Personal Liability for Franchise Tax

What is the liability if no tax is due? What is the liability if there is tax due but the LLC has no funds (and the funds didn't end up in the owner's hands)? I don't know, but it seems that if there is no liability in either of these cases, there should be no personal liability.

I don't think you are missing anything if the owners filed the election to treat the LLC as a corporation. Otherwise, there is personal liability to pay the $800 tax. There is also failure to file and failure to pay penalties. Until the LLC is cancelled, another $800 per year will accrue with failure to file/pay penalties.

There's apparently a penalty of a couple of hundred dollars for each LLC member, even if there is no tax due. So the question is whether that means the members themselves can be liable for the tax. My guess is that they can't, that there's no personal liability except for sales and withholding taxes.

The other issue is whether failure to file a return at all when there is no tax due could lead to criminal penalties for the members.

If the members got money out of the LLC in preference to creditors, they can be forced to give back what they got. But in this case they got nothing.

The whole purpose of corporations and LLC's is so that investors will have no personal liability for debts of the organization. But the client is worred, so I want to make sure I'm not missing anything.

___ Stu

So the members will have personal liability if they did not take the election, even though they have no personal liability for any other debts of the LLC? Ok, thanks.

Is that the same, personal liability if they didn't file the election and no personal liability if they did?

Thanks, Alan. I appreciate the information.

___ Stu

If not a corporation, it is a pass-through entity. As such, the tax & penalty due passes to the members.

I also appreciate the information, but note that there is no support given for Alan's comments. Treating the LLC as a corporation is NOT about liability protection, it is about how the income will be taxed.

It is my understanding that an LLC that has designated itself as a corporation is treated as a corporation for delinquent taxes and assessments. Therefore, unless the LLC distributed its profits as dividends, wages or return of capital to the members, there is no recourse for collection of back taxes and penalties from the members. Stuart said there was never any income. I conclude that the members have no personal liability for the franchise tax and its accruing penalties.

LLC's were created because of the dissatisfaction with limited partnerships, where at least one solvent person was required to be personally liable for the organization's debts. People had tried to avoid that by having, for example, a corporation be the general partner. When the corporations didn't have sufficient assets, the IRS would come in and tax the partnership as a corporation anyway.

The LLC was created to avoid the problem. Each state created an LLC law, and had it approved by the IRS so that anyone complying with the law could be taxed as a partnership even though there was no one with personal liability. The IRS just threw up its hands at that point and let LLC's pick how they were to be taxed. There is no law, as far as I am aware, that provides that - it was done by regulation only because the IRS didn't want to deal with the issue anymore.

While it would certainly be legal for the legislature to require LLC members to be personally responsible for some LLC taxes (i.e. sales and withholding taxes), I am not aware that they have done so.

If you look at R&T Code §17941 et seq., the statutes that impose the tax on LLC's that are not taxed as corporations, the tax is imposed only on the LLC. There is no hint that any liability is imposed on members.

___ Stu

The section you cite is buried in Part 10 Personal Income Tax. This part deals with imposition and calculation. It has nothing to do with collection, penalties or liability. E.g., Part 10 says that CA will impose an income tax on individuals, a tax on LLCs, a tax on Partnerships, etc. It doesn't say how the tax is administered nor how it is collected nor who is liable for failure to file or pay. For that, you have to look to other parts of the R&T code and court cases.

It's been a very long time since I've been involved with CA taxation. I have no citations for you. I thought that CA would be no different than other states that pass-through liability for taxes from an entity to a responsible individual when the taxes are not paid.

knowing little about California fees, I would be real surprised if a federal tax election had anything to do with who was or was not liable under California law for this particular fee.

So that means that if an election was made to tax it as an S corporation then the members will still be responsible for paying the $800 minimum tax plus other penalties. It's only if it were a C corporation then it is free.

I believe that theory has been debunked.

No, you merely disagreed with it. No authority for either position has been given by anyone.

___ Stu

The well known limited liability of "LIMITED LIABILITY companies" was pointed out, and no contrary authority was provided.

Platitudes don't apply in the law. The statute legislatures are permitted to do pretty much what they want in terms of imposing liability on corporations and LLC's. They normally don't. But just saying so doesn't mean that limited liability applies in any particular case.

Just for the record, I agree with you on the way the law should be. But how it is? I'm still waiting for real authority.

___ Stu

Okay Stuart, I did some research for you. LLCs are under the CA Corporate Code. Section 17101(a) says that a member has no liability solely because they are a member. 17101(b) provides liability under common law governing alter ego liability in the same manner as it relates to a shareholder of a corporation. Therefore, for an LLC operating as a partnership, you look to the law that relates to the liability of corporate shareholders. 17101(e) provides liability if the articles of organization or a written operating agreement specifically referring to this section makes makes them liable.

There is a case that appears to have direct bearing on liability by the members: Ralite Lamp Corporation. I didn't have access to the case but there is an explanation of it at

(Shareholder Liability for Minimum Corporate Corporate Franchise Tax in California).

Basically, it says that shareholders are not liable unless they expressly assume liability or they are liable in equity under the law of fraudulent conveyances.

So.... Based on the set of facts you presented, I conclude that a partner member of an LLC or a corporate shareholder of an LLC would not be liable for the $800 fee.

Thanks, Alan. That's awsome, and well above and beyond!!! I'll pass the information on.

___ Stu

> (Shareholder Liability for Minimum Corporate Corporate Franchise Tax in > California).>

That is very useful. But I don't understand your statement "for an LLC operating as a partnership". LLCs operate as, well, LLCs. I agree their operating agreement could be controlling, just as some sort of shareholder agreement in a corporation.

> (Shareholder Liability for Minimum Corporate Corporate Franchise Tax in >> California).>>

In CA, a single member LLC is disregarded and for tax purposes is a sole proprietorship. A multi-member LLC is a partnership for tax purposes unless an election is made to be treated as a corporation for tax purposes.