Yesterday I wrote about ways that businesses with two equal owners can avoid management deadlocks (Resolving Small-business Disputes: The 50-50 Deadlock). Today I am writing about dissolution, i.e., termination of a California entity’s existence – the only reasonable outcome if a serious deadlock cannot be resolved.
LLC section references below have been updated to reflect California?s new LLC law that took effect on January 1, 2014 (see RULLCA Brings New LLC Laws to California in 2014).
The essence of the dissolution process for a California corporation is as follows:
- Fifty percent (or more) of the shares can vote to dissolve the corporation (Corporations Code Section 1900).
- The board of directors is responsible for winding up and settling the corporation’s affairs, and the corporation continues to exist solely for that purpose (Corporations Code Section 1903).
- Once the corporation’s affairs have been wound up and settled, the board files a certificate so stating and arranges to file a final franchise tax return, if that has not already happened (Corporations Code Section 1905).
The process is somewhat similar for dissolving a limited liability company (LLC), except that certain statutory requirements can be modified by the LLC’s articles of organization or operating agreement:
- Fifty percent or more of the voting interest of the members – or a greater percentage, if so specified in the articles of organization or the operating agreement – can vote to dissolve the LLC (Corporations Code Section 17707.01(b)).
- The managers or, if none, the members or, if none, the organizer may wind up the LLC’s business (Corporations Code Section 17707.04(a)), and the LLC continues to exist solely for that purpose (Section 17707.06(a)).
- Once the LLC’s affairs have been wound up, the managers file a certificate of dissolution and a certificate to cancel the articles of organization and arrange to file a final franchise tax return, if that has not already happened (Corporations Code Section 17707.08).
Forms required for dissolution in California are available at the Secretary of State’s website. The only slightly good news in this situation is that there is no fee to file dissolution forms.
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Follow-up: For information about owners’ personal liability if the business has outstanding obligations at the time of dissolution, please see “Your Business is Dead – Are You Liable for its Obligations?“.
- Something You Might Want to Do BEFORE You Kill Your Company
- How to Dissolve a Delaware Corporation or LLC
Dana H. Shultz, Attorney at LawÂ +1 510-547-0545Â dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.