ASK THE EDD LAWYER- DO I HAVE TO PAY THE FRANCHISE TAX BOARD A MINIMUM TAX EACH YEAR FOR MY CORPORATION OR LLC IF IT IS NOT DOING BUSINESS?
By Robert S. Schriebman
California requires a minimum franchise tax payment of $800 per year regardless of whether or not your corporation or LLC is active or dormant. If this amount is not paid timely, the business entity will be assessed tax, penalties and accruing interest until the amount is paid in full. The Franchise Tax Board may also notify the Secretary of State to suspend the corporation or LLC from doing business in California if these taxes, penalties and interest are not timely paid. A suspended corporation cannot conduct business. It cannot sign contracts and it cannot engage in litigation. The corporation or LLC may be reinstated by the payment of back taxes, penalties and interest and by the filing of delinquent annual returns. If the corporation is in the middle of litigation, a formal Certificate of Revivor is required in order to prosecute or defend the litigation. These rules apply to corporations and LLCs with equal force.
Recently, the California State Board of Equalization (SBE) issued an important decision in Margate Properties LLC, filed on April 17, 2014.
In Margate Properties LLC, a limited liability company (LLC) that failed to timely file its California LLC returns and pay its minimum tax was liable for late filing and payment penalties even though the LLC had no assets, it never did any business, it had no income, it never opened a bank account, and the LLC’s attorney never advised the members that it was necessary to file state tax forms. The members were siblings who had inherited a house from their deceased father and, upon the advice of their attorney, had set up the LLC when they thought that they would rent the house out. However, after they fixed up the property and during the same tax year that the LLC was formed, the siblings decided to sell the home rather than rent it out and they advised the attorney to stop further legal services in relation to the LLC.
The siblings had no previous experience with LLCs and were unaware that they were required to file state LLC returns. They learned of this requirement after the LLC was officially dissolved. Upon learning of the requirement, they filed the delinquent returns and paid the minimum taxes. However, the LLC was assessed delinquency penalties and interest. They brought their case before the SBE to argue that the penalties should be abated for reasonable cause as they relied upon the advice of their attorney.
The SBE refused to throw out the penalties and the accruing interest. The SBE held that the siblings’ ignorance of their filing requirement as well as their reliance on their attorney to inform them of their filing obligations did not constitute reasonable cause. The filing and minimum tax requirements for LLCs is clear and unambiguous and there was no need to rely upon an attorney for professional for substantive clarification of the law.
An EDD lawyer, Robert Schriebman has a successful practice in the Rolling Hills Estates area of Los Angeles County serving clients throughout California and the United States.
As a trusted EDD attorney, has successfully dedicated more than 30 years to helping individual taxpayers, business owners, CPAs, Enrolled Agents, and tax attorneys navigate the complicated tax systems of the federal and state governments.
Robert Schriebman has written over 20 books including the major manual used nationally by practitioners and the IRS, “IRS Tax Collection Procedures – A Manual for Practitioners” published by Commerce Clearing House and the only 2 books ever published dealing with how California Employment Development Department (EDD) operates. See “California Tax Collection Practice and Procedures” and “California Taxation Practice and Procedure,” both published by Commerce Clearing House.