Dissolving a limited liability company (LLC) when the business is done has some clear benefits, but is the liability exposure worth it?
Dissolving has its plusses. Clients usually want to avoid paying the minimum franchise tax of $800 in California, filing tax returns showing “no activity,” and filing the annual reports for an entity that’s no longer conducting business.
But these costs need to be balanced against the potential for residual liabilities that may arise post-dissolution.
Liabilities can include:
- Lawsuits. Under Corp C §17707.07(a), the members can be sued “to the extent of the limited liability company assets distributed to them upon dissolution of the limited liability company.” In general, these suits must be brought before the earlier of (1) the expiration of the statute of limitations applicable to the cause of action or (2) 4 years after the effective date of the dissolution of the limited liability company. Corp C §17707.07(b). This seems relatively straightforward, but there are complicated issues, such as what company assets are distributed to the members on dissolution and how long a look-back period there is.
- Taxes. There’s possible tax liability exposure due to the complex provisions in both the federal tax assessment and tax collection statutes of limitation. When an LLC can’t pay a tax assessment because it’s dissolved, the IRS may assess the members according to their proportionate shares, or even in excess of their proportionate shares. Corp C §17707.07(a). And when the IRS is a potential creditor, state statutes of limitations are inapplicable.
It’s best not to be penny wise and pound foolish. Keep a reasonable reserve in an LLC that has wrapped up business and keep it alive for 4 years. And if there’s potential tax exposure, carefully consider how long to keep the LLC active.
This is from a longer article on this topic by Belan K. Wagner and Matthew D. Carlson in the March 2019 issue of CEB’s California Business Law Reporter. On liquidating and dissolving LLCs, turn to CEB’s Forming and Operating California Limited Liability Companies, chap 16.
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