Closing Shop in California: Business Dissolution Done Right

As exciting as it is to establish your own business, there are crucial legal and tax considerations to keep in mind before and during operations. It's even more complex when you're about to close shop. You'll need the assistance of a skilled California Business Attorney to guarantee that the procedure goes successfully. Consider one of our prescreened California Attorneys in your Cal Bar Attorney Search.

Find A Business Law Attorney for Business Dissolution in California

One of the most crucial considerations a business owner must make is the legal entity through which the company will operate. In California, various sorts of entities are available, each with its own set of asset security, tax benefits and drawbacks, administration complexity or simplicity, and other characteristics. In addition to sole proprietorships, small business groups such as LLCs, Corporations, and Non-Profits are available in California.

How You Establish A New Business

We help clients with all elements of starting a business, including:

• Starting a business needs a strategy. Our prescreened CA Business Attorney have the experience and dedication to help you turn your initial notion into a winning business plan.
• Persons chosen. Your exposure to a legal obligation, taxation, and other aspects will be affected whether you work as an LLC, a sole proprietorship, or another company entity. Our prescreened California Business Litigation Lawyers will give you competent legal guidance and counsel to assist you in choosing the company model that best fits your long-term objectives.
• Operating documents. California Business Attorneys help clients develop initial operating papers, ownership agreements, vision statements, and other key company documents.
• submitting a document to the Secretary of State. In order to launch your business, our California-based Business Law Attorneys will help you organize, prepare, and file all essential papers with the Secretary of State.
• Contracts are agreements between two parties. At the outset of their businesses, California Business Law Attorneys assist clients with the negotiation, preparation, and analysis of initial contracts such as vendor agreements, relationship agreements, and lease and rental agreements.
• Obtaining funding. We'll assist you in raising funds and managing budgetary restraints, as well as offering venture capital guidance to clients.
• Investing in real estate. Lawyers can assist with purchase and sale transactions, as well as real estate, property rights, and other disputes.

Types of Businesses

One of the most vital phases in launching a new business is deciding on the correct legal framework and organization. The structure you choose will have an influence on your taxes, documentation, and potential future liability issues. Entrepreneurs should not take this decision lightly; since it can have substantial financial and legal repercussions for your company.

Here are some examples of different types of business entities:

A sole proprietorship. A sole proprietorship is a business that is owned and operated by just one person. One of the benefits of starting a sole proprietorship for your business is the minimal costs and convenience of setup. If the company name is the same as your name, you may just need to complete a few legal paperwork, depending on the business. The primary disadvantages of starting a firm as a sole proprietorship are related to your accountability. As an unincorporated corporation, there is no legal difference between you and your corporation. All firm operations, along with all expenditures, debts, and tax responsibilities, are directly under your control.

General Partnership. In terms of corporate structure, a general partnership is equivalent to a sole proprietorship. The key difference is that a general partnership requires two or more individuals to participate as co-owners in the business. If the partners work together for the purpose of doing business, or if they draft a partnership agreement, the relationship will be formed immediately. A general partnership necessitates the submission of a few more legal documents.

Legal documentation includes a fictitious company name, a federal tax ID, and a business license. While joining a general partnership is quick and inexpensive, there are a few disadvantages to this business structure. Each partner has limitless culpability, not only for his or her own contributions to the firm or personal conduct but also for the other partners'. These responsibilities, which are similar to those of a sole proprietorship, could include, but are not limited to, the following:

• You are responsible for all expenses.
• The individual who owes the debt is responsible for the debt.
• Any of the partners have the authority to levy business taxes on the entire group.
• As a result, a general partnership is a dangerous company structure.
• In addition, if one of the members leaves the business, the partnership is dissolved, and a new corporate entity must be formed.

C Corporation. A C Corporation also referred to as a C Corp, is a legal body that is separate from its members. Stockholders or shareholders are the corporation's owners. There are numerous benefits to creating your business as a C Corp. The C Corporation is exclusively responsible for its obligations and debts.

