As the year comes to a close, we should consider any time sensitive corporate transactions. Included in this category is the formation of new entities or the formal dissolution of entities no longer needed.  We should also consider whether we need to formally dissolve. One advantage of a formal dissolution is that it provides certainty as to the deduction of any related losses for income tax purposes.

Note that, California charges a minimum tax of $800 each year for the privilege of being able to do business as a corporation or Limited Liability Company (“LLC”). For LLCs, there is also a gross receipts fee based upon gross revenue (even if you incur a loss) as follows:

$0 – 249,999


$250,000 – 499,999


$500,000 – 999,999


$1,000,000 – 4,999,999


$5,000,000 and above



California does use an unwritten fifteen (15) day rule in which a period of fifteen (15) days or less is disregarded if no business was conducted. Consider forming your new corporation or LLC between December 17 and December 31 to be prepared to conduct business in the new year without having to pay the minimum tax for 2021.

An LLC that elects to be taxed as a corporation will avoid the gross receipts fee but must still pay the $800 minimum tax. The LLC can elect to be taxed as a “C” corporation or achieve pass through status as an “S” corporation. Of course, the LLC could also elect to be taxed similar to a partnership, each has different advantages and disadvantages.

To avoid the minimum tax, the corporation or LLC must be formally dissolved through the California Secretary of State. This requires the appropriate dissolution and cancellation forms before December 31.

For dissolutions, the $800 minimum tax requirement continues until the appropriate filing with the Secretary of State even if “final” tax returns are filed. That said, a formal dissolution may not be required for some taxpayers. The landmark case on this issue is the Appeal of Howard Zubkoff and Michael Potash, Assumers and Transferees of Ralite Lamp Corporation (the “Ralite Case”).

The Board of Equalization (“BOE”) determined that the only way shareholders are personally liable for the corporate minimum tax would be at equity under a theory similar to or based upon the “law of fraudulent conveyances.” (See California Civil Code Section 3439-3439.12). The California Franchise Tax Board, prior to the reformation of the California tax agencies, administrative appeals from the Franchise Tax Board (“FTB”) audits were resolved by the BOE.

To hold the individual shareholders liable for the corporate level tax, the FTB must prove all five (5) of the following conditions:

  • The corporation transferred property to the shareholder(s) for less than full and adequate consideration;
  • At the time of transfer and at the time shareholder liability was asserted, the corporation was liable for tax;
  • The transfer was made after liability for the tax was accrued, whether or not the tax was actually assessed at the time of the transfer;
  • The corporation was insolvent at the time of the transfer or the transfer left the corporation insolvent; and
  • The FTB had exhausted all reasonable remedies against the corporation.

Because all five (5) of these conditions were met in Ralite, the BOE held that the shareholders were liable for the corporation’s franchise tax.

Because all five (5) of the conditions must be met in order to establish shareholder liability, shareholders only need to avoid one of the conditions to prevent liability.

A transfer for less than full and adequate consideration of any corporate asset should be avoided, including but not limited to the following:

  • Notes and accounts receivable;
  • Inventories;
  • Furniture, machinery, and equipment;
  • Real property;
  • Goodwill; and
  • Client list.

If a corporation transfers any cash or property to the shareholders, be certain that “full and adequate consideration” is given in return. Although the term “full and adequate consideration” was not defined, we think that you could make a strong case that most transfers to a corporation at fair market value – including but not limited to the following – could qualify:

  • Loans from shareholders;
  • Services performed for the corporation with fair market value included in compensation;
  • Expenses incurred on behalf of the corporation; and
  • Stock in the corporation.
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