Unused Corporation

Today TaxMama hears from Luz in California with this problem. “I opened a corporation in 2001 but I never used it. I never filed tax returns. I didn’t even know how it works! Now I just learned that the state charges a fee for year that it is open. Is there a way or a law that I can reference to close the corporation and dismiss the past years?”

Dear Luz,

You’re in luck. You came to exactly the right person to help you.
The State of California wants you to believe that you must file each back year and pay the annual $800 fee AND all the penalties and interest related to that fee. However, in the Court’s discussion of the Ralite case, the Court made it clear that if the corporation is insolvent, it cannot be required to pay the back taxes. http://www.boe.ca.gov/legal/pdf/90_sbe_004.pdf

As to holding the owners liable?

In Ralite, the owners were held liable. But the Court said the owners can’t be held liable if the owners of the corporation did not get any money from the company without consideration. In other words, if the shareholders took loans out from the company without repaying them – or got paid without doing any work.

In your case, you never funded the corporation. And you never drew money out. So just write the Franchise Tax Board a nice letter, saying that under the Ralite case you are not obligated to pay the corporation’s debts.

File a final return showing zeroes on all the lines. Check the box as FINAL RETURN to stop any new assessments.

Do NOT file the dissolution paperwork with the State Franchise Tax Board or Secretary of State. The dissolutions papers require you to accept liability for the corporation’s debts. So just be patient. The notices will stop. Someday.

Though, you may want to have your tax professional help you with this. After all there is well over $6,000 at stake here.

And remember, you can find answers to all kinds of questions about dissolving corporations and other tax issues, free. Where? Where else? At TaxMama.com

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