What is the difference between dissolving and terminating an LLC?
Dissolving an LLC starts the process of closing a business. Dissolution does not mean the business is terminated. It starts when an event triggers the need to dissolve or the need for the LLC to stop operating, which must be according to the operating agreement.
There are different reasons why an LLC may decide to dissolve. After you close your LLC in California, the LLC shall be canceled, and its powers, rights, and privileges shall end upon the filing of the Certificate of Cancellation. This means you can no longer conduct business using that LLC.
The Dissolution Process in California
When you file to dissolve your LLC in a state, it is called dissolution. On the other hand, termination occurs when the state cancels or terminates your company from the state records. In California, there are three methods to dissolve an LLC. Depending on how long you’ve been in business and whether you have the consent of all LLC members, different forms may be necessary.
The first step in shutting down a company is to decide to dissolve it. Following that, you’ll need to take a few actions to move forward, such as:
- Notifying any relevant governmental bodies
- Filing your final tax returns
- Alerting your creditors
For federal income tax purposes, the consequences will depend on whether you were the only owner or if there were other owners.
Dissolution vs. Cancellation
Dissolution is the winding up of the affairs of the entity in advance of its termination. The termination of the entity occurs when the entity ceases to legally exist. While both steps are required, they are not the same thing.
Dissolution and cancellation are different concepts. Dissolution is the legal process of terminating an LLC, while cancellation occurs when a business license or permit issued by the state is revoked due to noncompliance with regulations or statutes.