Closing your California limited liability company (LLC) will involve a variety of tasks. Among the most important are what is known as dissolving and winding up the business.
Dissolving Your LLC
Your LLC is registered with the State of California. Officially ending its existence as a state-registered business entity and, by extension, putting it beyond the reach of creditors, begins with a formal process called dissolution. While an LLC may be involuntarily dissolved through a court decree, this article covers voluntary dissolution by the LLC members. Moreover, although California has special dissolution rules for LLCs that have not conducted any business (generally just-formed LLCs), here we focus only on LLCs that have conducted business.
In order to voluntarily dissolve your LLC, you first should look to the company’s formational documents—the articles of organization and operating agreement. In most cases, one of those two documents will contain a section with rules for how to dissolve the company. Typically the rules will require a vote of the LLC members on a resolution to dissolve, and more specifically a requirement that some percentage of members vote in favor of the resolution. Make sure you follow any specific procedural requirements that may be part of the dissolution rules, such as setting a specific time to meet and vote and giving advance notice to all members regarding the meeting.
Also, regardless of whether your articles of organization or operating agreement contain any dissolution provisions, California’s LLC Act allows for an alternative method to voluntarily dissolve an LLC: a majority vote of the LLC members—or a greater percentage of voting interests of members if so specified in your operating agreement. As further discussed below, if all LLC members vote to dissolve, you do not need to file a certificate of dissolution, only a certificate of cancellation.
For either approach to dissolution of your LLC—relying on rules in formational documents or on majority (or greater) vote—you should make sure to record the decision to approve the dissolution in the official minutes of the dissolution meeting or on a written consent form.
Note that dissolving your LLC, alone, does not stop legal actions or proceedings in which your LLC is a party.
Certificate of Dissolution
Upon dissolution of your LLC, you must file a certificate of dissolution with the Secretary of State (“SOS”). For immediate purposes, there is one exception to this rule: if all LLC members unanimously vote to dissolve the LLC, and a statement to that effect is added to the certificate of cancellation, no separate filing of a certificate of dissolution is required.
At a minimum, the certificate of dissolution must include your LLC’s name and SOS file number. You’ll also need to provide one or more authorized signatures and a return mailing address.
There is no fee to file the certificate of dissolution. However, there is a non-refundable $15 special handling fee for processing documents delivered in person at the Sacramento SOS office. It can take the SOS many weeks to process a certificate. However, expedited service is available for an additional fee.
Following dissolution, your LLC continues to exist only for the purpose of taking care of certain final matters that, collectively, are known as winding up the company. You may choose to designate one or more LLC members or managers to handle the winding up.
Under California’s LLC Act, key winding up tasks include:
- prosecuting and defending actions by or against the LLC in order to collect and discharge obligations
- disposing of and conveying the LLC’s property; and
- collecting and dividing the LLC’s assets.
When it comes to the last listed item, be aware that your LLC’s assets must be distributed in a particular order. First, you must pay, or make adequate provision to pay, all known LLC debts and liabilities, including, without limitations, the debts and liabilities of LLC members who are creditors. Note that it is particularly important that you pay all outstanding taxes. Next, unless your formational documents provide otherwise, you must pay members any interim distributions as may be required and authorized under rules in your operating agreement. Interim distributions generally are approved payments to members unrelated to the dissolution. Unless your operating agreement states otherwise, these distributions generally must be on the basis of the value of each member’s contribution. Finally, unless your formational documents provide otherwise, you must pay any remaining assets to members (a) for the return of their contributions to the LLC; and then (b) in the proportions in which members generally share in distributions.
Notice to Creditors and Other Claimants
California requires that the people winding up an LLC mail a notice of the commencement of winding up to all known creditors and claimants whose addresses appear on the LLC’s records. You may want to contact a local business attorney for assistance with drafting the notice.
Certificate of Cancellation
After dissolving and winding up your LLC, you are required to file a certificate of cancellation with the SOS.
To complete the certificate of cancellation, you must provide:
- the name of your LLC
- the LLC’s SOS filing number; and
- a statement that the proper final tax return has been or will be filed with the Franchise Tax Board.
The SOS has a certificate of cancellation form including instructions that is available for download. In most cases, you should use the SOS form. Among other things, it includes a checkbox for indicating whether dissolution was made by a vote of all LLC members, and the specific required statement regarding a final tax return. As with the certificate of dissolution, you also need to provide one or more authorized signatures and a return mailing address. Make sure to use Form LLC-4/7 and not the short form LLC-4/8; the latter form is only for LLCs that have not conducted any business.
There is a no fee to file the certificate of cancellation by mail. However, if you deliver the certificate in person there is a $15 special handling fee. As with the certificate of dissolution (discussed above), it can take many weeks to process your certificate of cancellation, but expedited service is available for an additional fee.
Be aware that your business name will become available for use by others after dissolution.
California does not require that you obtain tax clearance before dissolving your LLC. However, as mentioned in the preceding section, you do need to include a statement in your certificate of cancellation regarding a final tax return. The statement affirms that you have filed, or will file, either a final franchise tax return or a final annual tax return with the Franchise Tax Board. The final return you use will depend on whether your LLC is classified as a partnership or a corporation for tax purposes. Also, you should file your certificate of cancellation within 12 months of filing your LLC’s final tax return.
For federal tax purposes, check the “final return” box on your IRS Form 1065 (if your LLC is classified as a partnership for tax purposes) or IRS Form 1120 (if your LLC is classified as a corporation for tax purposes).
Is your LLC registered or qualified to do business in other states? If so, you must file separate forms to terminate your right to conduct business in those states. Depending on the states involved, the form might be called a termination of registration, certificate of termination of existence, application of withdrawal, or certificate of surrender of right to transact business. Failure to file the additional termination forms means you’ll continue to be liable for annual report fees and minimum business taxes.
You can find additional information, such as forms, mailing addresses, and filing and expedited processing fees, on the SOS website.
For information on dissolving and winding up LLCs formed in other states, check Nolo’s 50-state series on dissolving LLCs.
Final Advice: Dissolving and winding up your LLC is only one piece of the process of closing your business. For further, general guidance on many of the other steps involved, check Nolo’s 20-point checklist for closing a business and the Nolo article on what you need to know about closing a business.