Corp treated as S-Propiertor

[ILLMAS]

I have a client that the IRS indirectly suggested to report as a sole-propiertor because of the way they were handling cash. Basically, they were not depositing all the cash they received and paid about 80% of their vendors cash, this was suggested about 10 years ago, now the state is questioning why they continue to keep the Corp active, but haven't filed corp tax returns in the past 10 years. To this day, they still continue to operate in the same manner, and the client needs to explain to the state why? The problem I see in this is that the IRS agent suggested, not recommended or put in writing if the client didn't change the way they handled cash, has anyone else ever encounter a situation like this before?

[jainen]

>>they continue to keep the Corp active, but haven't filed corp tax returns in the past 10 years<<

There are two separate things. He is operating his business as a sole proprietor. He also has a corporation that is not conducting any business. Since the corporation was never actually dissolved, it continues to have a filing requirement. The IRS doesn't much care, but the state might. Here in California, the corporation would owe a minimum franchise tax of $800 per year.

[JohnH]

I've often wondered about this. How does CA handle the unpaid $800 per year if the corp has no assets?

Do they have provisions to determine responsible parties & go after them in any manner, or does the fact that the corp is defunct end the discussion?

[joanmcq]

They can't dissolve or do business if they owe back taxes, penalties, etc. Not sure how they collect.

[JohnH]

I'm mainly wondering what CA does if the corp is out of business and has no assets. $800 per year is a lot of money over time, and I'm wondering if the state tries to determine any responsible parties and/or hold them personally accountable for the unpaid fees (or if they can).

In NC, the corp can't dissolve or do business either if it's behind on F&I taxes or annual reports. However, after so many years of inactivity, the Dept of Revenue puts it on revenue suspension and then the Sec of State just administratively dissolves the corp and everything's over if the corp doesn't have assests.