Shutting Down Business

Dissolving A Business

COVID-19 has caused substantial damage to California businesses. In mid-March 2020, Governor Newsom ordered all non-essential businesses to close, including bars, beer pubs and wineries. San Francisco Bay area officials ordered some 7 million residents to “shelter in place” on Monday, prohibiting people from leaving their homes, except under “limited circumstances,” according to the order. Dawn Kopecki, Coronavirus: California estimates 25.5 million residents — 56% of the state — will get virus in next 8 weeks. CNBC, Mar. 19, 2020, at 1, https://www.cnbc.com/2020/03/19/coronavirus-california-estimates-25point5-million-residents-56percent-of-the-state-will-get-virus-in-next-8-weeks.html.

On March 20, 2020, Sacramento implemented a mandatory stay-at-home order. As part of the order, residents are told to stay at home except for “essential activities, essential government functions, or to operate essential businesses.” The order mandates the closure of all bars, wineries, and brewpubs. It also orders an end to all in-dining at restaurants, but still allows for home delivery and takeout. All gyms, bingo halls, and card rooms will also be required to close. Matthew Nuttle, Here's what Sacramento County's coronavirus stay-at-home order applies to, ABC, March 19, 2020, at 1, https://www.abc10.com/article/news/health/coronavirus/sacramento-county-shelter-in-place-coronavirus-covid/103-d6218d97-f198-4247-8907-844146b00a8b.

The mandatory business closures have continued for eight weeks. The restrictions are slowing being lifted and some businesses have been able to reopen, but we do not fully know the long term impact COVID-19 will have on businesses in Sacramento, California. Regardless, these initial closures have resulted in mass layoffs. "During a press conference Monday night, Newsom reported that the daily average of claims over the last seven days is 106,000. The normal average per day is just 2,500, meaning the number of jobless claims has increased by over 4,000%." Eric Ting, California's increase of unemployment insurance claims is absolutely staggering. SFGate, Mar. 24, 2020, at 1,. https://www.sfgate.com/politics/article/California-unemployment-coronavirus-numbers-news-15152303.php. The unemployment claims have only continued since this issue began in mid-March 2020.

Its likely that a significant number of businesses will permanently close as a result of COVID-19. The question becomes how do business owners close their business? There are ultimately two options: dissolution and bankruptcy.

Dissolving A Corporation

The process for dissolving a corporation begins with receiving authorization from the board of directors and/or shareholders. The approval to dissolve is obtained through a specially called meeting in accordance with the corporation's bylaws. In the event the corporation does not have bylaws, the California Corporations Code section 601 provides:
Whenever shareholders are required or permitted to take any action at a meeting a written notice of the meeting shall be given not less than 10 (or, if sent by third-class mail, 30) nor more than 60 days before the date of the meeting to each shareholder entitled to vote thereat.
Cal Corp Code § 601

The next step is to send notice to the business' creditors, vendors, suppliers, clients, and employees informing them that the business has commenced proceedings to wind up and dissolve. The corporation will create and adopt a plan for selling and distributing any assets. The proceeds from the sales should be used to pay debts and liabilities of the business. The corporation will need to file all delinquent tax returns and pay any outstanding balances, including penalties, fees, and interest. The shareholders will need to decide if they are individually assuming any debts or liabilities that were personally guaranteed. Upon paying all third-party creditors, any remaining proceeds from the sales of the business' assets may be distributed to the shareholders.

The business will then file a certificate of dissolution with the California Secretary of State and the final tax returns. The business needs to write "final" at the top of the first page of its tax returns. Upon filing the final tax return, the business should cease doing transactions in California. In the event the corporation is suspended by the Secretary of State or the Franchise Tax Board, the corporation will need to go through the revivor process to bring the business entity in good standing before being allowed to dissolve.

The Franchise Tax Board also suggests closing out the business checking accounts and credit cards, canceling any licenses, permits, and fictitious business names, and to publish a statement in the local newspaper of general circulation near the principal place of business that the business entity is no longer in business.

Dissolving A Limited Liability Company

The process for dissolving a limited liability company (LLC) begins with receiving authorization from the members and/or managers. The approval to dissolve is obtained through a specially called meeting in accordance with the limited liability company's operating agreement. In the event the corporation does not have bylaws, the California Revised Uniform Limited Liability Company Act, California Corporations Code section 17704.07 provides:
Whenever members are required or permitted to take any action at a meeting, a written notice of the meeting shall be given not less than 10 days nor more than 60 days before the date of the meeting to each member entitled to vote at the meeting. The notice shall state the place, date, and hour of the meeting, the means of electronic transmission by and to the limited liability company or electronic video screen communication, if any, and the general nature of the business to be transacted. No other business may be transacted at that meeting.
Cal Corp Code § 17704.07
The next step is to file a certificate of dissolution with the California Secretary of State. The limited liability company will then send notice to the business' creditors, vendors, suppliers, clients, and employees informing them that the business has commenced proceedings to wind up and dissolve. The business will create and adopt a plan for selling and distributing any assets. The proceeds from the sales should be used to pay debts and liabilities of the business. The limited liability company will need to file all delinquent tax returns and pay any outstanding balances, including penalties, fees, and interest. The shareholders will need to decide if they are individually assuming any debts or liabilities that were personally guaranteed. Upon paying all third-party creditors, any remaining proceeds from the sales of the business' assets may be distributed to the shareholders.

