Does Your Client Know to Dissolve, Surrender, or Cancel Their Business Entity When They Are No Longer Doing Business?
September 2009 - It is very important for taxpayers to understand that business entities registered with the California Secretary of State (SOS) must be dissolved, surrendered, or canceled when they are ceasing operations in California.
Domestic corporations (those that originally incorporated in California) may legally dissolve.
Foreign corporations (those that originally incorporated outside California) may legally surrender.
Limited liability companies and partnerships (both domestic and foreign) may legally cancel.
Until a taxpayer formally terminates the legal existence of the entity, the entity continues to exist. The entity’s tax filing and annual tax due requirements also continue. Often, a taxpayer does not formally terminate the entity with SOS even though it stops doing business, and stops fulfilling its tax filing requirements. Not filing timely tax returns or paying the annual tax usually leads to an entity being suspended. Penalties, fees, and interest will accrue until the entity is formally terminated.
Steps to dissolve, surrender, or cancel a business entity
- File any delinquent tax returns.
- File the final/current year tax return. On this tax return's first page, write FINAL at the top of the page and check the box labeled "Final Return."
- Exception for a nonprofit tax-exempt church or tax-exempt corporation - It need not file a final return if its 3-year gross receipts average is not more than $25,000. But it must file a final return if its average exceeds $25,000, it's a private foundation, or it has non-member or unrelated business income.
- Pay all tax balances, including any penalties, fees, and interest.
- File the appropriate dissolution, surrender, or cancellation form(s) with the SOS within 12 months of filing your business' final tax return. To get the correct forms, visit sos.ca.gov, or call the SOS at 916.657.5448.
- Suspended or forfeited business - You must revive your business before you file dissolution, surrender, or cancellation forms with the SOS.
- Public benefit, religious, and mutual benefit corporations holding charitable assets - You must obtain a dissolution waiver from the Office of the Attorney General before filing dissolution forms with the SOS. For more information, visit www.ag.ca.gov/charities, or call the Office of the Attorney General at 916.445.2021.
Dissolving, withdrawing, or canceling a business' legal status does not nullify its legal tax requirements or outstanding liabilities. The entity or its transferees remain liable for the business' tax debts. See personal responsibility for more information.
For more information see FTB Pub. 1038 Guide to Dissolve, Surrender, or Cancel a Business Entity.