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AB 2341 enacted, eliminating need for tax clearance certificate

On September 29, 2006, the governor signed Assembly Bill 2341, eliminating the need for a tax clearance certificate. This legislation streamlined the process for dissolving, or canceling the existence of business entities. Before this law was enacted, certain business entities, i.e., foreign corporations had to meet requirements of FTB, before the Secretary of State (SOS) would grant the business's request to terminate. Passage of AB 2341 remedies this situation.

Here are facts about AB 2341, and some scenarios to clarify the effects of this new law on various business entities.

Entities affected by this law:

  • Corporations.
  • Limited liability companies (LLC).
  • Limited liability partnerships (LLP).
  • Limited partnerships.
  • Not-for-profit corporations and exempt entities.

Effective/operative date:

  • Effective September 29, 2006.
  • Operative for taxable years beginning on or after January 1, 2006.

Specific provisions of this law:

  • Eliminates the tax clearance certificate beginning September 29, 2006.
  • Allows entities to avoid the minimum franchise tax or annual tax for the current taxable year, if:
    • The entity files a timely final franchise or annual tax return for the preceding taxable year, including extension.
    • The entity does not conduct any business after the end of the preceding taxable year.
    • Within 12 months of the filing date of the timely final franchise or annual tax return, the entity files appropriate paperwork with the SOS.
  • For corporations, considers the filing of a "final" franchise tax return a request for information to dissolve or withdraw.
  • Does not allow SOS to file a business entity's documents if the entity is suspended or forfeited with FTB. Suspended or forfeited entities must pay all outstanding balances due, file any delinquent returns, and then request that the entity be revived to good standing. Suspended or forfeited entities should contact FTB at (800) 852-5711 for revivor requirements.

How does a business entity terminate its existence in California under AB 2341?

  1. File the appropriate termination documents with the SOS. You can find in-depth information, forms, instructions, and examples of the necessary forms on their Website www.ss.ca.gov, or call (916) 653-3795.
  2. File a "final franchise tax" or "final annual tax" return with FTB.
  3. If a business entity is suspended or forfeited, it would have to be revived to good standing before the SOS would accept its termination documents. To be revived, a business entity must pay all outstanding tax liabilities and file the appropriate returns, including the final franchise tax return.

AB 2341 scenarios

  1. A corporation files its returns on a fiscal year basis.
    Facts:


    • The corporation is a fiscal year (FY) filer with a taxable year ending June 30, 2006.
    • Return due date is September 15, 2006.
    • Return due date with extension is April 15, 2007.
    • FY 2005 "final" return filed on September 15, 2006.
    • No business is conducted after June 30, 2006.

    Conclusion:
    The corporation would not be subject to the minimum franchise tax after June 30, 2006, if:

    • It files the appropriate dissolution documents with the SOS.
    • The SOS accepts the documents by September 15, 2007.
    • It does no business after June 30, 2006.
    • The corporation is not FTB-suspended or forfeited.

    If the certificate of dissolution is filed later than 12 months

    If the corporation fails to file the documents by September 15, 2007, or the SOS does not accept the dissolution documents, FTB would assess the corporation $800 for each year that it remains active. In this example, FTB would assess the minimum franchise tax for the 2006 and 2007 taxable years.

    This example is relevant for an LLC as well, except that it would apply to the annual tax, and the document filed with the SOS would be a Certificate of Cancellation.

  2. The LLC files its returns on a calendar year basis.
    Facts:


    • The LLC is a calendar year filer with a taxable year ending December 31, 2005.
    • Return due date is April 15, 2006.
    • Return due date with extension is October 15, 2006.
    • The LLC filed its 2005 "final" return on November 1, 2006.
    • No business was conducted after December 31, 2005.
    • The LLC paid the $800 annual tax for the 2006 taxable year.
    • Cancellation paperwork was filed and accepted. SOS cancellation date is January 18, 2006.

    Conclusion:


    The LLC would owe the $800 annual tax for the 2006 taxable year since the 2005 return was not timely filed, and the 2006 taxable year was more than 15 days.

  3. A suspended corporation files on a calendar year basis.
    Facts:



    The corporation:

    • Was suspended by FTB on June 15, 1999.
    • Filed its 2005 final franchise tax return on May 31, 2006.
    • Filed its Certificate of Dissolution on October 10, 2006.

    Note: Qualified foreign stock corporations must file a Certificate of Surrender with the SOS.

    Conclusion:

    • The SOS cannot accept the filing of the Certificate of Dissolution until the corporation is revived to good standing.
    • The corporation must contact FTB to revive. A revivor requires the corporation to file all necessary tax returns and pay any outstanding tax liabilities.
    • Once revived, the corporation can re-file the Certificate of Dissolution with the SOS within 12 months of the filing date of the timely, final franchise tax return to avoid incurring the minimum franchise tax for future years.

    Note: Reviving to dissolve or surrender a corporation does not qualify for a walk-through revivor process. It takes at least two weeks to process the corporation revivor request after FTB receives returns and payments.

    If the corporation fails to file its Certificate of Dissolution by May 31, 2007, or the SOS does not accept the dissolution documents by that date, the corporation would be liable for the 2006 minimum franchise tax, and remain liable for each subsequent year that it remains active.

If you have questions about a previous tax clearance request please contact us at tax clearance information: (916) 845-4124.

We are updating Publications 1038, 1038A, and 1038L - Instructions for Corporations Requesting a Tax Clearance Certificate to reflect the changes enacted by AB 2341. The current tax clearance-related information in these publications no longer applies, but the publications remain available for the SOS-related information.

If you would like to read more about AB 2341, please visit these Webpages:

To see the provisions that applied to taxable years that began before January 1, 2006, refer to Archive - tax clearance prior to 1/01/2006.