By David M. Steingold , Attorney
Updated by Amanda Hayes , Attorney University of North Carolina School of Law
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If you and your partners have decided to call it quits and dissolve your business, you'll need to take steps to formally end your partnership (also known as a "general partnership"). You'll need to follow California partnership laws, your partnership agreement, and best practices to close your business and limit your liability. For more general guidance, see our article on dissolving a partnership to end your liability.
As with most important matters affecting your partnership, the first step in dissolving your partnership is to check your partnership agreement. While a partnership agreement isn't required in California, ideally, you and your partners would've prepared an agreement when you first formed your partnership or at some later point in time. If you don't have a preexisting partnership agreement, you'll have to fall back on the default provisions of California's Uniform Partnership Act (UPA).
Along with reviewing the partnership agreement, it's a good idea for all of the partners to discuss the dissolution. Two of the key points to address are:
If you have a well-written partnership agreement, it should provide guidance on these points and provide a general procedure for dissolution. You might even be able to simply follow what's laid out in the agreement.
However, there could be cases where you'll want individual partners to pay particular debts, and those responsibilities probably won't be covered by the partnership agreement. If so, you'll now want to come to an agreement about who'll pay which debts and put those terms in writing.
If you have a partnership agreement that includes provisions on how to dissolve the business, you should follow those provisions. In most cases, dissolution provisions in a partnership agreement will say that all or a majority of partners must consent before the partnership can dissolve. Many partnership agreements allow you to dissolve your partnership in one of two ways:
You might specify different thresholds depending on the dissolution method. For example, the dissolution provisions in your partnership agreement might require the consent of all partners when there isn't a vote and the consent of just a majority of partners when there is a vote. In either case, you should draft a resolution to dissolve the partnership for the partners to consider and take action on.
Partnership buyouts. If some partners want to continue the business and other partners want to leave, your partnership agreement—or a separate buy-sell agreement—might provide an alternative solution to dissolution. Partnership agreements often include a provision where partners can buy out the partnership interests of the partners who want to leave.
No partnership agreement. If you don't have a partnership agreement, you'll have to rely on the rules in California's UPA. In California, a partnership can be dissolved by the express will of at least half the partners, including partners who dissociated from (left) the partnership within the preceding 90 days. Under California law, you can dissolve a partnership by having a majority of the current and recently-dissociated partners vote in favor of a written resolution to dissolve. (Cal. Corp. Code § 16801 (2023).)
Judicial dissolution. Sometimes the partners can't come to an agreement on whether or how to dissolve the partnership. If the partners have tried other options (like hiring a mediator) to no avail, you might have to let a judge decide how the dissolution will proceed. But you should try to avoid sorting things out in court. If you do end up in court, you and your fellow partners should be independently represented by lawyers.
In California, general partnerships aren't required to file a form with the state when they dissolve. General partnerships are considered "unincorporated" so you don't need to file a form with the Secretary of State (SOS) to create or end your partnership.
However, many California general partnerships file a statement of partnership authority with the SOS when first formed. In those cases, the partnership should file a Form GP-4, Statement of Dissolution when the partnership dissolves. The Statement of Dissolution cancels a filed statement of partnership authority and limits the partners' authority to bind the business to transactions. For example, a partner likely wouldn't be able to legally sell the partnership's real estate once a Statement of Dissolution is filed.
Only partnerships that have already filed a statement of partnership authority with the SOS can file this dissolution form. In your Statement of Dissolution, you'll need to provide:
You can file the Statement of Dissolution online or complete the form and mail it to the SOS. For either method, go to the general partnership forms section of the SOS website. As of 2023, there's no filing fee.
After you've voted to dissolve under the rules of the partnership agreement—or, in the absence of an agreement, the partnership has dissolved under the rules of California partnership law—you need to take some additional steps to close down the business. These steps are often referred to as "winding up" the partnership. In general, the steps include:
It's important that all debts are paid before you make any distributions to the partners. California's partnership law has rules for what order people must be paid in when winding up a partnership. In general, creditors, including partners who are creditors, must be paid first. Then any surplus must be distributed to the partners according to their partnership accounts. (Cal. Corp. Code § 16807 (2023).)
In a partnership, your partnership account (also known as a "capital account") represents how much you're owed by or how much you owe to the partnership. In other words, your capital account, if positive, is part of the partnership's debt. On the other hand, if your capital account is negative, then you owe that amount to the partnership.
