Alert – Administrative Dissolution of California Domestic Corporations and LLCs

October 16, 2018
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Assembly Bill No. 2503 was officially signed into law on September 22, 2018. The law has created two new forms of dissolution for both California domestic corporations and LLCs. California domestic corporations and LLCs may now be dissolved through Administrative Dissolution either Voluntarily or Involuntarily. This law is intended to address the issue where, corporations or LLCs have ceased operations and have “walked away” from their obligations associated with accrued taxes, interest and penalties. This often occurs when the business determines that the cost associated with a voluntary dissolution outweigh the risk of doing nothing. Administrative dissolution proceedings may commence after December 31, 2018.

Involuntary Administrative Dissolution

Under this law, if the corporation or LLC has been suspended by the Franchise Tax Board (“FTB”) for 60 consecutive months, administrative dissolution proceedings may commence. Prior to formal dissolution, the FTB is required to attempt to notify the corporation or LLC that the FTB intends to administratively dissolve the entity. The FTB will either send notice to the business’s last known address or in situations where there is no address on record, the California Secretary of State will provide notice of the pending administrative dissolution on its website. If the business does not respond within 60 days after notice, the business will be dissolved.

If the FTB does receive written objection to dissolution from the business during the 60-day notice period, the corporation or LLC will have 90 days from the date on which the written objection is received by the FTB to (1) file all required tax returns, (2) pay all accrued taxes, penalties and interest, (3) file a current Statement of Information with the Secretary of State, (4) fulfill any other requirements to be eligible, and (5) apply for a certificate of revivor. Once completed the administrative dissolution proceedings will be canceled.

If administratively dissolved, the business’s liability for the minimum franchise tax, interest and penalties will be abated, as well as the penalties for not filing a statement of information, and no administrative or civil action will be taken or brought by the state to collect the outstanding debts. However, this will not discharge any liability that the business may have to creditors, directors or shareholders of the entity or its transferees.

Voluntary Administrative Dissolution

California domestic corporations or LLCs may elect to be administratively dissolved if they fall into one of the two following categories:

  1. A corporation or LLC that never did business in California at any time after the time of its incorporation; or
  2. A corporation or LLC that did business in California but that has ceased to do business and has filed all required California income tax returns for the tax years in which it did business.

Similar to the Involuntary Administrative Dissolution, eligible corporations and LLCs need not pay the minimum annual franchise tax, interest or penalties that relate to those years in which the corporation did not do business. The corporation or LLC must certify under penalty of perjury that it has ceased all business operations and that it has no remaining assets. If the corporation or LLC continues to do business or it is later determined that the business had assets that were not disclosed at the time of request for abatement, the taxes, interest and penalties that were abated will cease to be abated and will instead become immediately due. Additionally, a penalty equal to 50% of the total tax abated with interest will be imposed.

Authored by:
Roger J. Brothers, Esq.
Cullen L. Schlievert, Esq.
T: (925) 944-9700
rbrothers@bpbsllp.com 
cschlievert@bpbsllp.com

CIRCULAR 230 DISCLOSURE – Pursuant to rules and regulations imposed by the Internal Revenue Service, any tax advice contained in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding tax penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another person any transaction or matter addressed herein.

The summary which appears above is reprinted for information purposes only. It is not intended to be and should not be considered legal advice nor substitute for obtaining legal advice from competent, independent, legal counsel. If you would like to discuss these matters in more detail, please feel free to contact us so that we can provide the clarification and resources you need to make effective decisions.