Furthermore, this type of business has permanence, meaning it will continue to exist even if all of its shareholders leave or die. By issuing several types of shares with varying preferences, the company may be able to attract more owners or investors. This corporate structure divides the company's ownership and management through well-structured governance.

The stockholders elect directors, who are in charge of making business decisions for the corporation. Because of this distinction, each owner of a C Corp is protected from personal culpability.

This benefit, combined with the simplicity with which ownership may be transferred, makes a C Corp a popular choice for both venture capital funds and passive investors. The most significant disadvantage of a C Corporation is that it acts as a separately taxed entity. Double taxation occurs when earnings are taxed twice: once at the entry-level and again at the stockholder level on dividends. In comparison to organizing a sole proprietorship or general partnership, incorporating a C Company needs the creation and submission of more legal documents, both at the time of formation and on an ongoing basis. The best approach to ensure that the C Corp is properly established is to seek legal counsel from an expert California Business Attorney.

S Corporation. An S Corporation, commonly known as a S Corp or an IRS subchapter-S, is a comparable type of corporation to a C Corporation. The way the corporate tax plan is set up is the major advantage of an S Corporation. The business operates on a flow-through tax system, which implies that income is taxed only once at the moment of distribution to shareholders.

The S Corporation business structure has a number of disadvantages. The corporation has a total of 100 stockholders. Shareholders must include individuals, tax-exempt corporations, and trusts. Because they do not come under these limits, many funds may find it difficult to invest in the company.

In addition, the corporation can only issue one sort of stock to investors. Investors are unable to purchase lower-cost shares and preferred stock from the corporation. As with forming a C Corp, forming an S Corp needs the preparation and submission of various legal documents, both at the time of incorporation and on a regular basis. Seeking legal counsel from an expert California Business Law Attorney is the best method to ensure that the S Corp is appropriately constituted. This is where a Los Angeles Business Attorney can help you.

Limited Liability Partnership (LLP). A Limited Liability Partnership (LLP) is a type of general partnership that has fewer liabilities. General, as well as limited partners, make up the LLP. The general partners are in charge of the business's operations and are liable for any debts and obligations. Limited partners typically invest money and take on a modest level of risk. A limited liability partnership (LLP) is a popular structure for partnerships in which one or more members want to keep control over business operations while also bringing in new investors.

All partners profit from a flow-through tax structure in which each partner is taxed separately. Make certain that an LLP has a solid, legally binding partnership agreement in place. An established California-based Business Litigation Lawyer can provide legal guidance and aid in the growth of your LLP.

Limited Liability Company (LLC). A Limited Liability Company, or LLC, is a type of organization that combines the benefits of general partnerships and corporations. Although an LLC is easier to set up than a C or S corporation, it also provides members with limited responsibility. A single tax rate applies to all shareholders, including general partners. The most major disadvantage of an LLC is the limited pool of potential investors. Investment limits imposed by venture capitalists may limit the company's prospective investments.

The submission of many legal documents, including the Articles of Incorporation, is required for the formation of an LLC. A benefit-sharing, decision-making, and interest-allocation agreement are also developed. Hiring a law company that specializes in the formation of Limited Liability Companies will give you the legal advice you need to get your business off the ground.

Public Benefit Corporation. A Public Benefit Corporation, also known as a California Benefit Corporation in California, was founded by the Corporate Flexibility Act of 2011. Benefit Corporations were established to allow social organizations to pursue both for-profit and non-profit goals. While the business structure of a Benefit Corporation is similar to that of a C Corporation, it requires corporate officers and directors to consider the triple bottom line of profit while making decisions. In three respects, a California Profit Corporation varies from a California Corporation:

1. It is necessary to have a public benefit intent.
2. When it comes to fulfilling the triple bottom line, directors are better protected by shareholders.
3. Transparency and accountability regulations

To summarize these qualities, a California Profit Corporation must proclaim in its Articles of Incorporation that its sole objective is to produce a general public benefit. Shareholders' interests do not take precedence over the other components of the triple bottom line of profit, citizens, and the environment.

