How to Close a Business in California

Aug 12, 2021 | Small Business Tips

Did you know that close to 50% of new small businesses don’t make it past five years — and 65% fail before their tenth year? Sometimes all the money, time, hard work, and perseverance you put into your business doesn’t pay off, and after an exhausting journey of slow sales, financial losses, stiff competition, etc., you might be thinking of closing your business.

Shutting down a business in California is not as simple as shutting your office doors and putting a closed sign, or taking down your company website and walking away. There are a few legal steps you have to take to dissolve a business in the Golden State.

In this post, I’ll share with you a rundown of how to legally close your business in CA. You should know from the start that working with an experienced business attorney will make the process of closing your business much easier. An attorney will be able to explain and deal with the legal issues associated with shutting your business.

When does closing a business make sense?

One of the main reasons a lot of businesses close down is because the owners aren’t making money from the venture. However, a business doesn’t have to be making losses for it to shut down. Other factors that can lead to business closure include:

  • The business partners are having unresolvable disputes over how to run the business
  • The business was intended to run for a short period, so once the specific purpose is met, dissolving the company makes sense
  • The business owner is retiring and doesn’t want to sell the business
  • The owner wants to try their hand at another business
  • The owner is no longer excited about their company

The process for closing a business in CA

When you decide to close a business you must legally terminate its existence as an independent business entity in California. Businesses incorporated in the state can legally dissolve, while companies incorporated outside of California can legally surrender. Limited liability businesses local and foreign may legally cancel.

To dissolve, surrender, or cancel a business entity you’ll have to deal with two agencies, the California Franchise Tax Board and the California Secretary of State (SOS).

Without further delay, here are the steps to legally shut down your CA business.

1) Vote to close the business

If you’re a sole proprietor this is not necessary because the decision to shut down the business is entirely up to you. If you’re in a business partnership, all or majority of the business associates must agree to close the business. To decide to dissolve you might have to take a vote among the partners.

Your business agreement most likely outlines how this vote should be taken, If it doesn’t look at the state business statutes to find out how to conduct a partner’s vote correctly. Once the vote is taken ensure you record the outcome in the company meeting minutes or through a written consent form.

2) File your final tax return

When winding down your business the California Franchise Tax Board (CFTB) requires you to pay all taxes balances due and file the final year tax return. When filling the tax return form check on the “Final Return box” on page one of the return, and also write “final” at the top of the page.

Once filed the tax returns will be subject to an audit. If everything is in order, you’ll get tax clearance or consent to dissolution from the CFTB.

3) File the appropriate dissolution, surrender, or cancellation forms

To do this you’ll have to get the appropriate forms from the California Secretary of State. For example, if you’re closing down a company incorporated in the state, you’ll fill the dissolution forms; for a business incorporated outside of the state you’ll fill the surrender forms.

You can access the necessary forms to dissolve a business in CA online from the state’s Secretary of State’s website. There are two things you should know,

  1. You’ll be required to show proof that you have cleared all your taxes with the California Franchise Tax Board before you’re allowed to formally close your business.
  2. You should file the necessary dissolution, surrender, or cancellation forms with the Secretary of State within 12 months of doing your final tax return.

The above three steps are the most important. Additional steps you should take include:

  • Informing your employees, suppliers, creditors, vendors, customers, and anyone else you deal with of your intention to go out of business
  • Closing your bank accounts and credit facilities linked to your business
  • Canceling all business licenses and permits
  • Publishing a statement in your local daily or online on your intended closure
  • Pay any outstanding business debts. If you can’t pay the debts owed you need to look at the legal options you have to protect your personal property from being used to recover any debt

Why is it important that you follow the legal process of closing a business?

If you don’t formally close down your business in the state, you may still be liable to pay taxes and file returns. So to avoid this, legally dissolve your business. Doing so will also let creditors know that you cannot incur business debts.

Let Gallagher Krich, APC, help you legally shut down

The process of shutting down a business can be intimidating, particularly if you’re not conversant with the legal jargon involved. Fortunately, the attorneys at Gallagher Krich, APC have helped hundreds of business owners dissolve their business and can help you do the same.

When you make the decision to shut down, get in touch with us, and we will help you deal with the paperwork required, notify all the interested parties about the dissolution, terminate business licenses, and a lot more.

You can get in touch today at (858) 926-5797 to schedule a free consultation with a business attorney who will take you through the steps to wind down your business quickly and smoothly.