Liability for S-corp Penalties

Depends what you are calling "fairly low". They owe at least $800 per year to the state, and after a few years of noncompliance that plus penalties could be few thousands of dollars.

What are the "large" sanctions?

And yeah, shareholders/officers are liable .. who else would be?

S.

The $800 per year is not a penalty, it's California minimum franchise tax. And yes, if it's not paid there can be penalties and interest, but that amount by itself is not a penalty.

I don't know yet. The last time I checked the IRS penalty for failure to file an 1120-S was $200 per month (up to 12 months) for each shareholder.

The corporation. Under California law, the minimum franchise tax is generally due ONLY by the corporation (as with most other corporate obligations), and is NOT the personal responsibility of the shareholders.

So you are wrong about that.

Not my area of expertise but here is my understanding: Federal: Failure to file penalty is assessed against the corporation. Shareholders are not liable. I would just file one return for the first year and make it the final return. As long as there are no assets in the corporation, that should put an end to it. CA: Minimum franchise tax is assessed against the Corporation. Shareholders are not liable unless the state can show there was shareholder fraud. I would just file one return and make it the final return and send the Certificate of Dissolution (Form DISS STK) to the CA Secy of State.

Thanks Alan. That's excellent advice.

Upon further research it appears that you are correct, with one minor exception. Whether someone is personally liable for either state or federal income taxes for a corporation depends on state law. Under CA law there is no personal liability. There are states that do impose personal liability, however.

You may want to read the BoE decision in Ralite. Or just read this summary. Kinda explains when CA can pierce the corporate veil and make the shareholders liable.

In that case it was more an issue of fraudulent conveyance - when a shareholder takes money that wasn't earned, in preference over a corporation's creditors. It's not personal liability per se - but any money paid to the shareholder can be clawed back. So if the debt were higher than the money received by the shareholders, the most they would be required to pay back is what they received.

In situatations like sales or withholding taxes, there can be actual personal liability even if the person who they seek money from didn't get any personal benefit from it at all.

I certainly recall learning once that, as a preferred shareholder, I might be liable for the liabilities of the corporation, and while (in my scenario) a common shareholder would not be, an officer or director definitely could be. Explaining why officers/directors have insurance taken out against this.

Were I a tax collector type, I would be looking to "pierce" the corporation...

S.

Some of that is just incorrect. The rest is largely incorrect because it is not nearly that simple.

And they do. And there are several bases for requiring someone other than the corporation or LLC itself to pay its debts. But "piercing the corporate veil" is the hardest and most expensive one to accomplish, if it works at all. There are others (depending on the precise circumstances) that are easier to accomplish.

I gave you the Ralite case because it was on point. I.e., it dealt with just the franchise tax. The reason I gave it to you was to show how difficult it is for CA to hold the shareholders liable. Specifically, all of the following had to have happened:

1. The corporation transferred property to the shareholder(s) for less than full and adequate money.
2. At the time of the transfer and at the time the shareholder liability was asserted, the corporation was liable for the tax.
3. 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.
4. The corporation was insolvent at the time of the transfer or the transfer left the corporation insolvents, and
5. The FTB had exhausted all reasonable remedies against the corporation.

IRC 6672 allows collection of corporate trust fund taxes, but not income tax, from responsible persons.

Administrative and judicial nominee, transferee, alter ego, and fraudulent conveyance actions can be useful in following corporate assets diverted for personal benefit.