Ending your California business partnership will involve a variety of tasks. Here’s a brief overview of the process for dissolving a general partnership in California. This article covers general partnerships where there is no specified term (at-will partnerships) and where the dissolution is by mutual, voluntary decision of the partners.
As with most important matters affecting your partnership, the first step in dissolving your partnership is to check your partnership agreement. While a written partnership agreement is not required in California, ideally, you and your partners would have prepared a partnership agreement when you first formed your partnership or at some later point in time. If you don’t have a preexisting partnership agreement, you’ll have to fall back on the default provisions of the state’s Uniform Partnership Act.
Along with reviewing the partnership agreement, it’s a good idea for all of the partners to discuss the dissolution. Two of the key points to address are:
If you have a well-written partnership agreement, it should provide guidance on these points. You may even be able to simply follow what’s laid out in the agreement. On the other hand, there may be cases where you’ll want individual partners to pay particular debts, and those responsibilities will not be covered by the partnership agreement. If so, you’ll now want to come to an agreement about who will pay what, and put that agreement in writing.
Assuming you have a partnership agreement and it contains provisions on how to dissolve, you should follow those provisions. In most cases, dissolution provisions in a partnership agreement will state that all or a majority of partners must consent before the partnership can dissolve. In such cases, you should have all partners vote on a resolution to dissolve the partnership. Ideally, there will be the unanimous or majority consent required by the agreement. You should record in writing the results of the vote to dissolve.
If you want to dissolve your partnership because of a disagreement among the partners, and not all the partners are in agreement regarding dissolution, you usually have a couple options. First, the partnership agreement may provide a solution. For example, there often is an option for partners who want to continue the business to buy out one or more partners who want to leave. Or you could bring in an independent mediator to try to help resolve the disagreements. Ultimately, however, if the partners can’t come to an agreement after trying other options, you’ll have to fall back on going to court and getting a judge to decide how the dissolution will proceed. You should try to avoid going to court, but if you really have no choice, you and your fellow partners should be represented by lawyers.
If you don’t have a partnership agreement, you’ll have to rely on the Uniform Partnership Act. California’s version of this Act is different than in other states. In general terms, it provides that an at-will partnership will be dissolved by the express will to dissolve of at least half the partners, including partners who dissociated from (left) the partnership within the preceding 90 days. You can accomplish this by having a majority of the current and recently-dissociated partners vote in favor of a written resolution to dissolve. It is also possible for remaining partners to choose to continue the partnership without the dissociated partners.
After you have voted to dissolve under the rules of the partnership agreement—or, in the absence of an agreement, the partnership has dissolved under the rules of the Partnership Act—you need to take some additional steps to close down the business. These steps are often referred to as winding up the partnership. In general, the steps include:
It’s particularly important that all debts are paid before you make any distributions to the partners. California’s Uniform Partnership Act has rules for the order in which people get paid when winding up a partnership. In general, creditors must be paid first, then partners are entitled to receive back their capital contributions, and, finally, if anything remains, the partners are entitled to distributions.
In California, general partnerships are not required to file a form when they dissolve. However, many California general partnerships file Form GP-1, Statement of Partnership Authority, with the Secretary of State (SOS) when first formed. In those cases, the partnership should file Form GP-4, Statement of Dissolution, when the partnership dissolves. Filing a Statement of Dissolution will help make clear that your partnership has ended and limit your liability. You cannot file a Statement of Dissolution unless you have first filed a Statement of Partnership Authority.
You can file the Statement of Dissolution online or on paper. For either method, go the Forms Section of the SOS website. There is no filing fee. Under California law, other people generally are considered to have notice of the partnership’s dissolution ninety (90) days after filing the Statement of Dissolution.
While not a legal requirement, you should make sure to notify creditors, customers, and others that your partnership is dissolving. In some cases, if one of your partners makes a deal with someone after dissolution, you and your fellow partners could be on the hook for that deal—including any debts involved—if the other party didn’t have notice of the dissolution.
There are several options for how to give people notice of the dissolution. One option is to send them written notification. Another good option is to publish a notice in one or more local newspapers.
California does not require that you obtain tax clearance before dissolving your partnership. However, the CaliforniaFranchise Tax Board (FTB) does require you to file a final tax return for your partnership and pay any state taxes due with that return. For federal tax purposes, check the “final return” box on your IRS Form 1065. Under IRS rules, if your partnership terminates before the end of its normal tax year, the final federal return is due by 15th day of the fourth month following the termination date.
In addition, if you partnership had a seller’s permit (for collecting sales tax), you must inform the California StateBoard of Equalization (BOE) in writing that you are closing your business. You can use Form BOE-65, Notice of Close-Out, to satisfy this requirement. (The BOE also should be notified any time a partner is added or dropped.)
Is your partnership 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 fees, on the SOS website. For information on dissolving and winding up partnerships formed in other states, check Nolo’s 50-state series on dissolving partnerships.
Dissolving and winding up your partnership 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.