This motivates the board of directors to make decisions that benefit the public rather than the bottom line of the shareholders. To ensure transparency and accountability regulation, the company must pass three tests: a third-party assessment standard, an annual benefit report, and a benefit enforcement procedure.

Making the decision to incorporate your business as a California Benefit Company is a big step. However, there are a number of special legal provisions that must be acknowledged and followed by this type of business. Hiring a Los Angeles Business Litigation Lawyer to complete and file all of the necessary legal documents allows you to focus on what you do best: running the business and helping society.

Non-Profit Organizations (NPOs). A non-profit or not-for-profit organization is one that strives to improve society, the environment, or a specific group of people. Despite being structured like a corporation, the company is not owned by individuals or shareholders. Our California Business Attorneys are conversant with the numerous types of corporate entities that can be used by your non-profit. The most common non-profit corporation structures are listed below.

Public Benefit Nonprofit Corporation. The majority of people associate "non-profit" with a Public Benefit Nonprofit Corporation. The organization is usually established to provide charitable assistance to the whole public or a specific subset of the general public. Typically, a Public Benefit Nonprofit Corporation consists of groups that provide social assistance, educational initiatives, and artistic activities.

Mutual Benefit Corporation. The resources of a Mutual Benefit Nonprofit Corporation are concentrated on a limited number of people. Chambers of business, unions, and homeowner's organizations are examples of Mutual Benefit Nonprofit Corporations. The corporate structure is similar to that of a Public Benefit Nonprofit Corporation, but the mission is focused on a specific company or cause, and the benefits are limited.

Foundation for the Private Sector. In contrast to public or mutual non-profit organizations, which rely on public finances and fundraising to operate, a private foundation is generally funded by a donor, family, or corporation. Because a donor controls a private foundation, you have the ability to create crucial components of the foundation, such as:

• The Foundation's Objectives
• The Board of Directors of the Foundation
• The Investment of Funds
• Disbursement of the Funds

A foundation, like any other organization, can be founded with the goal of serving your cause indefinitely.

Exemptions under Internal Revenue Code Sections 501(c) and 501(c)(3)

The government offers tax-exempt status to not-for-profit groups, which is a significant distinction and benefit. Sections 501(c) and 501(c)(3) of the Internal Revenue Code provides tax exemption for non-profit organizations. Other subparagraphs of Section 501(c)(2) specify service and membership, whereas Section 501(c)(3) provides charitable non-profit standards and eligibility (c). An entity must comply with a variety of federal and state regulations to be qualified for tax exemption, including:

• Making a clause for a specific purpose
• Initially, there were multiple directors
• A unique language that governs the way business is conducted
• Self-dealing is not allowed
• Propaganda is forbidden, as does seeking to manipulate laws or elections

Donors can deduct their contributions from their personal or corporate taxes if a charity organization's application for tax-exempt status is approved by the IRS. Your non-profit organization's mission, intended beneficiary, federal restrictions, and state legislation, to mention a few, all have an impact on the type of corporate structure it can use. Hiring a legal team that specializes in non-profit formation can give you the legal counsel and guidance you need to ensure that your non-profit complies with all federal and state rules.

Dissolution of a Business

When a firm is on the verge of being dissolved, you have two basic options to consider. The first option is dissolution, followed by bankruptcy. It's critical in both circumstances to verify that the proper protocols are followed and that all requirements are met. Having the appropriate California Business Litigation Attorney on your side while you try to shutter your firm is critical. Our prescreened California Business Law Attorneys will assist you in effectively finishing this endeavor.

The official process of stopping operations, liquidating holdings, and distributing monies to creditors and shareholders is known as dissolution. During this time, you must follow proper dissolution guidelines at all times. You should also be cautious about the asset liquidation and payment decisions you make. Improper behavior could make the dissolution invalid, exposing you to personal liability. Creditors may cause an involuntary split of a corporation in extreme instances.