Your capital account should reflect how much you've contributed to the partnership—your initial capital contributions—and how much you've received from the partnership. (To learn more about capital accounts, read our partnership FAQ.)
For example, suppose Oscar and Felix have agreed to dissolve and wind up their California partnership. After liquidating its assets and paying creditors, the business has $20,000 left over to divide between the partners. Oscar has a balance of $15,000 in his partnership account and Felix has a balance of $5,000. So, Oscar would receive $15,000 of the partnership's $20,000 and Felix would get the rest. Oscar and Felix's partnership accounts would reflect:
(Cal. Corp. Code § 16401 (2023).)
Your partnership agreement might provide each partner's percentage share in the partnership's assets and liabilities. For example, your agreement might specify a 60/40 split of the profits. But if there's no agreement, California law says that a partnership's profits and losses are divided equally among the partners. (Cal. Corp. Code § 16401 (2023).)
When you dissolve your partnership, your business might end up with more debt than assets. It's a good idea for your partnership agreement to cover such a situation where your business doesn't have enough money to pay its obligations. Your agreement should provide a process for how the partners will share in the partnership's debts (along with its profits). Otherwise, California's default partnership rules will apply and all partners will share in the assets and liabilities equally.
To limit what the individual partners owe, you should negotiate a debt settlement with your creditors. If creditors know you're going out of business, they could be motivated to settle for an amount of money that's less than what you owe them. You should put any agreement you reach with creditors into writing.
While not a legal requirement, you should notify creditors, customers, and others that your partnership is dissolved. In some cases, if one of your partners makes a deal with someone after dissolution, you and your fellow partners could be on the hook for that deal—including any debts involved—if the other party didn't have notice of the dissolution.
There are several options for how to give people notice of the dissolution, such as:
In California, filing a Statement of Dissolution provides notice to everyone (including creditors) of your company's dissolution 90 days after the statement is filed. (Cal. Corp. Code § 16805 (2023).)
You should keep a record of any notice you provide, especially notices to creditors.
California doesn't require you to obtain tax clearance before dissolving or winding up your partnership.
However, the California Franchise Tax Board (FTB) does require you to file a final tax return for your partnership and pay any state taxes due with that return. Partnerships file Partnership Return of Income (Form 565).
State personal income taxes. Partnerships are pass-through entities. So, the partnership's income passes through the business to the owners, who are responsible for reporting and paying taxes on their share of the income. Each partner's income is reported on their individual Partner's Share of Income, Deductions, Credits, etc. (Schedule K-1 Form 565).
Federal income taxes. For federal tax purposes, check the "final return" box on your IRS Form 1065. Under IRS rules, if your partnership terminates before the end of its normal tax year, the final federal return is due by the 15th day of the third month following the termination date. Each partner will also need to record their earnings on their individual returns.
State sales tax. If your partnership had a seller's permit (for collecting sales tax), you must inform the California Department of Tax and Fee Administration (CDTFA) in writing that you're closing your business. You can use the CDTFA Online Services Portal to close your account(s) if your account is registered. However, if you don't have an online account, you'd need to use the CDTFA-65, Notice of Closeout form. You'll also need to report and pay taxes on your sales up until you've stopped operations. The CDTFA provides a helpful guide with detailed instructions on how to close your account.
Other state taxes. Depending on your location and business activities, you might be responsible for reporting and paying other business taxes. You can find information specific to different types of business taxes on the CDTFA website.
If you opened a bank account for your business, you should close it once you've finished distributing the partnership's assets. You should also cancel any other accounts, licenses, or permits under your partnership's name.
If your partnership operated under a fictitious name (also called "DBAs") and you registered that name, you should cancel that registration as well.
The steps to dissolve and wind up your partnership are only part of the process of closing your business. For additional, general guidance on the other tasks involved, check out our 20-point checklist for closing a business.
Many partnerships can dissolve and wind up their businesses on their own. If you have few assets and creditors and only a few final tax forms to file, you can probably terminate your partnership on your own. But if there are disagreements between the partners, a lot of complex assets to dissolve (such as property with liens), or challenges with creditors, consider talking to a local business attorney. A lawyer with experience dissolving partnerships can help you resolve disputes with your partners, properly transfer title to partnership property, and negotiate debt settlements with creditors.