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

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Discussion Forum Index --> Advanced Tax Questions --> Is it possible to walk away from a California LLC or let it "die on the vine"

Discussion Forum Index --> Tax Questions --> Is it possible to walk away from a California LLC or let it "die on the vine"

Taxl Rose (talk|edits) said:

12 April 2010

I've been trying to find a definitive answer to this question and no luck.

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.

Kevinh5 (talk|edits) said:

12 April 2010
no to the thread discussion question. do a yellow box search "California LLC".

CATaxAtty (talk|edits) said:

12 April 2010
Hi Taxl,

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.

Kulatax (talk|edits) said:

1 July 2010
A colleague just received a letter from FTB for one of his clients (CA LLC) stating that if the LLC did not do any business after the end of year, and the Certificate of Cancellation is filed within 12 months of filing the final return, then the $800 minimum for new year would not apply. I think this is something fairly new from FTB. Finally, some relief! I've got two CA LLCs in this situation that I'm filing '09 for now. I'm marking them "final returns". I think that would help argue your case.

IDrinkYour Milkshake (talk|edits) said:

1 July 2010
All I will say is that the FTB cannot come after the member for the annual fee or tax.

Tm ea (talk|edits) said:

1 July 2010
I believe one of the keys to the Ralite case was the shareholder(s) didn't take any money out of the corp, the corp owed them money. I would think it would be the same in an LLC. If the member decided to take a distribution rather than pay the tax CA could come after them.

IDrinkYour Milkshake (talk|edits) said:

1 July 2010
Said again,

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

KatieJ (talk|edits) said:

1 July 2010
Kula: In your case you are not letting the LLC "die on the vine," you are formally cancelling it. It is a simpler process than it used to be, but it still requires that all returns have been filed and minimum taxes paid (see FTB: Closing a Business Entity). In the OP's situation, the returns have not been filed and multiple years' minimum taxes are due. No doubt, by now, the entity has been forfeited by the FTB for failure to file returns; its status can be checked on the Secretary of State's web site. It appears the LLC has no assets.

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.

KatieJ (talk|edits) said:

1 July 2010
Note that the Ralite logic would not apply to a limited partnership, because an LP must have at least one general partner who is liable for all of its obligations. However, it probably also applies to an LLP, all of whose partners have limited liability.

Birdman (talk|edits) said:

12 July 2012
California now has a failure to file penalty. If an S-corporation uses Ralite to "die on the vine", do you think that the FTB could not hold the shareholder for the failure to file penalties?

JAD (talk|edits) said:

16 October 2012

Has anyone had any success applying Ralite to an LLC? I've seen articles and discussion about the theory, but no specific cases. Client just found out that his son formed an LLC in 1998, no activity, no filing, etc...

Diane EA (talk|edits) said:

9 February 2013
JAD - did you come to a desision on how to let the LLC in California just die on the vine?

JE O Leary (talk|edits) said:

14 February 2013
A client of mine moved from California to Nevada many years ago and filed a final federal and California return in 2009. At that time the LP distributed all of their assets and closed down. The Franchise Tax Board is looking for a copy of their 2010 return or a copy of their certificate of cancellation and a certificate of amendment which I don't think was ever filed.

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.


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