When a corporation has little assets and a large number of debtors, bankruptcy may be necessary. After filing for bankruptcy, some businesses can reorganize and become profitable again. The company's management would stay in charge, but important business decisions would need to be approved by the bankruptcy court. Some businesses have decided to shut down their doors indefinitely. The company's assets are sold to pay off the loans, and a trustee is appointed. In such circumstances, creditors are paid first. Bondholders and other unsecured creditors are paid first, followed by stockholders. If secured and unsecured creditors do not receive full payment, stockholders will receive nothing.

Putting an end to a commercial partnership

Business ties, like all things, eventually come to an end. Some of these agreements come to an end when a certain contract or task is completed. Others run their course if one of the partners passes away or the partners disagree. Others may dissolve if the partners determine that creating a corporation or limited liability business would be more advantageous. If any of these circumstances apply to your situation, you should see a Los Angeles Business Litigation Lawyer who is experienced in terminating business relationships in California.

In California, there are several limitations when it comes to ending a business agreement. The majority of these procedures are to making the dissolution public so that all parties concerned are aware of the situation. Legal notice of termination must be published for at least 12 business days under the California Revised Uniform Partnership Act, for example. Distributors, investors, and other stakeholders are also entitled to direct notification under the law. Dissolution documentation must also be filed with the state as well as the Internal Revenue Service.

When it comes to ending a business partnership in California, it's best to work with an experienced California Business Attorney to ensure that you're following the law and getting the best possible outcome for you. Legal advice is required if the partners are in a disagreement. It is critical to get legal guidance in such situations to guarantee that both partners' interests are protected and preserved.

When husband and wife have a disagreement, they will require the help of an LA Business Attorney to interpret the terms of the initial partnership. This contract should include instructions for leaving the partnership, and it's only fair if everyone follows them.

If the partnership agreement, on the other hand, is poorly written or lacks proper explanations of how to end the partnership, it is critical to rely on the skills and experience of a California Business Law Attorney to help fill in the blanks based on California law and the partners' intent. A California Divorce Lawyer will frequently negotiate a divorce that is equitable to both parties and adheres to the original relationship agreement's roles and obligations.

Statutory Provisions

• Sections 17707.01 through 17707.09 of Article 7 of the California Revised Uniform Limited Liability Company Act ("CRULLCA") provide the legislative procedures for dissolving and terminating California limited liability firms.
• Section 17707.01 outlines the behaviors that will or may cause dissolution. It was modified in 2016 and became effective on January 1, 2017.
• Section 17707.02 makes dissolving a limited liability company (LLC) that hasn't done much business easy. It was modified in 2016 and became effective on January 1, 2017.
• Section 17707.03 outlines the procedure for an LLC management or member to petition the court for a judicial decision dissolving an LLC. It also creates a structure for non-petitioning members to avoid being dissolved by the courts. In 2016, this section was modified, and it became effective on January 1, 2016.
• Section 17707.04 specifies the authority and compensation of the person or persons who wound up an LLC's affairs. The first time this clause was introduced was in 2012, and it went into effect on January 1, 2013.
• During the winding-up phase, Section 17707.05 establishes the sequence in which LLC assets might be allocated. An LLC must first pay off or adequately provide for all of its identified debts and obligations owed to non-members before making distributions to members. This section was added in 2012 and went into effect on January 1, 2013.
• According to Section 17707.06, a canceled LLC (one that has submitted a certificate of cancellation as the final step in dissolution) may continue to operate for certain purposes, such as distributing assets that were previously excluded from the winding-up procedure. It expressly allows for the continuation of litigation brought against or by an LLC after the latter has been dissolved. In 2015, this section was modified, and it became effective on January 1, 2016.

