QUESTION:
Can I simply abandon a California corp and leave it blowing in the wind? I started a company a while back, and it didn’t work out. Since then, I’ve moved on to another profitable venture. Instead of bothering to close down the old company, can I simply abandon it. What will happen? Am I liable for anything like taxes?
ANSWER:
Ethan Stone
by Ethan Stone, Stone Business Law
First, a quick caveat: I’m not your lawyer and this answer doesn’t establish an lawyer-client relationship. I’m giving a generic answer to a generic question to educate the users of this site.
As a general rule, shareholders, directors, and officers of a California corporation are not liable for the franchise tax owed by the corporation. So, with a few very important qualifications below, it’s generally safe to abandon the corporation and leave the franchise tax unpaid. Franchise taxes will accumulate for awhile, the Franchise Tax Board will send notices etc. If you ignore the notices, the Secretary of State will eventually suspend the corporation.
The most important qualification of the above is that it’s only true if you haven’t and don’t plan to take any assets out of the corporation. This includes not only cash, but also property (e.g. IP), so be careful. If you drain assets out of the corporation and then leave it to twist in the wind, you will often be personally liable up to the amount of whatever you took out. So if there’s anything left in the corporation that you want, or if you took anything out while you were using it, you should go to a tax professional to assess the situation.
Another important qualification is that you absolutely cannot use the corporation for anything once it is suspended and it would be better not to use it for anything before that happens. If you’re going to abandon it, abandon it completely. Don’t look back!
Good luck with the new venture! Let’s hope it pays a lot more in California franchise tax than the old one owes. As my father always said, if you’re paying income taxes, you’re usually making money.
Hi! I have a question…
Suppose that after couple of years FTB will suspend my LLC. After suspension will they keep adding $800 for following years?
So after many years, if I decided to dissolve it. Will I pay for Creation Date to Suspension Date or will I pay for Creation Date to The Date after many years?
I am amazed at the confusion on this page. The response to all of your questions should be based on a simple fact. YES! if you leave assets (a checking/saving account, tangible assets, etc.) in your suspended corporation, then of course the FTB will put a lien, levy, etc on those accounts in order to collect on monies it is owed. Otherwise, it is not happening.
I registered a foreign LLC with the Ca. Sec. of State and did not file returns or pay $800 per year to Ca. I am a resident of Florida and that is original state of LLC incorporation which is also a subchapter S Corp. I filed corporate returns in Florida.
I received a letter from Franchise Tax Board. I cancelled the LLC in 2015 in Ca. They sent me a bill for about $1500 for 2012 and want tax returns for all years now. I am preparing them from 2011 to 2015. The LLC has not made any money and has losses for every year its been in existence. There is about $100 in checking account. I told them they could have that.
I have never really used the account since I paid all the bills and I was the only one putting money into it. There were no employees and I never got the money I loaned the company back because of the losses. They keep trying to tell me they can come after me personally. These people are so money hungry and threatening. I cannot afford an attorney.
The FTB is threatening to come after me personally if I don’t pay.
Hello,
I have a question regarding transfer of ownership of a CA C-Corp. I started a company with a friend. The company was registered in my name only as a CA C-Corp. However, the partnership didn’t work out and now I’m withdrawing from the company. My friend wants the company and I’m willing to transfer it to him. What do I need to do to get the company transferred to his name and what do I need to do to protect myself going forward?
Thank you.
~mej
Hi there, I’d like to point out a couple of things from reading this discussion. One, if you never used your LLC, but you registered with the Sec. of State, then you will certainly be receiving FTB demands for tax returns and payment.
First, two questions arise here: to whom are the letters addressed, and what is the ID number? To use a case like Ralite, you have to be at a certain point in the collections process, and many clients I work with are not there yet. Chances are, you are not either. The corporation will NEVER not be liable for returns and the $800 minimum tax. Ralite does not apply to the corporation. It only applies to the shareholder(s).
Second, there are only certain entity types where Ralite will apply. C Corp and S Corp shareholders can rely on Ralite if they meet the tests. LLC members MAY be able to rely on it, and LP partners absolutely CANNOT rely on Ralite.
Third, if you qualify and demand relief under the Ralite decision, the FTB will still fight for its money, so be patient.
