The following is the text of an e-bulletin that I wrote and that was published by the Corporations Committee of the Business Law Section of the California Lawyers Association.
On September 22, 2018, Assembly Bill No. 2503 was signed into law (and became Chapter 679). This law creates a new form of dissolution, administrative dissolution, for California domestic corporations, as defined in Corporations Code Section 167, and California domestic limited liability companies, as described in Corporations Code Section 17701.02(g) & (k). The law provides for two types of administrative dissolution, involuntary and voluntary.
These laws are intended to address the status of corporations that have ceased operations and have no assets. Frequently, the owners of these corporations simply “walk away” from the accruing tax, interest, and penalties due rather than incur the expenses associated with voluntarily dissolving the corporation.
Involuntary Administrative Dissolution
After December 31, 2018, a California corporation may be administratively dissolved if the corporation’s corporate powers have been suspended by the Franchise Tax Board (“FTB”) for 60 consecutive months.
Before dissolving the corporation administratively, the FTB must notify the corporation of the pending administrative dissolution by mailing a notice to the last known address of the corporation. If the FTB does not have a valid address for the corporation, the FTB will notify the Secretary of State, which will provide 60 days’ notice of the pending administrative dissolution on its Internet website by listing the corporation’s name and the Secretary of State’s file number. The Secretary of State will provide instructions for a corporation to submit a written objection of the pending administrative dissolution to the FTB before the expiration of the 60 days.
If the FTB does not receive the corporation’s written objection to the administrative dissolution during the 60-day period, the corporation will be administratively dissolved.
If the FTB does receive the corporation’s written objection to the administrative dissolution during 60-day period, the corporation will have 90 days from the date the written objection is received by the FTB to (1) file returns, (2) pay all accrued taxes, penalties, and interest, (3) file a current Statement of Information with the Secretary of State, (4) fulfill any other requirements to be eligible, and (5) apply for a certificate of revivor. If all the foregoing conditions are satisfied, the administrative dissolution will be canceled, but if not, the corporation will be administratively dissolved. The FTB may extend the 90-day period one time.
If the corporation is dissolved administratively, the corporation’s liability for the minimum franchise tax, interest, and penalties, will be abated, as well as the penalties for not filing a statement of information, and no administrative or civil action will be taken or brought to collect those liabilities. An administrative dissolution will not, however, discharge the corporation’s liability to creditors.
An administrative dissolution also will not discharge any liability of the directors or shareholders of the corporation or its transferees. Therefore, if there was an illegal distribution by the corporation or a fraudulent transfer prior to the dissolution, the liability of the directors or shareholders of the corporation or its transferees would not be affected by the dissolution.
Like provisions apply to California limited liability companies.
Voluntary Administrative Dissolution
After December 31, 2018, certain California corporations may apply to be administratively dissolved. The benefit of applying for voluntary administrative dissolution is that eligible corporations need not pay the minimum annual franchise tax, interest, or penalties that relate to years in which the corporation did not do business.
Two types of California corporations are eligible for this treatment:
- A corporation that never did business in California at any time after the time of its incorporation.
- A corporation that did business in California but that has ceased to do business and has filed all required California income tax returns for the tax years in which it did business.
In applying for this benefit, the corporation must certify under penalty of perjury that it has ceased all business operations and that it has no remaining assets. Any abatement would be conditioned on a certificate of dissolution first being filed with the Secretary of State.
The abatement of taxes, interest, and penalties would not apply to any year prior to the cessation of doing business in California.
If the corporation that was voluntarily administratively dissolved continues to do business or has remaining assets that were not disclosed at the time of request for abatement, the taxes, interest, and penalties that were abated will cease to be abated and will be immediately due. In addition, a penalty equal to 50% of the total tax abated (plus interest) will be imposed.
Additional Points
The FTB is authorized to prescribe regulations to implement these new provisions.
Like provisions apply to California limited liability companies.
An earlier statute (Ch. 363, Stats. 2015) established similar administrative processes to dissolve domestic and foreign nonprofit public benefit, mutual benefit, religious corporations, and foreign nonprofit corporations that have qualified to transact intrastate business in California.
