September 9, 2024
There may be several reasons a business owner will dissolve their business. The business might be experiencing poor performance, internal issues with management, or the shareholders or managing members may require the business capital for other purposes.
As a preliminary matter, it is important to review any corporate documents such as an operating agreement or the bylaws, which typically detail the procedure for dissolution of the company. Is a majority vote for dissolution required? Are there buyout options for the stakeholders? How will the business entity be liquidated? These are some points that should be addressed prior to forming and operating your company. If no formation agreements are created, the company will be subjected to the state’s default laws, which may not be favorable to the company's stakeholders.
Preliminary Matters
Before dissolving a business, there are a few matters to take care of. Some matters include, but are not limited to:
Transfer any real estate and other assets out of the legal name of the company
File all delinquent and final tax returns (indicate on the document that this is the business’ final tax return)
Pay off tax balances, fees, and penalties, if any
Close down bank accounts and credit lines in the business’ name
Notify and settle outstanding debts and obligations with creditors
Filing Required Documents for Dissolution
Depending on the type of legal business entity, there are certain requirements by the Secretary of State and Franchise Tax Board that must be satisfied.
Limited Liability Company (LLC)
The forms required to dissolve an LLC can be found and submitted online on the Secretary of State website. Forms must typically be filed within 12 months of filing the final tax return. The forms can be titled Certificate of Dissolution, Certificate of Cancellation, or Short Form Cancellation Certificate, which is used only if the LLC was formed in the last 12 months. Some states such as California will also charge handling fees. Please check with your state’s business division for a thorough list of instructions.
The forms may require the name of the LLC as it is recorded with the Secretary of State, the entity file number, whether all or some of the members voted for the dissolution, and the reason for the dissolution.
Corporation
After holding a formal meeting to vote to dissolve the company, specific forms must be submitted to the Secretary of State. In California, the forms are called Certificate of Dissolution, Certificate of Election to Wind Up and Dissolve, and Short Form Certificate of Dissolution (for corporations registered less than 12 months ago). Depending on whether the vote to dissolve was unanimous, some forms may not be required. Again, please check with your state’s business division for a thorough list of instructions.
Finalizing Steps
After settling any debts, taxes, and other obligations, the company can distribute any remaining assets in accordance with the business’ governing agreements. Without any agreements, the state’s default rules for distributions will apply.
Aside from these requirements, ensure that these additional steps are taken:
Timely inform employees, customers, vendors, and other suppliers of the business' closing
Cancel the business’ employer identification number (EIN)
Close down business accounts
Cancel licenses, permits, and fictitious business names (FBN)
Shut down business websites and social media accounts
The process of winding up and dissolving a business can be very complex as different requirements must be satisfied within specified deadlines. If the process is skipped or not properly followed, this can be more detrimental for the business and its owners. The business’ owners can lose the right to do business in the state and be subject to hefty penalty fees and interest.
Moreover, the business entity can still be sued and depending on the entity, the owners might be subject to the annual franchise tax, which is $800 in California. Without a valid business entity, some protections like limited liability will no longer apply. This means that the business' owners will be personally liable for any debts or lawsuits of the business.
If you have any questions about your business, please speak with a licensed attorney. An attorney at DY LAW can help evaluate your business and plans for winding up operations. Give us a call at (714) 386-7755 or email at admin@dylawcorp.com .
All information provided is strictly educational and does not constitute legal advice. Any past or previous results do not guarantee future outcomes as results may vary. Please note that, while this article accurately describes applicable law on the subject covered at the time of its writing, the law can continue to develop with the passage of time. Care should be taken to verify that the law described herein has not changed. For legal advice, please consult with a licensed attorney.
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