You have poured in so much of your money, time, and effort into your LLC. You probably spent hard-earned money on training seminars on how to start a business and market your product or service. Add to that the money you spent just to organize your LLC the right way.

Sadly, things have happened, and you’re forced to abandon your sinking LLC. Naturally, you’re eager to clear everything out and cut your losses before your business starts to drag you even further down and cost you the rest of what little you have left.

That’s understandable.

The problem is that eagerness to cut losses might do more harm than good. That eagerness to move on can eventually add more stress and a false belief that you have finally freed yourself. Why? Because just like organizing an LLC, dissolving it is a process.

You need to know how to close an LLC in California properly. When you terminate your business, it is of utmost importance that no one can get their paws on what you personally own. Yes. No one! Not even the government nor your business creditors.  You have already lost so much so what you want is to limit the debt and the losses to your LLC.

So what are the pitfalls you need to avoid? What are the questions you should ask yourself if you want to dissolve your LLC? What will happen to the LLC properties? Those are just some of the things we want to help you with.

Follow along this article to guide you before, during, and after dissolving your LLC. Let’s start with what you should consider before dissolving your LLC and why dissolution is important to your discontinued California LLC operation.

Before Dissolving Your LLC: What You Should Know

Closing your LLC in California involves a lot of tasks. Before dissolving your LLC, here are things you need to remember.

Do You Need to Dissolve Your California LLC or Can You Simply Close the Business?

Simply closing up shop sounds quick and tempting, but you can’t do that. Not if you want it done right. You’ll need to take your California LLC through the dissolution process if your intention is to permanently shut down the business. You’ll have to dissolve the business entity.

There’s nothing worse than a business that costs you money and creates debt without you knowing it. This is precisely what can happen if you close an LLC in California without seeking professional advice on how to dissolve it.

Unless dissolved, your California LLC will continue to be liable for state fees, it will continue to be open to incurring more debts, it will continue to own the assets under its name, and you won’t be able to sell those assets as your own.

Closing the Doors of Your Business Is Not the Same as Dissolving It

Dissolution is more of a legal process, not physical. It focuses on the termination of the legal entity as opposed to breaking down the walls of a failed business.

If the LLC is not properly dissolved, it continues to exist under state law; it will remain subject to LLC filing requirements, such as annual reports and franchise taxes.

Failing to meet these continuing obligations can result in additional fines, taxes, and penalties. To make things worse, it might be possible that these fines, taxes, and penalties will have to be paid out of your own pocket as opposed to your LLCs bank account.

Failure to dissolve your California LLC means continuous annual fees. Whether your business is making money or not is irrelevant.

Let me introduce you to Form 568 (Limited Liability Company Return of Income). It basically contains the total income of the LLC, the members’ share in the income, property distributions, LLC fees, and more.

If you’re a business owner who intends to permanently close an LLC in California you might not feel the need to file Form 568.

You might feel that as far as you’re concerned, the LLC has just ended by merely stopping operations.

You’re wrong.

LLCs that are classified either as a partnership or a disregarded entity and are doing business in California must file Form 568 annually.

This is a continuing obligation for an undissolved LLC.

What if you failed to file Form 568? Then expect to pay a penalty plus interest.

Failure to file form 568 is justifiable only if it’s dues to a reasonable cause. A penalty is incurred if Form 568 is either:

• not filed on time or
• if it does not contain all the required information.

The monthly penalty (for up to 12 months) is $18 multiplied by the number of LLC members during any part of the taxable year for which the return is due. So, if you have a multi-member LLC consisting of 4 members, the penalty you will have to pay is a total of $864.

But that does not end there! You will also have to pay interest on that penalty. The interest is computed from the day the notice of tax due is mailed until the return is filed. This is where your ongoing financial obligation can grow if left alone. Not only will you be dealing with having to start over, you’ll be faced with the added nightmare of having to pay for something you never thought you could still be liable for.

Dissolution eliminates the possibility of having to pay for these penalties and the matching interest. Why? Because a dissolved LLC is a non-existent LLC, and a non-existent LLC does not incur any liability.

For small partnerships under IRC Section 6231, the federal exception from penalties for failure to file partnership returns does not apply in California. Simply stated, if it’s a California partnership (multi member LLC) it’s not exempted from the penalties.

Continuous obligation to file Form 568

An LLC is an entity of perpetual duration. This means it will be continually under the obligation to file Form 568. In case of failure, it will continually be liable for the penalty and interest, unless it is properly dissolved.

Another reason to dissolve an LLC is to enable the member to take property from under the LLC name and dispose of it as his own.

Can you personally dispose of the LLC property prior to dissolution?

No. The properties under the LLC name will continually be considered as the property of the LLC unless and until such LLC is dissolved. Mere shutting down operations will not transfer LLC business properties to its members.

If business operations have stopped and the LLC remains undissolved, none of the members, not even the sole member, can claim personal ownership of such assets. To lawfully dispose of such properties, it would still have to be disposed of under the name of the LLC as the seller, and the proceeds would still be that of the LLC, not the members.

When will the members be entitled to the LLC properties?

Ironically, the LLC members are at the back of the line when it comes to LLC property distribution.

Even if the limited liability company has undergone dissolution, the members will still not be entitled to the undiminished business properties if the LLC has outstanding debts.