Sincerely,
Matthew Cooling, EA
http://www.action-tax.com
Note, I am an Enrolled Agent (EA). EA’s are considered America’s tax professionals. An EA is a federally-authorized tax practitioner who has technical expertise in the field of taxation and who is empowered by the U.S. Department of the Treasury to represent taxpayers before all administrative levels—examination, collection, and appeals—of the Internal Revenue Service.
Caviat: This statement(s), along with subsequent correspondence, is not intended or written to be used, and cannot be used by the taxpayer, for the purpose of avoiding lawful penalties that may be imposed on the taxpayer by the Internal Revenue Service or any state tax authority. The principal purpose of any stated tax advice included here is information and does not constitute a client/tax professional relationship.
Ethan,
I don’t know if you’re still monitoring this page, but I’ll give this scenario a try:
In our small Central Valley community, a group started a non-profit community center and incorporated it with the state about a decade ago.
After about six years, the project was abandoned, leaving behind at least $5500 in debt, not counting back taxes and fines. The president of the corporation, who never lived in the community, simply walked away.
No tax returns or statements of information were filed with the State of California or with the IRS since 2008 and, subsequently, the state suspended the corporation, and its 501(c)(3) exemption was revoked by the IRS.
The issue here is that this community center could be a vital part of this city, serving seniors and other local residents in need, but the “owning” corporation still exists — even though it has been abandoned by its president and board, none of whom respond to phone calls, emails, letters or visits to their homes.
Is there any way for a local civic group to take over a non-profit corporation such as this without the approval of the board that still “owns” the community center, at least on paper?
I registered a ‘C’ corporation in year 2008 and till 2011 i was paying the tax although doing nothing.
2012 onwards i stopped filing.
Is it ok to renew it or just abandon and start a new one ?
My C Corp closed 4 years ago and the business was abandoned. Today I received a notice addressed to the corporation (my home address which was never an address used by the corporation and is addressed to the corporation, not me personally) of intent to offset Federal Payments. The corporation closed with substantial debt, including the sale of a building with an $800,000 loss. I took nothing out of the company and either abandoned or donated any property in the building which was actually owned by me and not the corporation. Am I personally responsible?
Am I screwed? In that last post you said do not file dissolution paper work but I did. I started an corporation. I think it was an s corporation. I never did any business at all. Never did nothing but start the corporation on paper. Like 4 years later I got notices saying I owed the $800 a year for the 4 years. On advice from a tax person I filed all the years tax documents. Dissolved the corporation and filed the final tax documents. Could not pay the money, so I never did and never got any notices. I asked the last person who did my taxes about it and he said not to worry about it. Now I am looking to start a new non profit corporation and was wondering if I will be able to.
Elle — check this post: http://taxquips.com/index.php?id=1263
Answer to a no activity LLC for years excerpt.
You’re in luck. You came to exactly the right person to help you.
The State of California wants you to believe that you must file each back year and pay the annual $800 fee AND all the penalties and interest related to that fee. However, in the Court’s discussion of the Ralite case, the Court made it clear that if the corporation is insolvent, it cannot be required to pay the back taxes. http://www.boe.ca.gov/legal/pdf/90_sbe_004.pdf
As to holding the owners liable?
In Ralite, the owners were held liable. But the Court said the owners can’t be held liable if the owners of the corporation did not get any money from the company without consideration. In other words, if the shareholders took loans out from the company without repaying them – or got paid without doing any work.
In your case, you never funded the corporation. And you never drew money out. So just write the Franchise Tax Board a nice letter, saying that under the Ralite case you are not obligated to pay the corporation’s debts.
File a final return showing zeroes on all the lines. Check the box as FINAL RETURN to stop any new assessments.
Do NOT file the dissolution paperwork with the State Franchise Tax Board or Secretary of State. The dissolutions papers require you to accept liability for the corporation’s debts. So just be patient. The notices will stop. Someday.
I see a lot of us with the same issue re no activity for LLC for years, and now FTB is hitting me up for the fees. It’s a single member LLC (me being the only member). Can anyone shed some light on this? Any new info from anyone here? James Povio? Randy? Ethan, do you have any advice?? Thanks.
