Closing a business in California, a brief overview
47% of new small businesses fail in the first 5 years — and 65% fail before they reach 10 years. Sometimes they shutter because there are other ventures that are more pressing, sometimes because of market realities that prevent growth, and other times, the idea just didn’t have legs. No matter why you call it a day, there are steps every CA-based business owner must take to properly close their business. Taking the proper steps will protect you from financial and legal trouble in the future.
First and foremost, this article is not intended to be taken as legal advice. As in any consequential business transaction, the counsel of a paid qualified California business attorney is the right choice to ensure no detail is left to chance. This article is a cursory overview of some of the steps involved in closing a business in CA.
Why businesses close
Running a business is hard work, it requires emotional investment, financial investment, and, usually running at a loss for at least the first 1 – 3 years. Not everyone can weather that level of personal and financial sacrifice. While the majority of businesses that close (as opposed to being sold) are losing money, financial insolvency is not the only reason to shut down a business.
Sometimes a business has to be closed because of struggles between business partners, other times, business partners are in different lifecycle stages, for example with one ready to retire while the other lacks the funds to buy them out. Other times there are new opportunities that present themselves, new ideas or partnerships that make the current venture unappealing. Serial entrepreneurs leave businesses in their wake all the time.
Whatever the reason for closing your business, there are steps to take to protect yourself in the future from legal liability or hidden risks.
To end business dealings properly, you must legally terminate the business with the California Franchise Tax Board and Secretary of State. This is only true if your business was formed in the state of CA, if it was formed in another state, you will need to “legal surrender it” (or, in the case of an LLC, cancel it).
Here are the top three steps you must take to properly close your business in the state of California from a legal standpoint. Note: these steps are in a specific oder, step 3 requires that step 2 is complete and all must be accomplished within 12 months.
Step 1: Get buy-in for the decision
Unless you are a sole proprietor, you must have a majority agreement to terminate your business. Document this well, get legal signatures to a written document for the records.
Step 2: Pay Uncle Sam
The Internal Revenue Service (IRS) and California Franchise Tax Board (CTFB) need to know that you won’t be filing next year so mark your final payments “FINAL” clearly and be sure to follow up. All dissolved businesses are subject to a final audit followed by clearance or consent for your dissolution from the CFTB.
Step 3: File more papers (Secretary of State)
File dissolution, cancellation, or surrender forms here: https://www.sos.ca.gov/. Do these 3 steps in the proper order so you can send the SOS your CFTB proof of consent to dissolve (you have 12 months).
From a legal standpoint, these are the 3 most important steps.
From a business relations standpoint you should address the following 5 steps:
ONE: Tell your employees, suppliers, creditors, vendors, customers that you are going out of business
TWO: Close your bank accounts and credit lines linked to your business
THREE: Cancel all business licenses and permits that might auto-renew or trigger an audit for suspension
FOUR: Post your impending closure online and on social media.
FIVE: Pay your creditors
You may be closing your business to pursue a lifelong dream of travel in the rainforest, or you may have given it your heart and soul and the process may feel like defeat. In either case, failing to follow the correct procedures can leave you open to future tax bills, liability for unpaid debts, unfilled orders, and more. Take the time to do it right and, to ensure you don’t miss anything, hire a qualified business attorney to help.