California Cracks Down on Deadbeat LLCs

Prior to 2009, California did not impose any suspension or forfeiture penalties for LLCs that failed to pay their annual franchise tax, any associated penalties, interest, of failure to file a return. Consequently, unlike corporations, LLCs were able to continue to operate without consequence for not following the statutory tax prescription.That has all changed. The California Franchise Tax Board (FTB) and Office of the Secretary of State are currently working together to implement a suspension and forfeiture process for Limited Liability Companies that do not comply with their tax responsibilities. The FTB will now exercise its right to suspend or forfeit the rights, powers, and privileges of any LLC for non-payment of taxes, penalties, or interest, and/or failure to file a return (Revenue and Taxation Code Sections 23301, 23301.5 and 23304.1(d)).

The new crackdown will force LLCs to comply or suffer the consequences of not being able to transact business in the state. Noncompliance, along with the dire financial state of California has motivated the FTB to begin the policing. To implement the program, the FTB will send notification to all entities at their last known addresses, 60 days before imposing suspension and forfeiture.

To recover from suspension or forfeiture, LLCs will have to go through the same “revivor” process followed currently by suspended California corporations. Similarly, the suspended or forfeited LLCs will be subject to contract voidability – just like suspended corporations. Contract voidability prevents the suspended or forfeited entity from enforcing any claim that they might otherwise have under a contract that was entered into during the suspension or forfeiture.

To avoid the hassles associated with recovering from suspension or forfeiture, LLC owners who have missed some deadlines, failed to file returns or not paid franchise taxes, should proactively clean up the mess before their businesses are stopped in their tracks.