Discussion:Is it possible to walk away from a California LLC or let it "die on the vine"

It's my understanding that shareholders can walk away from an S corp without a formal dissolution. The state will suspend the corp and send notices. If the notices are ignored, the state will eventually deactivate the corp and they cannot come after the shareholder for any income tax liabilities (payroll and sales tax are another issue). This was determined by the Ralite case.

However, there seems to be no case that answers this question for LLCs.

Here's my issue: I have a client who began an LLC in 2001 and essentially forgot about it, and never dissolved. Since the California minimum annual tax for LLCs is $800 this could add up to a good chunk of change with interest and penalties. I know that in order to formally dissolve an S-corp, the client needs to have all tax liabilities paid up. Is this the same for an LLC?

Will my client theoretically need to pay off all of these taxes to dissolve? Also, can the state attach to the individual LLC members for any unpaid tax liability?

Any input is greatly appreciated.

Good question. You should look to the CA Corporations Code, starting with section 17350. Dissolution requires a final tax return to be filed with the FTB. In addition, from CA Rev. & Taxation Code 23561 it would appear that all taxes must be paid before the entity can be legally dissolved. Not sure if there's a responsible person tax for the minimum fee, as there is with sales tax.

So I guess at least a partial answer is - no, it does not appear that an LLC can die on the vine.

All I will say is that the FTB cannot come after the member for the annual fee or tax.

In the OP's case, I believe the LLC can safely be allowed to "die on the vine." That is, just ignore any correspondence from the FTB or Secretary of State. Unless the members have taken something of value out of the LLC without consideration, so as to cause it to become insolvent, the state cannot collect the delinquent minimum taxes from the members personally; and since the LLC has no assets, there is nothing there for the state to collect from. In other words, the logic of the State Board of Equalization decision in Ralite (90 sbe 004) should also apply to an LLC.

Actually, in Ralite, the stockholders were held to be personally liable for the corporation's taxes to the extent that they had taken money out of it in the form of loans that were not repaid. However, the decision clearly sets forth the criteria that must be met in order for the state to be able to collect from the stockholders as transferees of the corporation.

I was reading about Ralite above and I think the issue this client falls under KatieJ's comment re: an LP.

What options do we have for closing this out without incurring $800/year fees?

I appreciate whatever practical guidance you can provide.

Thanks.