The LLC debts and liabilities should be paid first, any remaining assets are distributed to the members. So, it’s quite possible for the members of a dissolved LLC to be left with nothing. On the bright side, the members of the dissolved LLC can rest assured that their personal assets will remain out of reach.

After knowing why dissolution is necessary, the next question is how do you properly close an LLC in California?

How to Close an LLC in California 

Closing your LLC in California is a fairly straightforward process, but the forms you need to submit depend on your circumstances. If you finally decide to dissolve your LLC, choose the right form to avoid delays.  

1. What does the LLC’s operating agreement say about your LLC dissolution process.

The operating agreement is your go-to document. It usually contains the events that can trigger the dissolution as well as the required number of votes.

If you don’t have an operating agreement that deals with these matters, then you’ll have to look at the applicable law.                                                                                                                

2. What does the applicable State law require?

The California Revised Uniform Limited Liability Company Act requires that if you’re voluntarily dissolving your LLC you’ll need 50% or more of the voting interests of the members or a greater percentage of the voting interests of members as may be specified in the articles of organization or a written operating agreement.

3. What is required in case of a Unanimous vote to dissolve the LLC?

Only the Certificate of Cancellation should be filed with the Secretary of State.

Information required in the Certificate of Cancellation is as follows:

• The name of the limited liability company and the Secretary of State’s file number.
• A statement that a final franchise tax return or a final annual tax return has been or will be filed with the Franchise Tax Board; and
• That upon the filing of the certificate of cancellation, the limited liability company shall be canceled and its powers, rights, and privileges shall cease.
• Any other information the persons filing the certificate of cancellation of articles of the organization determine to include.

4. What if the vote to dissolve the LLC is not unanimous?

You will need to file a Certificate of Dissolution with the Secretary of State. The Certificate of Dissolution should be filed before or together with the Certificate of Cancellation.

Information required to be included in the Certificate of Dissolution is as follows:

• The name of the limited liability company and the Secretary of State’s file number.
• Any other information the persons filing the certificate of dissolution determine to include
• The event that caused dissolution. Refer to Section 17707.01, Article 7 of Title 2.6. of the California Revised Uniform Limited Liability Company Act

5. What if the LLC dissolution was Involuntary?

There can be an involuntary dissolution of a California LLC if it has no members for 90 straight days. If the California LLC has a sole member who dies, his interest may pass to his heirs by will or by applicable law.

A court can also order the dissolution of the LLC by reason of the following:

• It is not reasonably practicable to carry on the business consistent with the articles of organization or operating agreement.
• Dissolution is reasonably necessary to protect the rights or interests of the complaining members.
• The members could not agree as to the management of the company.
• Those in control of the limited liability company have been guilty of, or have knowingly allowed, pervasive fraud, mismanagement, or abuse of authority.

If you’re authorized to pay the liabilities, distribute assets, and terminate the limited liability company then you must sign the Certificate of Cancellation. There should be an authorized representative if the limited liability company was dissolved due to not having a member for 90 consecutive days

Having dissolved the LLC, what can you expect to happen to the LLC’s assets, debts, and right to conduct business?

What Happens After Closing an LLC

When you close an LLC in California, it will come to a point in the dissolution process when the LLC assets are used for the following:

• to pay off debts or
• distributed to the LLC members.

Under the California Revised Uniform Limited Liability Company Act, after all the known LLC debts and liabilities have been paid, the remaining assets shall be distributed among the members according to their respective rights and preferences.

The distributions can be made in accordance with the members’ interest in the LLC or in proportion in which the members share in distributions.

The Effect of Dissolution

After you close your LLC in California, that LLC shall be canceled, and its powers, rights, and privileges shall end upon the filing of the Certificate of Cancellation. This means you can no longer conduct business using that LLC.

The LLC’s Continued Existence After Dissolution.

Nevertheless, the limited liability company continues to exist for a limited purpose which includes the following:

• Winding up its affairs
• prosecuting and defending actions by or against it in order to collect and discharge obligations
• disposing of its property, and
• collecting and dividing its assets.

The limited liability company shall not continue business except so far as necessary for its winding up.

Can one still file a claim against a dissolved LLC?

Yes. If a person files a complaint against the dissolved LLC, whether his cause of actions arose before or after the dissolution, such action can be enforced against the dissolved limited liability company to the extent of its undistributed assets.

What if the assets have already been distributed?

If the LLC’s assets have been distributed, then the action can be enforced against the members who received such assets, but each member shall be liable only to the extent of the assets he received from the LLC.

Limiting Your Liability Doesn’t Stop At Closing Up Shop: How You Legally Close Your LLC in California is the Right Question

You organized your LLC to limit liability and that is the very same reason why you should dissolve it properly. Not dissolving your LLC despite discontinued operations means your LLC is idling while simultaneously costing you money.

To effectively and completely close an LLC in California, dissolve it.

LLC dissolution also gives you the chance to move on to a different venture on a completely clean slate. If you want a genuine fresh start without any issues from your old LLC popping up every now and then, dissolve your old LLC.

Seek professional legal advice. In the end, the cost of legal fees might actually be easier to bear mentally and emotionally than the problems you might encounter by only physically shutting down the business. With Incorporation Attorney, we’ll help you ensure everything is taken care of and you can move on with peace of mind.