Sometimes, as an entrepreneur, you have to know when it's the right time to walk away from a business idea. The term "walking away" is used loosely here, of course—if you've gone through the formality of forming an LLC for your business, the proper course of action is to formally dissolve the LLC.
LLC dissolution: California
In fact, if you have a California LLC—that is, an LLC formed in California and therefore governed by California LLC laws—it's very important to accurately follow all the steps required to properly dissolve—or cancel, which is the term used in California—your LLC.
Annual minimum franchise tax affects your timing
Why is it important to accurately complete all the steps that will see to the proper dissolution of your LLC in California? California law requires the payment of an $800 annual minimum franchise tax by all LLCs—this payment is required whether or not the LLC is actively in business, which means it must be paid even if the LLC is not actively generating revenue.
There are also other annual maintenance requirements with which the LLC must comply, including an annual information return and the annual filing of a tax return with the Franchise Tax Board of California.
If your LLC isn't doing well financially and you've decided it's time to cut your losses and dissolve it, it's a good idea to act on your decision in a timely manner and have your LLC properly dissolved before the annual minimum franchise tax and annual filings are due again.
According to the Franchise Tax Board, in order to avoid having to pay the annual minimum franchise tax for the current or subsequent years, your LLC must:
- File its final franchise or annual tax return for the preceding taxable year in a timely manner
- Cease doing business in California after the last day of the preceding taxable year
- File the necessary documents to cancel the LLC within twelve months of filing the LLC's final tax return
Dissolving an LLC in California requires the proper forms
There are three ways to dissolve an LLC in California. The required form(s) vary, depending on how long you've been in operation and on whether or not you have all the LLC members' approval. While the steps to formally dissolve your company are fairly straightforward, navigating the formal dissolution process can be daunting to do by yourself. Fortunately, there are online resources that can help.
If you decide to dissolve your company by yourself, it's important to choose the right form for your particular situation, as submitting the wrong form might delay the proper dissolution of your California LLC.
If You filed your articles of organization less than 12 months ago
If you filed your Articles of Organization less than 12 months ago, you may be eligible to file the Short Form Certificate of Cancellation (Form LLC-4/8).
In order to file for cancellation using the Short Form Certificate, you must meet all of the eligibility requirements specified by the California Franchise Tax Board.
If you have obtained the unanimous of consent of all LLC members
If you've held a formal vote—following the procedures and rules outlined in your LLC's operating agreement or in the articles of organization for dissolving the company—and received a unanimous consent for cancellation, you may file for cancellation using the Certificate of Cancellation (Form LLC-4/7).
In order to dissolve your California LLC using the Cancellation Form only, you must indicate on the form that a vote to dissolve the company was made by all the members of the LLC.
If you have not obtained the unanimous consent of all LLC members
If you're unable to obtain the unanimous consent of all the LLCs members, but you meet the requirements to dissolve your LLC, you can file for cancellation by submitting the Certificate of Cancellation (Form LLC-4/7) plus a Certificate of Dissolution (Form LLC-3).
All necessary forms can be downloaded from the California Secretary of State website.
How to dissolve an LLC in California
Once you've selected the right form for your specific situation, you'll need to correctly fill out the form. You'll need your LLC's filing number and the full name of your company.
Additionally, each form has its own requirements. For example, if you're filling out the Short Form Certificate of Cancellation (Form LLC-4/8), you will need to indicate on the form that you have met all the requirements to be eligible to obtain dissolution by filing the Short Form.
In order to complete the Certificate of Dissolution (Form LLC-3), which must be filed in conjunction with the Certificate of Cancellation (Form LLC-4/7) if you do not have unanimous consent of your members, you must be able to check one of the options in section 3 of the form, which outlines the circumstances causing the dissolution of the LLC
These options include, among others, the happening of an event as set out in the LLC's operating agreement or articles of organization, or the vote of a majority of the LLC members or the percentage required for such a vote as specified in the LLC's articles of organization or operating agreement. If you're unable to select one of the listed options, you cannot file Form LLC-3.
If you choose to mail in your signed and dated form, you won't be charged a filing fee. However, if you decide to drop off the form in person, you'll be charged a small non-refundable service fee.
Making the decision to end a business endeavor is stressful enough; after doing so, you will want the closing-out process to go as smoothly as possible.
If you need to dissolve an LLC, LegalZoom can help. The process begins by completing a simple online questionnaire. A specialist will create your dissolution paperwork, file it with the state, and send your paperwork to you.