In California, dissolving a limited liability company (LLC) can be said to be a formal process that enables a clear and legal dissolution of the business. Whether you are changing business directions, changing your business structure, or winding up your operations, there are procedures that you have to consider.
Not adhering to them would mean penalties, owing taxes, or obligations that remain unpaid. It is important to know the actions and the processes that must be adhered to because they prevent you from creating confusion and allow you to go through with the steps that are absolutely necessary.
This guide will help you clarify how to go about every single step to dissolve an LLC in California.
1. Vote for Dissolution of the LLC
The first step in dissolving an LLC is obtaining approval from the members. Look into your LLC’s operating agreement to see what provisions exist for the dissolution. Usually, this is done by the members over a voting process requiring a certain percentage of votes in favor of dissolution, which is specified in the operating agreement.
In situations where the LLC does not have an operating agreement, follow the California Revised Uniform Limited Liability Company Act (RULLCA) which provides for a simple majority. And there are sufficient votes in favor of dissolution. It is also necessary to ensure that the decision is put down in writing because it will prove to be useful when disputes arise regarding the dissolution.
2. File a Certificate of Dissolution
The document that will be used to start the Dissolution of an LLC in California is a Certificate of Dissolution (Form LLC-3). Please note the following points regarding the submission of the documents:
If all shareholders of the LLC rely on the decision to dissolve the company, you may have to utilize the Short Form Certificate Of Cancellation (Form LLC-4/8). However, this is possible only where the LLC is not in the possession of any debts, assets, or business activities.
Such forms can be sent by post, delivered in person, or submitted through electronic means, There is a stipulation that when the submission is made via postal means, such submission should be accompanied by an envelope with prepaid postage for the return of such documents once filed.
No fees are charged for the submission of the Certificate of Dissolution; however, if fast processing services are used then they may require an extra fee. If you have any deadlines that are strict, then expedited filings can assist in the reduction of the processing time significantly.
3. File a Certificate of Cancellation
After filling out the dissolution form, the next form that needs to be filled in case of an LLC corporation is a Certificate of Cancellation (Form LLC-4/7). Submitting this document alerts the state that the LLC corporation is closed and business is no longer offered.
All fields on the forms must be filled out properly. Mistakes and omissions may cause delays or even cause your submission to be denied. If in doubt, consider hiring an attorney to check your form before filing it.
4. Settle Debts and Obligations
It is critical to emphasize that all of the existing debts, taxes, and obligations are treated before an LLC is terminated. This includes:
Settling in full, all payments that are owed to creditors. It is helpful to remember that at the beginning of this process, you should approach your creditors to discuss payment options.
The payment of any pending taxes with the California Franchise Tax Board/Final tax return filing/Pay the applicable base franchise tax of $800. Also, keep in mind that filing for annual tax returns is mandatory.
Ensure to cancellation of business licenses, permits, and any other registrations that would incur fees and penalties. Make sure that you cancel all business addresses with local state and federal agencies to avoid complaints.
The failure to settle such obligations can expose LLC members to personal liability. Therefore, it’s extremely important to approach this step with care.
5. Notify Stakeholders
Make sure that all the important stakeholders regarding the dissolution are informed such as:
Employees: Complete the last payments and inform about any notices or upcoming healthcare benefits that cover health insurance or unemployment.
Creditors: Alert creditors and resolve any unsettled claims. Contemplate issuing a public notice of dissolution to shorten the period within which the creditors can lay claim.
Customers: Notify the customers regarding the closing of the business and try to meet other requirements: for example, settle the delivery of the last goods or services. Effective communication removes misunderstandings and grudges.
6. Distribute Remaining Assets
After paying all the debts and other obligations, the members of the LLC must share the remaining assets of the company. Sharing out of assets should be by the provisions of your operating agreement. If an operating agreement does not exist, then distributions would be by the California statute law which is mainly by proportion of ownership.
Make a comprehensive and well-documented account of the sharing out of the assets: their value before sharing and how they were shared. Documentation may help safeguard you from disputes or lawsuits later on.
7. Cancel Tax Accounts
Shut down all tax accounts belonging to the LLC which include the following:
Federal Employer Identification Number (EIN) via the IRS. Although an EIN is simply assigned to the business, it is advisable to inform the IRS that the LLC has been dissolved so that no further obligations are associated with it after that dissipation.
State tax accounts with the California FTB. Be certain that you have made your final tax payment and that all other payments have been made.
In addition, submit a final tax return for the LLC and indicate it is the last one so that the IRS and state tax departments are aware of the LLC’s tax status. By completing this step, the tax obligations of the LLC are officially closed and there will be no further notices or penalties imposed in the future.
8. Keep Documentation
Do not destroy even one document after the dissolution of the LLC. You may need to keep several of the following documents for record keeping:
- Filed Certificates of Dissolution and Cancellation.
- All final returns and financial reports.
- Written resolutions were given to the members to dissolve the business.
Under California laws, such records must be maintained for a particular period for auditing purposes or legal processes.
Common Pitfalls to Avoid
Not Paying the $800 Franchise Tax: Californian law mandates there is an annual franchise tax payable for inactive LLCs until the business is rounded up. If you have any branches in other states check those for similar requirements.
Not Terminating Business Licences: Having active business licenses that aren´t necessary will incur avoidable costs as well as hassles.
Not Keeping Stakeholders Informed: Litigation or loss can occur if the members including the creditors and other stakeholders do not get notified.
Conclusion
The dissolution of an LLC is a lengthy process. For starters, one needs to follow through with all the necessary steps that lead to the formal dissolution of the LLC. Once the tasks are followed through, LLC closures are bound to be smooth and free from legal loopholes and eventual penalties.
If you are unsure or don’t know how to do it, a legal expert licensed in your state can help answer some questions to better understand the specifics of the law.
If you are looking for a method that would allow calm and issue-free dissolution of your company then EasyFiling is for you. As experts who aid in a variety of regulatory matters, we can cut through the red tape and save time during the process. For a more peaceful and easy approach to dissolving your LLC, give EasyFiling a try!
Frequently Asked Questions (FAQs)
1. What is the time frame required for the dissolution of an LLC in the state of California?
Dissolving an LLC is all about how fast you can file papers and complete the steps required. Coming into contact with the Secretary of State of California provides a little bit more perspective, as that itself can take weeks sometimes.
2. Am I required to file a final tax return?
Yes, LLC dissolution requires you to submit a final tax return within California together with an IRS filing. Marking the return as “final” does indeed clarify that at that point, the LCC is finished and closed.
3. What is the penalty for not dissolving LLC?
Assuming that you do not remedy a breach of any kind, it would seem that you remain exposed to annual franchise taxes, penalties, and legal exposures every year. This is why you must complete everything that has been required of you.
4. How to revive a dissolved LLC in California?
Yes, there are specific guidelines and prescribed protocols that if adhered to would allow you to revive such an LLC. But just like most cases, this should be done with proper legal assistance to avoid any problems.
5. How much does it cost to dissolve an LLC in California?
The filing of the California LLC Certificate of Cancellation or the Certificate of Dissolution does not attract any filing fee. On the other hand, if services are rendered on priority, clients may need to pay an extra fee.
Nabin Adhikari