Upon completing the above tasks, the business will file a certificate of cancellation with the California Secretary of State and the final tax returns. The business needs to write "final" at the top of the first page of its tax returns. Upon filing the final tax return, the limited liability company should cease doing transactions in California. In the event the business is suspended by the Secretary of State or the Franchise Tax Board, the business will need to go through the revivor process to bring the business entity in good standing before being allowed to dissolve.

The Franchise Tax Board also suggests closing out the limited liability company checking accounts and credit cards, canceling any licenses, permits, and fictitious business names, and to publish a statement in the local newspaper of general circulation near the principal place of business that the business entity is no longer in business.

Business Bankruptcy

Sole Proprietorship Bankruptcy

The owner of a sole proprietorship can file individual bankruptcy. The most common types of bankruptcy filings for individuals is chapter 7 bankruptcy and chapter 13 bankruptcy.

A chapter 7 bankruptcy entails filing the bankruptcy petition and all schedules. Upon filing the bankruptcy, all of the individual's assets become a part of the bankruptcy estate. The court will assign a trustee to oversee the matter, including the bankruptcy estate. It is the trustee's job to sell off all of the assets in the bankruptcy estate and use the proceeds to pay back creditors. In California, we have laws referred to as exemptions. These exemptions allow individuals to protect their assets from sale. There is the possibility of saving and protecting the business in bankruptcy, but there are dozens of considerations. For example, an accounting practice will have to value the client list as an asset for the bankruptcy. The individual would then need to find the appropriate exemption to protect the client list from sale during the bankruptcy. A sole proprietorship filing for bankruptcy will need to more information than a non-business bankruptcy, including, for example, month-by-month profit loss statements for the past twelve months.

An individual can determine if he qualifies for a chapter 7 bankruptcy by starting with the means test. If the individual does not meet the means test, there is the possibility of filing a chapter 13 bankruptcy as briefly discussed below. Interested in learning more? Check out our blog post discussing qualifying for bankruptcy and the means test. Alternatively, our practice page on bankruptcy law discusses frequently as questions along with a wide range of other helpful items.

A chapter 13 bankruptcy is a reorganization plan. The process involves setting up a payment plan to pay creditors on certain debts. The payment plan will usually last anywhere from three to five years. The chapter 13 bankruptcy opens additional options for individual sole proprietorships in bankruptcy. For example, the business' client list is valued at $25,000, but the individual only has an available exemption of $15,000. This means that the business' client list is unprotected by $10,000 and the trustee could try to sell that portion of the client list. In a chapter 13 bankruptcy, there is the possibility of paying the court $10,000 during the payment term to avoid selling the client list. There are dozens of factors, considerations and outcomes in filing for bankruptcy. Its important to have individual circumstances reviewed by a licensed bankruptcy attorney before proceeding with any court filing.

LLC or Corporation Bankruptcy

A formal business entity such as an LLC or corporation can file also file for bankruptcy. The most common types of bankruptcy filings for businesses are chapter 7 bankruptcy and chapter 11 bankruptcy.

A chapter 7 bankruptcy for an LLC or corporation is very similar to filing for dissolution. The business files the necessary bankruptcy petition and schedules. The schedules list all of the assets of the business, including equipment, machinery, furniture, intellectual property, everything. The bankruptcy court will assign a trustee to oversee the matter. Simply stated, the trustee's job is to sell all of the business' assets and then distribute the proceeds to creditors. Upon completing the process, the business will cease to exist. A business might consider filing a chapter 7 bankruptcy because their circumstances are very complicated or there is a problematic creditor. The formal bankruptcy process will give notice to all creditors and assign an unbiased trustee who will attempt to maximize the value of the business assets.

A chapter 11 bankruptcy involves a reorganization of a business' debts and assets. It creates an opportunity for businesses to negotiate debts and the possibility of continuing operations. The process is very expensive and complicated. There are few attorneys in Sacramento that handle these types of bankruptcy. Our office does not handle chapter 11 bankruptcies.

Sacramento Business Attorney

Whether you're considering dissolution or bankruptcy, it is highly recommended that you speak with a qualified business attorney. Feel free to contact Sacramento Business attorneys to set up an initial consultation.

Call Us: (916) 642-9399

*The information provided in this post does not constitute legal advice or opinion. The information is for guidance purposes only. Individual situations vary and you should contact an attorney for legal advice. Rooted Legal PC includes attorneys who are well-versed in business law matters and are located in Sacramento California. This post is addressing the process of closing a business in California.