Many business entities in California are formed with the expectation of generating a profit, but things do not necessarily go as planned. For various reasons, business tax returns are not always filed on time, the annual franchise tax is not always paid, and/or the business entity is not always formally dissolved with the Secretary of State. This may seem like a minor problem to some; however, it can quickly turn into a very large tax bill from the Franchise Tax Board (FTB). Concerned about your business and filing tax returns? Contact a Roseville tax lawyer of NewPoint Law Group, LLP for help.
Filing Tax Returns
California has an $800 minimum annual franchise tax, in addition to any applicable corporate taxes. The tax is assessed every year until the business entity is formally dissolved with the Secretary of State, regardless of whether or not the business is operating during those years.
If the business entity does not file tax returns and pay the annual franchise fee for any reason, the FTB will place the corporation in “suspended status.” The Secretary of State is prohibited from dissolving a business entity that is in “suspended status.” This can easily turn into an endless cycle of annual assessments in addition to potentially severe penalties and interest. Unfortunately, many business entities that were unable to formally dissolve simply do not have the funds to pay the amount due to the State of California.
Although the annual franchise fee is imposed on the business entities themselves, the FTB has the power to make a personal assessment against the individual(s) responsible for failing to pay the tax, putting many business owners in a difficult situation.
The Ralite Decision
For many business owners in this situation, the Ralite decision may provide a way to safely walk away from a corporation or LLC without incurring the costs associated with a formal dissolution. Under Ralite, a corporate shareholder or LLC member cannot be held personally responsible for corporate or LLC taxes unless the following five factors are met:
- A transfer of assets out of the business entity was made.
- The tax liability accrued before or during the year the transfer occurred.
- The transfer was made without adequate compensation.
- The transferring business entity was left without sufficient assets to pay the tax due to the transfer.
- The transfer of assets was made to actual beneficial owners.
Contact a Sacramento Tax Attorney of NewPoint Law Group, LLP Today
If these factors exist, the California FTB can make a personal assessment up to the amount of the transferred assets. However, if the factors are not met for any reason, such as the business being insolvent during the periods at issue, no personal assessment can be made. In this scenario, it may be advisable to simply walk away from the corporation or LLC. If you have questions regarding any tax law issues you or your business might be facing, contact a Sacramento tax audit attorney of NewPoint Law Group, LLP.