This post addresses a question that arises frequently from founders of California limited liability companies that have been suspended: Can I walk away from my suspended LLC?
A suspended LLC is the result of a founder who has neglected to file Statements of Information with the Secretary of State, or file returns with or pay amounts due to the Franchise Tax Board, or both of the foregoing. Please see Why was My Corporation / LLC Suspended or Forfeited?
Forgotten LLC = Suspended LLC
Frequently this happens because the LLC did little or no business, so the founder forgot about it. (This apparently happens less frequently with corporations because their greater formal requirements result in their being formed by more-attentive, more-sophisticated founders.)
The founder might want to dissolve the LLC. (Please see How to Kill Your Company when that’s the Only Choice.) However, before the suspended LLC can be dissolved, it first must be revived!
Suspended LLC Can Be Expensive to Revive
How Can I Revive My Suspended / Forfeited Entity? discusses how to revive a suspended LLC. However, the $800 per year minimum franchise tax, plus interest and penalties, can result in an unjustifiably huge expenditure.
That expenditure then leads the founder to ask: Can I walk away from my suspended LLC [without incurring personal liability for amounts owed]?
Assuming that the founder has not personally guaranteed the LLC’s obligations and has done nothing else to compromise the LLC’s limited liability protection (see Beware Your Alter Ego), the answer probably is “Yes, you can walk away.” This is not what the law prescribes (thus no lawyer can recommend it), but it is a practical solution that countless people choose very year.
The Ralite Case
Tax professionals sometimes cite the State Board of Equalization’s Ralite case as stating that the founder will be responsible for the tax obligations of the LLC. (While Ralite involved the shareholders of a corporation, that case’s analysis reasonably could be applied to members of an LLC.)
However, Ralite rested on a fraudulent conveyance analysis. Among the most important elements of that analysis were the following.
- After corporate tax liability accrued, the corporation made loans and cash distributions to its shareholders.
- Because of those transactions, the corporation became insolvent (liabilities greatly exceeded assets) and was not able to make tax payments.
- As a result, the shareholders were liable for satisfying the corporation’s tax liability (“transferee liability”).
To summarize, unless you have done something unusual or inappropriate, you probably can walk away from your suspended LLC.
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.