Business Law: New Administrative Dissolution Processes for California Corporations and LLCs

In the past, it has been all too common for a corporation or a limited liability company (“LLC”) to be formed in California and either never to commence actual business operations, or to close the business after some operations, but the entity is never formally dissolved. State law requires the Franchise Tax Board (“FTB”) to continue to impose a minimum franchise or annual tax for up to 20 years before it is allowed to extinguish the uncollected taxes. As time passes, many business owners simply elect to let their entities remain inactive or suspended rather than pursuing formal dissolution as they do not want to pay the accrued taxes and related interest and penalties. In order to remedy this situation, as of January 1, 2019, California has added new administrative dissolution processes for California corporations and LLCs. The new law created two types of administrative dissolutions: voluntary and involuntary.

Certain corporations and LLCs may apply to the FTB for voluntary administrative dissolution. The benefit of applying for such a dissolution is that an eligible entity need not pay the minimum franchise or annual taxes, interest or penalties relating to any years in which the entity did not actually do business. The two types of entities eligible for this treatment are: (1) a California corporation or LLC that never did business in California at any time after the time of its incorporation or formation; and (2) a California corporation or LLC that conducted business in California but that has ceased doing business and has filed all required California income tax returns for the years in which it did business. To quality, the entity must certify that it did not operate or has ceased operating the business, that there are no remaining assets in the business, and that a certificate of dissolution or cancellation has been filed with the Secretary of State. The abatement of taxes is limited to the years in which the entity did not conduct business. However, if an entity obtains a voluntary administrative dissolution but is found to have continued to do business, the entity is punished by restoration of the abated tax, interest and penalty liability plus a penalty equal to 50% of the restored liability.

The FTB is also authorized to effect involuntary administrative dissolutions for California corporations and LLCs whose entity powers and privileges have been suspended for at least 60 consecutive months. Prior to such a dissolution, the FTB must provide written notice to the entity at its last known address or, if the address is unknown, the Secretary of State is to post a notice on its website. The notice provides a 60-day period in which the subject entity may object to the administrative dissolution and, if a timely written objection is received, the entity then has 90 days to file returns, pay taxes, file a current Statement of Information, and apply for revival of the entity. If these requirements are not timely satisfied, the administrative dissolution is consummated and the minimum franchise and annual taxes, interest and penalties for the period of suspension are abated.

To be clear, an administrative dissolution, whether voluntary or involuntary, does not discharge any liabilities of the dissolved entity to creditors nor any liabilities that directors, shareholders, managers, members or other persons may have related to the dissolved entity. Further, an administrative dissolution does not diminish or adversely affect the ability of the Attorney General to enforce liabilities otherwise provided by law.

Instead, the Legislature’s aim in these processes is to provide a means to get rid of defunct businesses that are unlikely to be revived or to pay the tax liabilities that continue to accrue while they are not actually doing business. The mechanism to abate these liabilities is hoped to induce an entity’s owners to finally dissolve it and involuntary dissolutions will eliminate bureaucratic backlog and clear the FTB’s accounting system of accounts receivable that are unlikely ever to be paid.

That said, do you have any corporations or LLCs sitting on your shelf that might be eligible for, or subject to, administrative dissolution? The attorneys at Poole & Shaffery, LLP would be happy to assist you in navigating through the administrative dissolution processes.