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July 8, 2022 | BusinessCaliforniaFrom the blog

Dissolving a Business Entity in California

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Ellie Sanders

Associate Attorney

If you own a business in California and you have decided to wind down your operations, you will have to go through the formal process of dissolving the company.  Laws vary from state to state, for example, the process in New York differs in some ways from the process in Florida.  California state law requires that you take various steps including notifying several state agencies that you are shutting down the business.  Complying with these rules is important to avoid potential liability.

What Steps Must Be Taken to Dissolve a Business Entity in California?

California business dissolution requirements vary depending on the type of business (i.e., corporation, LLC, partnership or sole proprietorship).  For all entities, you must take the following steps:

Review your corporate contract. California law does not require all business entities to have a corporate contract.  Notably, sole proprietorships do not require any paperwork be filed at all to set up in California.  However, if you do have a corporate contract, you must comply with any provisions related to dissolution in your agreement, including when and how dissolution is permitted.  For example, in the event all partners do not agree to dissolution, the agreement may allow for the buyout of partners who want to leave.  Under state law, if you do not have a corporate contract, California Corporations Code or the Revised Uniform Partnership Act will govern the dissolution process based on your business entity type.

File tax returns and pay taxes. The State of California Franchise Tax Board (FTB) requires that prior to dissolving a business, the entity must file all delinquent tax returns and pay all tax balances, including any penalties, fees and interest.  It must also file a final tax return expressly indicating on the form that it is a final return and cease transacting business in California after the final taxable year.

Comply with the California Secretary of State (SOS) requirements. The SOS business division requires that the entity being dissolved file the appropriate forms with their office within twelve (12) months of filing the final tax return.

Wind down the business. You and your partners must shut down operations of the business.  Recommended actions include:

    • Paying any outstanding debts.
    • Notifying all creditors, vendors, suppliers, clients and employees of the intent to go out of business.
    • Closing business checking accounts and credit cards.
    • Canceling any licenses, permits and fictitious business names.
    • Publishing a statement in a local newspaper of general circulation near the principal place of business that the business entity is no longer in business.
    • Distributing remaining assets in accordance with each owner’s percentage of ownership and as set forth in the partnership agreement.

Do You Need an Attorney to Dissolve Your Partnership?

Just as you put significant thought into starting a business, you must take care in dissolving one. Complying with your corporate contract and California law is essential.  If you fail to follow the applicable procedures, you could be subject to personal liability in a lawsuit by private parties or action by the government.  To minimize these risks, consult a qualified attorney for help.

Photo by Claudio Schwarz on Unsplash
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