Morgan Miller Blair

Corporations seeking to close key business transactions often experience delays that are otherwise avoidable had the corporation kept current with routine corporate maintenance. For example, if the corporation is required to deliver to another party a certificate of good standing from the California Secretary of State, the corporation may learn that it is not in good corporate standing and, in fact, has become suspended. Suspension legally immobilizes a corporation, and a corporation must be restored to good standing before it can complete almost any transaction. Corporations are wise to fully understand what corporate suspension means in California, the filing requirements that must be met to avoid suspension, and the procedure for resuming good standing once a suspension occurs.

Corporate powers – Suspension is best understood as a corporation’s loss of all of its corporate powers. A California corporation in good standing has all the powers of a “natural person” (that is, a human being) in carrying out its business activities, such as the powers to enter into contracts, assume obligations and incur liabilities, borrow and lend money, buy and sell property, and sue and be sued in court. In California, as in other states, these corporate powers exist by virtue of a state statute that authorizes the creation of corporations. Since the state that grants the powers may also take them away, a corporation can be stripped of its corporate powers by state law as well.

Filing requirements to maintain good standing – Avoiding corporate suspension in California is a simple matter of meeting a few basic requirements of good corporate citizenship: the corporation must regularly submit an informational filing to the Secretary of State and must submit a franchise tax return to the Franchise Tax Board and pay the associated taxes.

• Annual information filing – Corporations are required to submit an information statement within 90 days of incorporation and every year thereafter. The filing consists of a form that the Secretary of State mails to the corporation’s registered address in advance of its due date. For private companies, the one-page filing requires basic information (mainly names and addresses) regarding the corporation, its directors and officers, and its agent for service of process, as well as a general description of the type of business operated by the corporation. For public companies, more detailed disclosure is required under legislation adopted in 2002. A filing fee of $25 must be paid when the form is submitted. If the corporation fails to file, a notice of delinquency from the Secretary of State is mailed, which notifies the corporation that sanctions may follow in 60 days. Thereafter, if the corporation fails to file, it may face monetary penalties and ultimately may be suspended.

• Franchise tax returns and payments – Unlike some states, California both charges corporations a franchise tax for the privilege of doing business in California and imposes a corporate income tax on such corporations. California corporations and foreign corporations that do business in California therefore must submit annual franchise tax returns, together with payment of minimum franchise taxes and income taxes, to the Franchise Tax Board. The minimum franchise tax for a corporation is $800 per year, although no minimum amount applies for the corporation’s first year of existence. Franchise tax returns and payments are generally due by the 15th day of the third month after a corporation’s fiscal year ends (i.e., March 15th for calendar-year corporations). If the corporation fails to pay taxes or file returns in a timely manner, the Franchise Tax Board will send the corporation a preliminary notice of suspension, which gives notice that suspension may follow after 60 days.

Suspension - The Secretary of State or Franchise Tax Board may suspend a corporation for failure to comply with the requirements described above. Whichever agency suspends a corporation will mail it a suspension notice. Thereafter, the corporation is disqualified from exercising its corporate powers, rights and privileges. The suspended corporation becomes incapacitated until it corrects its delinquent status with the agency that disqualified it. In fact, the corporation has all the burdens of corporate existence (such as the continuing obligation to pay applicable taxes on its operations) without any of the benefits. For example, another corporation may reserve or adopt its name (as occurred in the recent Boyer v. Jones case [link to update on Boyer]). The suspended corporation may be unable to answer a lawsuit filed against it, resulting in a default judgment, and it cannot initiate litigation, which may cause it to suffer losses that cannot be remedied. Any contract that it enters into is voidable at the demand of the other party. And, perhaps most salient to its officers and directors, any person who attempts or purports to use any of its corporate privileges is subject to fines and/or imprisonment. The only exceptions to the loss of corporate privileges upon suspension are that the corporation may (1) change its name by amendment to its articles of incorporation, and (2) apply to the Franchise Tax Board for tax-exempt status.

Revivor - A suspended corporation may have its corporate privileges reinstated by remedying delinquent filings, paying applicable penalties, and filing an application for a “certificate of revivor” with the Franchise Tax Board. Before the Franchise Tax Board issues the certificate, the Secretary of State must approve the corporation’s name as not being misleading or deceptive, since during the suspension period, another corporation may have reserved or adopted the same name (as occurred in Boyer). If the application is accepted, the Franchise Tax Board notifies the Secretary of State, at which time the restoration of the corporation’s powers and privileges becomes effective (retroactive to the date of suspension) and the revivor becomes a matter of public record.

Because of the serious business difficulties that suspension creates, a corporation should regularly review its compliance with its filing obligations in order to avoid suspension. If the corporation learns of an impending suspension, or discovers that it has already been suspended, it should act quickly to restore its good standing.

This article provides general information only. For more information on this subject, please contact Steve Harmon at (925) 937-3600 or e-mail sharmon@mmblaw.com.