Dissolution vs. Cancellation
Dissolving an LLC initiates the closure of a business, but it does not mean the business is terminated immediately. Instead, it begins when an event triggers the dissolution as per the operating agreement or when the need to cease operations arises. Unlike dissolution, "cancellation" refers to when an LLC is effectively removed from the state’s register, losing its powers, rights, and privileges. This occurs upon submitting the Certificate of Cancellation in California, and at this point, the LLC can no longer conduct business.
Process of Dissolving an LLC
In California, there are three methods to dissolve an LLC, which vary depending on the duration of the business and whether all LLC members consent. To start winding down a company, you first decide to dissolve it, then proceed with several steps:
- Notify relevant governmental bodies.
- File final tax returns.
- Inform creditors.
For federal income tax purposes, the impact of dissolution will differ based on whether you were the sole owner or had partners.
Dissolution vs. Termination
It’s important to distinguish between dissolution, the winding up of the entity’s affairs, and termination, which is when the entity ceases to legally exist. Both steps are prerequisite but represent different stages of ending an LLC. Dissolution should not be confused with cancellation, the revocation of a business license or permit due to noncompliance with regulations or statutes.