Sometimes, a business just doesn’t work out. Or you simply decide to do something else. It happens, and there’s no shame in saying you’re shutting down your business.
Unfortunately, you can’t just walk away from your business. Instead, you need to take steps to legally end it, and to let the world know about it.
If you fail to do so, you could end up being held personally liable for business debts, and you also could end up owing the government taxes for your defunct business. #WorstDayEver
So, what are the steps that you need to take to end a business that was organized in California as a limited liability company (LLC), and that was taxed as an S corporation? We have you covered with some helpful information below.
Just bear in mind that, while we’ve made every effort to ensure the following information is up-to-date and accurate, it doesn’t constitute legal advice, nor is it a substitute for legal advice, so you should always talk to your attorney for personalized recommendations and guidance.
1. Agree to Dissolve the LLC
If you’re the owner of a single member LLC (SMLLC), there’s no need for a formal member vote on dissolution. Phew!
But if there are two or more members, they need to vote to dissolve the LLC.
All you have to do is follow the voting procedures in your operating agreement.
At least 50% of the members need to agree to dissolve the LLC in order to move forward, unless your operating agreement states otherwise.
Next, record your decision to dissolve the LLC in a resolution signed by the LLC member(s).
You don’t need to file this document; just keep it with your LLC’s records.
Here is a sample resolution for dissolution of an LLC.
2. Send Notice to Creditors
California’s LLC law requires that whoever winds up the LLC has to provide notice of the winding up “by mailto all known creditors and claimants whose addresses appear on the records of the limited liability company.” (Cal. Corps. Code Section 17704.04(b).)
This might include:
- Suppliers that provide you with inventory and materials
- Service providers
- Your landlord
- Utility companies
In many states, providing this notice can result in extinguishing creditors’ claims against your LLC if they don’t file their claims by a deadline set forth in the notice.
However, California is not one of these states, so creditors generally have four years after the date of dissolution to file claims against an LLC.
If all of the LLC’s money is gone, they can collect from money or assets distributed by the LLC to its members.
There is no official notice form, so here is a sample Notice to Creditors and Claimants form that you can use.
Also, California’s LLC law doesn’t require that you send such notice by certified mail.
3. Wind Up Your LLC’s Business
Let’s get back to that winding up that we discussed above.
Basically, you need to wind up your LLC’s business and terminate any ongoing legal filings.
This includes the following steps:
Discontinue Registered Agent for Service of Process Services
If you use an outside registered agent for service of process, let them know you’re terminating the LLC. Otherwise, you’ll continue to get charged for the service.
Don’t know who your registered agent is? Hyke can help!
Cancel Local Business License
If your LLC has a business license with your city or county, you need to let them know that your LLC is dissolving. Otherwise, they may continue billing your business for annual license fees.
The procedures for doing this vary from county to county and city to city, so be sure to check your county or city website for details.
Let’s use an example here to clarify, shall we?
If your LLC was registered to do business in San Francisco, you must file by postal mail a Declaration of Closed Business with the San Francisco Treasurer and Tax Collector.
Print out the form, fill it out, and mail it to the address listed on the form.
Thankfully, this is a very simple form, as you only need to provide:
- Your LLC’s San Francisco Business account number (this is on your San Francisco business license)
- LLC name and DBA, if any
- Date your LLC business will end
Abandon Fictitious Business Name
If you registered a fictitious business name statement with your county clerk so you could use a fictitious name or “dba” to identify your business, you should unregister the fictitious name.
To do so, just file a statement of abandonment form with your county clerk’s office.
You might also be required to publish the abandonment in a local newspaper, so check your county’s website for details.
For example, in San Francisco, you must file a Statement of Abandonment of Use of Fictitious Business Name with the county clerk and pay a $45 fee.
You must also publish a notice of the abandonment with a San Francisco legal court-approved newspaper within 30 days from date of filing, once a week for four consecutive weeks. Contact the newspaper directly to arrange for the publication.
To help you out, here’s a list of legally adjudicated newspapers.