‘ve been renting a property that show the property is owned by a ministry that has been suspended by the Secretary of State and the franchise tax board. The owner incorporated 11/30/1987 to the ministry and he passed away and his son is the executor of his estate. I’ve been told since the owner incorporated the ministry the corporation is responsible for anything pertaining to the ministry as well as the property. Is this correct and why have his son been taking rent from me for almost 2 years? Now, I needed to get some help from the county where I reside with rental assistance and there is no document showing his son is the executor of this property.
Correction: no income came in 2013 either. It was an idea, but didn’t pan out well.
James Povio — I have an almost identical situation. An LLC made in 1998, no income until 2013, and forgotten until 2013, when I received a demand for a statement of information (and a sudden late fee for it). What solutions did you find?
Same thing here. Sold a gas station in 2004 and it was under the name of an LLC. Never did anything further with the LLC and now am getting letters that I owe CA franchise tax fees for all those years. Tax preparer already submitted returns for those years with no income/no expenses. Also, sent in letter to SOS to cancel this LLC before they add more years to the mix. I thought an LLC would help protect my assets. Can they come after my personal assets for this? Do they have any ground to stand on?
I wondered which of these might be better:
1) I go to my enrolled agent, ask him to file 6 years of past Form 568’s for the LLC – there will be absolutely zero tax owing, just the fees and penalties, let the FTB assess all that and then file an Offer in Compromise – gift or loan the LLC around $800 and offer it to them. (There’s nothing in the LLC – it never had any assets and earned very little income, which was all declared in the C-Corp that owns the LLC. Or
2) Would it perhaps be better to just ignore the notices until they suspend the LLC?
I have a C corp and added an LLC back in 2006. The LLC does about $6k per year, which it simply declares on the C-Corp’s tax returns, State and Federal. I’ve never file anything for the LLC separately but suddenly recvd a request from the FTB yesterday, for a Form 568 for 2008. The expenses for the LLC almost completely wipe out the income. Vehicle, equipt, rent etc come to as much as it makes but I hoped one day to gain enough traction that it would become profitable. Everything for the LLC – income and expenses are always reported on the C Corp and the C Corp always pays its $800 franchise fee. For the past few years there has been either zero or a small loss ($500 or so) in the C Corp, as its various small incomes suffered a big setback in the downfall of 2007/2008.
What can/ should I do about the FTB request for the LLC? There’s no money anywhere to pay a separate franchise fee for it. There are zero federal and state taxes owing – all that is accounted for in the C Corp. Can/should I abandon the LLC? If so how do I do that? If I reply to the FTB I’m sure they’ll start coming after money that was never there.
Many thanks for your thoughts on this.
In 1998 my wife, myself and a friend , started an online business and started an llc. We found another company online had the same name so we closed the company,sent in dissolution paperwork to sect of state in CA, and mailed in final tax return. Also we were getting married that year and had no time for another venture. We never heard another word from the state. We have done no business. Now we have received notice of taxes due for the year ending 10/31/2009. I called the Franchise tax board and was told we owe for 15 years x $800 a year plus penatlies and interest. I have no money and will lose my home. What do I do ?
We have nothing from the llc as it was all tossed in the garbage after ten yrs. Apparently the sect of state in Calif. kept the llc open because it never received the cancellation or dissolution of the llc and now the franchise tax board wants to collect the $800 ninimum franchise tax fee for the state of california from me and my wife as officers of the llc. We never derived any profit form the llc and have no records. No profits or losses were ever reported on our personal income taxes either.
are you sure we are not liable for the llc taxes and penalties?
I ask because I have read this
Annual fees in some states. In addition, some states impose an annual LLC fee that is not income-related. This may be called a “franchise tax,” an “annual registration fee” or a “renewal fee.” In most states, the fee is about $100, but California exacts a hefty $800 “minimum franchise tax” per year from LLCs
This is the fee, plus penalties and interest the state is trying to collect from me
thanks for this info.
today i got a call from the franchise tax board telling me i owe taxes on a company i opened 4 years ago BUT never did anything with. NOTHING. not even business cards. They told me i never closed it so i owe back taxes, interest, penalties and fees. I explained again – I NEVER DID ANYTHING. NO BANK ACCOUNTS. NO BUSINESS. NOTHING. She said too bad – i was still responsible. I told her to have her supervisor call me. Do i need to do anything else ? I DID WALK AWAY…..CONFUSED. THANKS FOR BEING THERE.