• Section 17707.07 governs the enforcement of causes of action against dissolved LLCs. It offers a process for reclaiming property that has been allocated to members following the corporation's dissolution. It also establishes a universal statute of limitations for action against dissolved LLCs, with the exception of quiet title statutes. This section was revised in 2019 and will be implemented on January 1, 2020.
• The Secretary of State's filing specifications for the dissolution procedure, which starts with the submission of a certificate of dissolution and ends with the submission of a certificate of cancellation, are outlined in Section 17707.08. The certificate of dissolution can be bypassed if all of the LLC's members vote for dissolution, and just the certificate of cancellation can be filed when the winding-up is finished. In 2015, this section was modified, and it became effective on January 1, 2016.
• Section 17707.09 enables LLC members to retract a filed declaration of dissolution to continue the LLC's activity in a variety of situations. In 2015, this section was modified, and it became effective on January 1, 2016.

The Steps You Must Take

It's always essential to get legal assistance when ending a business partnership in California, and dealing with a professional business litigator is a terrific place to start.

Everyone should agree. A corporation's dissolution must be approved by its shareholders. The action must be approved by the shareholders in corporations; the action must be approved by the owners in limited liability organizations (LLCs). Small business owners and members are generally involved in day-to-day operations and are familiar with the situation.

• The dissolution process and required permits are normally described in the bylaws of a company and the operating agreement of an LLC. To comply with corporate procedures, the board of directors should draft and approve a resolution to dissolve the company. The resolution that has been accepted by the board of directors is subsequently put to the vote by the shareholders. Both operations should be documented and reported to the company. Despite the fact that LLCs are not required to follow the same formalities as corporations, it is always a good idea to document the decision and obtain member approval.

Obtaining a Certificate of Dissolution from the state. Following a vote by shareholders or representatives to dissolve the corporation, papers must be filed with the state where it was created. If the business is licensed to operate in other states, it must also file documentation in those states.

• The method for submitting a Certificate of Dissolution (also known as Articles of Dissolution) differs by state. Some states require you to file papers before alerting creditors or resolving claims, while others need you to file after you have completed those steps. In some jurisdictions, the corporation must first acquire tax clearance before filing a Certificate of Dissolution. In these cases, any back-taxes owed by the firm or LLC must be levied first.

Prepare and file tax returns for the federal, state, and municipal governments. Regardless of whether or not you are discontinuing operations, your tax obligations do not terminate immediately. The IRS, as well as state and municipal taxing authorities, must be notified of the closure of the business. The IRS website has a business closing checklist that includes all of the necessary documents as well as connections to additional state and municipal procedures. Keep in mind your payroll reporting requirements if you have employees. Make sure to discuss your individual requirements with your accountant or tax counselor.

Notify your creditors that your business is closing.

1. You must write a letter to all of your company's creditors informing them.
2. Creditors should send their concerns with the following:
• A list of the information that should be included in the argument
• The claim filing deadline has passed (often 120 days from the date of the notice)
• A statement that claims will be prohibited if they are not submitted by the deadline

Creditors who have been unknown to the corporation at the time of dissolution may be able to submit claims in your state. You may be required to put a notice in the local paper announcing your company's demise. If you're unclear, speak with an California Business Attorney to learn what your state requires.

Creditors' claims have been resolved. Creditor claims can be accepted or rejected by your organization. Accepted claims must be paid, or suitable repayment arrangements with creditors must be negotiated. For example, a borrower may agree to settle a claim for a lower amount (such as 80%) than the initial amount. You must notify creditors in writing that your company has denied their claims. Hire an LA Business Attorney to assist you with the procedure and educate you on the applicable legislation in your state.

Distribute the remaining assets. After claims are paid, the remaining assets may be divided among the company's owners in proportion to their ownership. For example, if you own 80% of the company and your brother owns 20%, you will be entitled to 80% of the remaining assets. Any disbursements must be reported to the IRS. The mechanism for transferring assets to these shareholders is normally detailed in the corporate bylaws if your organization has multiple stock groups.

Find A Business Dissolution Lawyer in California

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