities and to formally conclude the business operations.
Close all business bank accounts, credit lines, and any other financial instruments. Ensure all transactions are completed and the accounts are at a zero balance before closure.
During our dissolution, we also terminated any ongoing service accounts or subscriptions, such as utilities, internet, phone services, and software subscriptions.
Contact the relevant state and local agencies to cancel any business licenses or permits. This might include trade-specific licenses, sales tax permits, or business operation licenses.
According to the US Small Business Administration between March 2021 and March 2022, the state saw 171,061 establishments close.
Related Articles:
- How to Begin an LLC in California
- How to Remove a Member from an LLC in California
- Top Registered Agent Services in California
- Best California LLC Formation Services
FAQs
How Long Does It Take To Dissolve a California LLC?
It takes more than a month to dissolve a California LLC. If you choose expedited service, you can shorten the processing period to either 24 hours or same-day processing. There are additional fees for expedited processing.
How Much Does It Cost to Dissolve a California LLC?
It costs \$15 to dissolve a California LLC if you file it in person but online and mail filings are free of charge.
If you choose to have your Certificate of Cancellation processed through the SOS expedited service, there is a \$750 filing fee for the same-day processing and a \$350 fee for the 24-hour processing.
When Can You File a Certificate of Dissolution in California?
You can file a Certificate of Dissolution in California when the company has completed its affairs and is no longer carrying on the business.
Submit the document within a 12-month timeframe from the date you file your final tax return.
Do I Need Tax Clearance to Dissolve a California LLC?
You do not need a tax clearance to dissolve a California LLC. However, follow the proper procedure and fill in the required form when filing the final return.
Check the box indicating that the dissolution is tax-free and write "terminated" as the reason for dissolving.
References:
- https://bpd.cdn.sos.ca.gov/llc/forms/llc-3--4-7.pdf
