Dissolving California Entities That Have Ceased Doing Business – The Ralite Lamp Corporation Case
By Ron Cohen, CPA, MST
Greenstein, Rogoff, Olsen & Co., LLP
Entities have one year from the date their final return is filed to formally dissolve with the Secretary of State.
The FTB no longer assesses the $800 minimum franchise tax, or the $800 annual tax, for the year after a corporation, LP, LLP, or LLC ceases business, provided the entity:
- Files a timely final tax return on or before the extended due date for the preceding taxable year;
- Does not do any business in California after the end of that year; and
- Formally dissolves with the Office of the California Secretary of State (SOS) before the end of the 12 month period beginning with the date the final return was filed.1
Most dissolutions can be accomplished using check-box forms provided by the SOS. For copies of those forms, go to: www.sos.ca.gov/business/be/forms.htm (You’re on your own with this. We don’t give legal advice!)
Five General Dissolution Tips
- The final return must be timely filed to avoid imposition of the $800 minimum/annual tax for the following year.
- The corporation/LLC must be in good standing to dissolve; i.e., all tax returns have been filed, taxes paid, and SOS registration must be current.
- If the entity dissolves with the SOS in the middle of the year, be sure to compute the due date of the return based on the short year.
- Check the State Controller’s Web site to search for unclaimed property prior to dissolution.
- If the corporation has unpaid taxes, unfiled returns, and no assets, evaluate using Ralite and walk away from the corporation rather than formally dissolve, which will require personal liability on the part of the shareholders. (Check with your lawyer on this! We don’t give legal advice.)
If you have any questions or comments, please call GROCO at (510)797-8661.
Dissolve before or after final return
There is no requirement that the entity wait until after the return is filed to dissolve with the SOS. The entity may dissolve and file the final tax return later.
Short year return due 10 months following dissolution
If an entity dissolves in the middle of its taxable year, the tax return will be for a short period. The time allowed to file the short year return begins the first day of the end of the month following the short year. For example, a calendar- year entity that dissolves the SOS prior to December 1 must file a final return on or before the 15th day of the 10th month following dissolution, or the FTB (and IRS) will assess late filing penalties.
PLEASE BE ADVISED THAT WHILE A TAXPAYER HAS A LEGAL RIGHT TO APPLY RALITE, WE ABSOLUTELY DO NOT RECOMMEND IT UNLESS YOU HAVE NO OTHER CHOICE. INSTEAD, FILE THE FINAL TAX RETURNS ON A TIMELY BASIS AND PAY ANY TAX DUE. FORMALLY DISSOLVE THE ENTITY WITH THE SOS. AVOID ALL THE FTB NOTICES, HASSLES AND ANGST. IN MY EXPERIENCE, IN MOST CASES, LITTLE OR NO TAX IS DUE, AND IT IS MUCH, MUCH EASIER TO SIMPLY FILE THE FINAL RETURN AND DISSOLVE RATHER THAN EXERCISE THESE ADMINSTRATIVE STEPS TO AVOID FILING AND PAYING A MINOR AMOUNT. KEEP IN MIND, FEES INCURRED WITH YOUR CPA OR LAWYER TO APPLY RALITE CAN EASILY EXCEED THE POTENTIAL TAX SAVINGS. MOST TAXPAYERS GET A GREAT FEELING OF CLOSURE TO FILE PROPERLY AND CLOSE THE ENTITY’S ACCOUNT WITH THE FTB.
Ralite still applies to corporations
A shareholder who “walks away” from a corporation without taking any assets is not personally liable for any taxes. For these shareholders, the Ralite case provides relief.2 (Check with your lawyer on this. We do not give legal advice.)
Under Ralite, the FTB must prove all of the following before holding a shareholder liable for a corporation’s tax:
- The corporation transferred property to the shareholder(s) for less than full and adequate consideration;
- At the time of the transfer and at the time the shareholder liability was asserted, the corporation was liable for the tax;
- The transfer was made after liability for the tax was accrued, whether or not the tax was actually assessed at the time of the transfer;
- The corporation was insolvent at the time of the transfer or the transfer left the corporation insolvent; and
- The FTB had exhausted all reasonable remedies against the corporation.
Ralite applies to the shareholder, not the corporation. You cannot use this decision until the FTB has made its assessments, given up trying to collect from the now-defunct corporation, and actively pursues the individual shareholder to pay the tax liability. Here is the chain of events:
- The shareholder gives up the business, doesn’t formally dissolve and stops filing tax returns.
- Because the taxpayer did not dissolve, the FTB sends the corporation a Demand to File notice.
- The taxpayer still does nothing, and the FTB sends a Notice of Proposed Assessment and begins billing the corporation. Assuming the corporation has no assets, there will be nothing for the FTB to collect.
- Eventually, the FTB may come to the shareholder (believe me, this is not fun for the shareholder!) and demands payment from the shareholder. At this time, you should invoke the Ralite decision, explaining that the taxpayer did not take assets without consideration. Enclose the following in the shareholder’s reply to the FTB:
- A copy of the final balance sheet which probably includes loans from shareholders to the corporation and capital stock as well as a negative earnings account;
- A list of assets with book value and fair market value. Indicate which shareholders took which assets; and
- A list of loans from each shareholder to the corporation, debts each shareholder paid, and the basis of each shareholder’s capital stock.
If it is clear that the shareholder did not receive more value out of the corporation than was owed, the FTB will generally stop pursuing the shareholder(s) and close the account.
Ralite and the LLC
The Ralite case applies to corporate shareholders. Although there are no cases on point, it would seem that the same criteria would apply to an LLC and its members, as an LLC has the same liability aspects as a corporation.
Ralite and the limited partnership
The Ralite decision does not apply to LPs. In the case of these partnerships, there is a general partner who is personally liable for the debts of the partnership. Unless the general partner is a corporation that itself would qualify for Ralite treatment, the general partner will be liable.
1R&TC §§17937, 17947, 17948.3, 23332
2Appeal of Howard Zubkoff and Michael Potash, Assumers and/or transferees of Ralite Lamp Corporation (April 30, 1990) 90-SBE-004