Avoiding California’s $800.00 Minimum Franchise Tax for the Newly Formed LLCs that Haven’t Transacted Business

It is common for entrepreneurs to get excited about new business ventures.  They often move forward with forming a formal business entity such as a California Limited Liability Company (“LLC”) believing that all of the elements of success are in place.  They hire a San Diego business lawyer to set up their LLC and file Articles of Organization with the California Secretary of State.  Sometimes, however, unanticipated changes or barriers stop the fledgling business in its tracks (partners back out, expected funding falls through or needed capital  equipment becomes unavailable).  Suddenly, the organizers of the LLC find themselves faced with the task of dissolving the company and aren’t sure what steps to take.  Some will simply ignore the situation assuming that no steps are necessary given that the company hasn’t conducted any business – no income is generated so no taxes are due.  This may or may not be true depending on the circumstances.  California LLCs are subject to a minimum franchise tax of $800.00.  This is true whether or not the LLC generates revenue.  Presently, it does not appear that the California Franchise Tax Board is interested in pursuing individuals for an LLC’s taxes so the organizers are not held personally liable in most cases.  Nonetheless, it makes sense to formally cancel or dissolve an LLC to ensure that any taxes due are paid and no outstanding obligations or liabilities come back to haunt organizers.  

1270512_boardwalk_paseo_entablado_3.jpgNewly formed LLCs may formally cancel the LLC and avoid California’s minimum franchise tax if the following requirements are met:

1.    A Form LLC-4/8 Certificate of Cancellation is filed within 12 months from the date the Articles of Organization were filed with the California Secretary of State;

2.    The LLC has no debts or liabilities;

3.    The known assets of the LLC have been distributed to persons entitled thereto, or no assets have been acquired;

4.    The final tax return or a final annual tax return has been or will be filed with the Franchise Tax Board;

5.    The LLC has not conducted any business from the time of filing the Articles of Organization;

6.    A majority of the managers or members, or if there are no managers or members, the person or a majority of the persons who signed the Articles of Organization, voted to dissolve the LLC; and

7.    all investments received from investors for membership interests have been returned to those investors.

This is good news for those that have recently formed an LLC and want to dissolve before transacting any business.  The LLC-4/8 Certificate of Cancellation is relatively simple to fill out and file.  However, it is important not to forget to timely file a final tax return.  Consult with a San Diego business lawyer to ensure that your LLC is properly canceled or dissolved.

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