California Officials Pursuing Noncompliant LLC's

Under a new state program, the state tax board has begun sending out the first of many monthly mailings to approximately 23,332 limited liability companies whose records are eligible for suspension. California officials are suspending LLCs due to the lack of filed state tax returns and other necessary information filings and overdue annual tax fees.

According to the Franchise Tax Board and the California state tax agency, if a company is suspended, that company will lose the rights to its name, it will be unable to sue or be represented in court, its contracts will be unenforceable and it will not be able to do business in California.

Next year, the secretary of state is expected to begin proceedings of its own to suspend LLCs for lack of filing an information statement every two years. Those LLCs who have not filed these forms, could be subject to a $250 penalty.

Before a suspension is imposed, the tax board is allowing any targeted LLCs 60 days to resolve any issues or explain why a notice was sent in error. To avoid suspension, LLCs must file missing income tax returns and pay any outstanding fees, taxes, penalties and accrued interest charges. If an LLC is cancelled, it is still responsible for missing income returns and unpaid fees, taxes and interest.

The tax board anticipates its new suspension program will reduce tax gaps and bring about LLC compliance. An estimated $64.7 million is owed by these non-compliant LLCs in back taxes, fees, penalties and interest. In addition, California officials will continue to bridge these gaps by increasing 2009 fees and penalties and forcing LLCs to file income tax returns sooner. At least one decision by the Board of Equalization has indicated that a shareholder can be liable for corporate taxes if certain conditions are met, and similar liability could apply to an LLC member who walks away. So it is best to close down an LLC that is no longer being used to ensure that you do not become liable for taxes, fees and penalties.

For more information on LLCs and the tax board's suspension program, please visit the tax board website at www.ftb.ca.gov