Close Out Seller’s Permit
If your LLC has a seller’s permit because it collected sales taxes on goods it sold, you need to close out your account with the California Department of Tax and Fee Administration (CDTFA).
To do so, file form CDTFA-65, Notice of Closeout.
And you also need to file your final sales tax return and any prior returns (including prepayments) that you have not yet filed.
CDTFA publication 74, Closing Out Your Account contains helpful information about closing out your permit.
Withdraw from Other States
If your LLC was qualified to do business in one or more states other than California, you should notify those states that it’s being dissolved and will no longer be doing business there.
To do so, file a certificate of withdrawal or similar document with the Secretary of State of each state involved (note: you’re usually required to pay a fee to file the document, so be ready).
Upon the effective date of the withdrawal, your LLC will no longer be legally authorized to transact business in that state.
For example, if your LLC was also doing business in Oregon, you would file Oregon’s Amendment/Withdrawal—Foreign Limited Liability Company form with the Oregon Secretary of State. Oregon charges a $275 filing fee. Simple enough, right?
Filings for Employees and Independent Contractors
If your LLC has, or had, employees, you must file final employment tax returns and make any tax deposits that are due.
Filings are required both with the IRS and with the California Employment Development Department.
For your federal payroll taxes, you must:
- Make any final federal tax deposits that are due
- File final quarterly or annual employment tax forms (Form 940 or Form 941)
- Issue final wage and withholding information to employees (Form W-2, Wage and Tax Statement)
- Report W-2 information to the IRS (Form W-3, Transmittal of Income and Tax Statements)
- If applicable, file a final employee pension/benefit plan return (Form 5500, Annual Return/Report of Employee Benefit Plan)
To submit your California payroll taxes:
File a Payroll Tax Deposit and Quarterly Contribution Return and Report of Wages, along with payment to the California Employment Development Department (EDD) within 10 days of closing your business.
If your LLC paid independent contractors (nonemployees) $600 or more during the last year:
You must file IRS Form 1099-MISC, reporting the payments.
Form 1099-MISC is due by January 31 to report payments for the prior year.
You can use tax preparation software to create Form-1099s, but if you use a payroll tax service, they might handle these filings for you.
There are also several inexpensive online services, like Hyke, that can complete and file the forms for you.
Collect Outstanding Accounts Receivable
If anybody owes your LLC money, be sure to collect it.
It’s best to do so before you notify customers or clients that you’re going out of business.
Pay Off LLC Debts
You must pay, or make adequate provision to pay, all known LLC debts and liabilities.
This includes money owed to your landlord, bank, suppliers, utilities, and service providers.
Distribute the LLC’s Assets to Its Member(s)
Any money that’s left after you pay off all of the LLC’s debts should be distributed to its members.
If there’s only one member, this is a very simple process—all of the money goes to him or her.
If there are multiple members, this can be more complicated. Unless your operating agreement says otherwise, you must pay the members in the following order:
- First, members should be paid any distributions they’re owed, and you need to repay any loans they made to the LLC.
- Next, the members should be refunded for their initial contributions.
- Finally, any remaining money is distributed to the members according to the percentage of their ownership.
Close LLC Bank Accounts
Close all of your LLC’s bank accounts after you’re done using them.
Banks may want to see a copy of your member resolution approving your LLC’s dissolution.
Cancel LLC Credit Cards
Cancel any credit cards in your LLC’s name.
If your LLC has insurance coverage in its name, such as liability insurance, workers’ compensation insurance, or renter’s insurance, be sure to cancel these policies or transfer them to your name.
If you have an office lease, cancel it or transfer it to your own name.
The same goes for any leases of business equipment.
Transfer Intellectual Property
Does your LLC own any intellectual property in its name (for example, trademarks, domain names, software, writings, videos, or other audiovisual works)?
If so, ownership should be transferred to the member(s).
Inform Clients and/or Customers
Inform clients and/or customers that the LLC is being dissolved.
4. File Notice of Cancellation
Once your LLC’s affairs have been wound up, you should legally terminate its existence. You do this by filing a termination document with the California Secretary of State.
The Secretary of State has created several termination forms you can use.
