Dissolving a Registered Company In California
Properly closing out business in California is not merely a matter of dividing the last profits and locking the doors. To properly dissolve a registered company in California, whether a limited liability corporation, a C- or S-Corp, or even a general partnership, requires several steps, some required by statute, and all essential to avoiding issues with creditors and the tax office.
Review the Partnership Agreement
If the partnership or corporation had a partnership agreement, it should be reviewed regarding the partnership's dissolution. This section should discuss, among other things:
Payment of outstanding debts and accounts payable;
Division of partnership assets, including tangible assets and fixtures.
Suppose the partnership did not have a written partnership agreement (standard with small businesses) or that agreement did not cover dissolution. In that case, the State of California has a Uniform Partnership Act (California Corporations Code, Title 2, Chapter 5) has boilerplate language to include dissolution of partnerships.
Formalize the Dissolution
Generally, all partners must agree to dissolve or terminate the business, and a partnership agreement will require a vote or unanimous resolution. If the reason for dissolving the business is a dispute between the partners, the partnership agreement may have solutions, such as a buyout or arbitration. The Uniform Partnership Act also suggests such remedies.
Although California does not require the filing of any documents proving that all partners voted to dissolve the partnership and were notified of the result, the Secretary of State's office provides a form, GP-4, formally ending the parties' responsibility to the business and terminating the liability. This form cannot be filed unless the business first filed a Statement of Partnership Authority, so be sure the business filed this form first.
"Winding Up" and Notifying Third Parties
There is no legal requirement to notify suppliers, creditors, customers, or clients that a business has been dissolved. Still, partners should be aware that failure to do so can have legal repercussions. A third party can rely upon the representations of any of the partners holding themselves out to be agents of the business so long as they "reasonably believe" the company is still in operation. Other partners could be liable for debts incurred unless steps were taken to notify third parties that the business was dissolved. Once the business has been dissolved, the partnership is not adequately relieved of all liabilities. The partners still have a duty to "wind up" the company, including:
Completing all outstanding work or assigning such work if the contracts so allow;
Paying all outstanding debts or canceling outstanding orders;
Selling some or all assets if the partners agree;
Equitably distributing remaining assets and profits, if any, to the partners.
Only when all this has been completed is the business officially closed and the partnership fully dissolved.
Finishing with the Tax Man
Once the partnership has been dissolved, there are three final taxes to be paid in California. The IRS has a checkbox on the business returns (Form 1065) for "final returns," and it is essential to mark this box upon closure of the business.
In California, the Franchise Tax Board requires a final tax return and taxes due upon the partnership's termination. The State Board of Equalization requires notice in writing that any business which had a seller's permit to collect sales tax is closing.
Odds and Ends
Finally, if the partnership was registered in other states, for instance, it was registered as a foreign corporation, it may be necessary to file separate forms to terminate the business in those states. Check with the Secretary of State's office to see what the title of the form to be filed is, as it is slightly different in each location. Otherwise, the dissolved partnership will still be liable for annual report fees and business taxes.
Dissolving a business partnership is no less complex than dissolving a marital partnership. It's advisable to consult an attorney for the same reasons: To ensure the paperwork has been completed correctly and all parties have been given their fair share.
The blog posts provided on this website do not, and are not intended to, constitute legal advice; instead, all information, content, and materials available on this blog are for general informational purposes only.