California officials going after noncompliant LLCs

Under a new state program, those LLCs face suspension if they didn't file state income returns, pay income fees owed, pay the $800 annual LLC tax or make an information filing that is required every two years.

It's the first time since state law allowed the popular business entities 15 years ago that California has taken steps to suspend noncompliant companies registered as LLCs.

Suspension means that a company loses the right to its name and its ability to sue or be represented in court, its contracts are unenforceable and it cannot legally do business in California, according to the Franchise Tax Board, the state tax agency.

Even if a business registered as an LLC in California never conducted business here, it continues to rack up the annual tax of $800, plus interest and penalties, until it formally cancels the registration. Out-of-state companies that registered as LLCs in California are also subject to suspension for noncompliance.

"When LLCs came about, we had many people set up LLCs -- small mom-and-pops or husband-and-wives -- and then they just never did their paperwork, never filled out income returns or filled it out the first year and that was that," said Gina Rodriquez, Sacramento editor of Spidell's California Taxletter.

On Dec. 30, the state tax board sent out the first of what it said would be monthly mailings that would attempt to reach the 23,332 limited liability companies its records show are eligible for suspension since the business structure became legal in California in 1994.

There were 484,945 California LLCs as of Dec. 1, according to the secretary of state's office, which handles business entity registrations and cancellations. How many of those are still doing business is unclear, an issue the suspension program will help to address.

Next year, after the tax board's program ends, the secretary of state's office said it would begin suspension proceedings of its own. The office requires LLCs to file an information statement every two years or be subject to a $250 penalty. The Franchise Tax Board is responsible for collecting the penalty, along with the $800 annual tax and income-based fees.

The tax board said all LLCs targeted for possible suspension would be sent notification to their last known addresses, giving them 60 days to resolve the issue or clarify why the notice was in error before the suspension was imposed.