For example, if all the LLC members vote to dissolve, as is usually the case, you can file a Certificate of Cancellation (Form LLC-4/7). You simply fill out the form online and then print it out. Just make sure to use Form LLC-4/7, not the short form LLC-4/8, as the latter is only for LLCs that haven’t conducted any business.
Form LLC-4/7 is simple:
- Provide your LLC’s name
- Provide the 12-digit Secretary of State file number (this number is above the file stamp on your Articles of Organization)
- Check the box in Item 3 that the vote to dissolve was made by all members
- Add your signature (this must be a personal signature on the printed form, not computer generated)
Tip: It’s also a good idea to complete and print out the optional Mail Submission Cover Sheet.
Unfortunately, you can’t file the forms online.
You must file by postal mail or hand deliver the paperwork to the Secretary of State’s office.
If you file by mail, there is no filing fee.
To get a copy of the filed document, you must pay $1 for the first page and 50 cents for each additional page. And you must include payment when the certification is submitted.
If you hand deliver the forms, there’s a $15 counter drop-off fee.
Your certificate might be processed faster if you have it hand delivered, but not always. You can check the Secretary of State’s processing times for the form here.
Before you file your certificate of cancellation, make sure your LLC’s status is listed as active on the Secretary of State’s records.
If it’s inactive, the Secretary won’t file the Certificate of Cancellation. Your LLC may have become inactive if you failed to pay your annual state franchise tax or failed to file a statement of information with the Secretary of State.
Your LLC’s status can be checked online on the Secretary of State’s Business Search here.
When the Secretary of State files your certificate of cancellation, your LLC will be cancelled and its powers, rights, and privileges will cease in California.
Moreover, your LLC’s name will become available for use by others.
However, your LLC may continue solely for the purpose of winding up its business affairs, bringing or defending LLC-related lawsuits, collecting or paying debts, disposing of its property, and dividing its assets.
5. File Final Tax Returns
You need to file the final tax returns for your LLC.
To do so, simply file your normal LLC tax return and check the box showing that it’s the final return for the LLC.
You’ll need to pay any taxes that are due. This includes payment of the $800 annual California franchise tax for the tax year of the final return.
If you’ve elected to have your LLC taxed as an S corporation:
You should file IRS Form 1120S and check box H(1).
You should also file the California S corporation tax form, Form 100S, with the California Franchise Tax Board, and check box A.1.
If your S corporation is not taxed as a corporation:
File Form 568 and check box J.2. Also, write “final” on the top of the first page of your California return.
Be sure to file these final tax returns!
If they aren’t filed, your LLC will remain active as far as the Franchise Tax Board is concerned. This means your business will continue to be subject to the $800 minimum annual franchise tax.
For information regarding Franchise Tax Board forms and publications, visit their website or contact the FTB at (800) 852-5711.
A Final Note About Taxes:
If your business is located in San Francisco, you’re required to pay a city payroll tax if your employee payroll is greater than $300,000. And you must pay a city gross receipts tax if your business gross receipts are greater than $1,120,000.
If your LLC is subject to either tax, it must file a Final Return Closing Business with the San Francisco Treasurer and Tax Collector.
See the detailed guide Instructions for Person Ceasing Business for more information.
On to Better Things!
Although shutting down your LLC might be a little depressing, view it as an opportunity to move on to better things. You might start another business in the same field, or go in a completely different direction as an entrepreneur.
No matter what, know that Hyke’s experts are here to help you at every step, from forming a business, to maintaining it, and even dissolving it, so feel free to contact us if you need any support!
Stephen has dedicated his career as an attorney and author to writing useful, authoritative and recognized guides on taxes and business law for small businesses, entrepreneurs, independent contractors, and freelancers. He is the author of over 20 books and hundreds of articles and has been quoted in The New York Times, Wall Street Journal, Chicago Tribune, and many other publications. Among his books are Deduct It! Lower Your Small Business Taxes, Working with Independent Contractors, and Working for Yourself: Law and Taxes for Independent Contractors, Freelancers & Consultants.