The Sunset of an LLC: Dissolution Considerations for Founders

Many times, early-stage startup owners make the mistake of organizing as an in-state, California limited liability company (“LLC”) instead of incorporating as a Delaware C corporation, the more traditional vehicle for equity investment-seeking startups.  

When that happens, they must decide whether to: (1) convert their startup entity, California LLC, into a Delaware C corporation; or (2) dissolve the LLC entirely and continue to do business under the newly formed Delaware C corporation.  The latter option might be more cost-effective from a legal and accounting costs perspective, especially if the LLC does not really own any significant assets, and the startup has not done any business through that entity.

To that end, we provide this informative blog post to discuss the considerations startup owners must face when dissolving an LLC in California.

The first consideration is the LLC’s existing Operating Agreement, which is key for determining the process of dissolution.  When there is more than one member in the LLC, the Operating Agreement explains from whom consents must be obtained in order to dissolve the LLC.  It is imperative that the owners execute the necessary written consents in order to properly dissolve the LLC.

Once the process for dissolution, as outlined in the LLC’s Operating Agreement, is determined by the owner(s), the second consideration is whether there are any assets and/or liabilities that are outstanding.  At this point in the game, a startup likely does not have many assets that belong to the LLC.  The LLC might own some technology assets, and the owner(s) may need to transfer those assets to the Delaware C corporation via a technology purchase agreement.  LLC owner(s) should also make sure that they are current on any tax liabilities, including franchise tax fees (i.e., a minimum annual franchise tax of $800.00 in California).

The third consideration is the type of form that needs to be filed with the California Secretary of State.  Applicable forms may include:

• Certificate of Dissolution (Form LLC-3);
  
• Certificate of Cancellation (Form LLC-4/7); and/or
  
• Short Form Certificate of Cancellation (Form LLC-4/8).
  

The type of form depends on a variety of factors, including whether all members have voted and/or executed a written consent, the age of the LLC, debts/tax liability, assets or investment, whether the LLC has conducted any business since filing the Articles of Organization, etc.

Smith Shapourian & Mignano, PC is available to answer any questions or concerns you may have regarding dissolving your LLC.

This blog does not constitute solicitation or provision of legal advice, and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter in a timely manner, as statutes of limitations may bar your claim.

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