Are Dissolution and Cancellation the Same?

When considering a California LLC cancellation, the question often comes up regarding whether dissolution and cancellation are the same. Cancellation and dissolution of an LLC are two different processes. Dissolution, also called winding up, is a process that members of an LLC will go through in preparation to cancel with the secretary of state and terminate the existence of the LLC. Cancellation is on the secretary of state's side, which terminates the rights, privileges, and powers of an LLC. The cancellation process happens after the LLC has gone through the winding-up process and dissolution. 

Although they are separate processes, cancellation and dissolution do work in sync with one another. In other words, the processes of cancellation and dissolution each include their own set of steps that must be taken, although the processes are handled by two different parties.

The LLC handles the dissolution, while the secretary of state handles the cancellation. Both steps typically must be taken to end the existence of an LLC. If dissolution and cancellation were the same, two terms would likely not exist for a single process. Put another way, dissolution and cancellation are the two steps that must be taken by two different parties. In many cases, dissolution happens based on Corporations Code Section 17707.01, while cancellation occurs in accordance with Section 17707.08(c).

One exception is if an LLC doesn't conduct business. Neither winding up nor dissolution would be necessary, so this LLC could go straight to the cancellation step. Within California, dissolution is done by both corporations and LLCs. Cancellation only applies to LLCs and does not apply to corporations. 

Dissolving Your LLC

Any California company that engages in some type of commerce in the state is legally required to register the business with the secretary of state. State laws govern processes around the dissolution and creation of any business that has been registered with the secretary of state. Before you can dissolve an LLC in California, you must file the appropriate documents. These are filed with the secretary of state. The required documents will depend on the company status and whether the LLC owners agreed through a unanimous vote to dissolve the business. 

The formal process of dissolution is the first step in ending a company's existence as a business entity registered in California. This process puts the business outside of the reach of any creditors. LLCs can be voluntarily dissolved by members or involuntary dissolved due to a legal decree in court. California has its own set of dissolution rules over an LLC that hasn't conducted business. These rules often apply to newly formed LLCS.

The first step in voluntary dissolution of an LLC is reviewing the documents used to form the company. These include the operating agreement and the articles of organization. At least one of these documents should include a section that will detail the plan for dissolution of the LLC. Oftentimes, the documents will outline a rule that requires all members of the LLC to vote to dissolve the business. The rule could also indicate the percentage of members that must vote in favor of dissolution in order to make it a voluntary action. 

When moving forward with dissolution, it is important to follow all procedural requirements outlined in your documents. These requirements could include:

  • Giving advance notice to all members
  • Setting a specific time to meet
  • Allowing members to vote by proxy 

Additionally, whether or not your operating agreement and/or articles of organization include provisions around dissolution, a law in California offers an alternative dissolution method. Under the LLC Act, a majority vote by the members of the LLC could allow for voluntary dissolution, if this is specified in the agreement. If every member of the LLC votes in favor of dissolution, you can skip the step of filing a certificate of dissolution and move straight to the step of filing a certificate of cancellation with the secretary of state.

Whether your LLC members choose to stick to a majority vote or follow the rules outlined in your formation documents, it is important to make a record of the decision. The record should be included in a written consent form that all members sign or in the official dissolution meeting minutes.

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