By: Eric Milliken, Attorney at Law, Sutter Law, a San Francisco Business Attorney
So Your California Corporation Has Been Suspended?
When a California corporation is suspended, the corporation has lost all of its rights and privileges and cannot legally operate. Technically, the corporation is required to close its doors, and to stop all business related activity. A suspended California corporation cannot sue, or defend, any action in court. In addition, a suspended California corporation that provides a service, or goods, to third parties while suspended may not be able to collect payment for such services and goods. For a suspended California corporation to once again achieve good standing, the California Corporation must be revived.
Reasons Why a California Corporation Is Suspended
Every corporation formed in California is registered with the California Secretary of State’s office, assigned a corporate identification number, and is legally required to file an annual Statement of Information of Officers and Directors with the California Secretary of State. In addition, every California Corporation is required to file an annual tax return with the Franchise Tax Board and to remit payment of $800 for the minimum franchise tax, even if the California Corporation didn’t engage in a single business activity.
Either the California Secretary of State’s office and/or the Franchise Tax Board (FTB) can legally suspend a California corporation.
The Secretary of State will suspend a California corporation if the corporation fails to timely file the required annual Statement of Information of Officers and Directors with the $25 filing fee. Failure to file the Statement of Information of Officers and Directors on time may also result in a significant late fee. If the Statement of Information remains unpaid, the Franchise Tax Board may also legally impose additional penalties and interest on the past due filing fee.
The Franchise Tax Board will suspend a California corporation if the corporation:
- fails to pay the minimum annual franchise tax of $800 or fails to pay any taxes due and owing
- fails to file a tax return (a tax return is required even if the corporation transacted no business)
- fails to file the Statement of Information with the Secretary of State which resulted in a significant late fee that has accrued additional penalties and interest.
Effects of Suspension
Whichever agency suspends the corporation will mail the California Corporation a suspension notice, at which time the corporation is thereafter disqualified from exercising its corporate powers, rights and privileges. In other words, the California Corporation cannot legally operate.
Until the California Corporation corrects its suspended status, the corporation will be prohibited from transacting business, answering a lawsuit filed against it, initiating litigation, or protecting and preserving its name. Any contract executed by a California suspended corporation is voidable at the demand of the other party. And, any person who attempts or purports to use any of its corporate privileges while the California Corporation is suspended 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 (which may be necessary to revive a suspended corporation), and (2) apply to the Franchise Tax Board for tax-exempt status. Nevertheless, a suspended corporation is still required to pay all the applicable taxes and to file tax returns (even if no money is earned).
The Franchise Tax Board will issue a delinquent penalty for failure to file a timely tax return of 5% per month up to a maximum of 25%. Interest begins on the original due date of the tax return. The Franchise Tax Board will issue a demand penalty when a corporation fails or refuses to furnish information requested by it or fails to file a tax return after written notice and demand. In either case, the demand penalty is 25% of the FTB’s assessment of what is owed or 25% of the tax shown on the return when filed before any refundable credits and payments from the original notice to the date full payment is received.
How To Revive or Reinstate a California Corporation
If your California Corporation is suspended, and during the suspension period you were operating the business (e.g. entering into contracts, selling goods or services, etc.) we strongly suggest you use a California attorney to ensure the reviver is retroactive to the date of suspension. However, if you insist on doing it yourself without an attorney, you will need to contact both the California Secretary of State and the Franchise Tax Board to determine what triggered the suspension and what is required to revive the California Corporation back to “active” status.
If the corporation was suspended by the Secretary of State because the corporation failed to file the required annual Statement of Information, the corporation can be revived by sending a letter to the Secretary of State along with: (1) the delinquent Statement of Information and (2) the payment of the overdue fees and/or penalties imposed. So long as the corporate name is still available, the Secretary of State will send a “Notice of Revivor” to the corporation and notify the Franchise Tax Board.
If, on the other hand, the California Corporation was suspended by the Franchise Tax Board, the suspended California Corporation may have its corporate privileges reinstated only by filing all delinquent tax returns and statements, paying all applicable taxes, penalties, interest and fees, and filing an application for a “certificate of revivor” (Form 3557) with the Franchise Tax Board.
Two Common Problems That May Arise When Trying To Revive a California Corporation.
When a Corporation has been suspended, another individual or entity is free to assume the “suspended” corporation’s name. Although you may love your corporate name, when this occurs to finalize the reviver process you will have to: (1) select a new corporate name, (2) perform a name clearance check, (3) prepare corporate minutes authorizing the Board of Directors to change the corporation’s name, and (4) prepare and file amended Articles of Incorporation with the filing fee and optional $350 state expedite fee.
A second common problem faced by a suspended California corporation is the request for a walk through revivor. A walk through revivor is a one-day process that requires a representative of the suspended California Corporation to obtain an appointment and personally appear at a FTB field office. This typically occurs, when the suspended California Corporation is faced with a pending escrow, loan or lawsuit.
Conclusion
As noted above, suspension can create serious problems. To avoid suspension, the owners of a California corporation should regularly review their compliance with the filing obligations imposed by the Secretary of State and the Franchise Tax Board. If a California corporation learns of an impending suspension, or discovers it has already been suspended, the officers of the corporation should act quickly to restore its good standing which may require the assistance of both a corporate attorney and an accountant, or tax preparer. At Sutter Law we focus on Business law and practice throughout California from San Francisco California. For a free consultation please contact us. If you find this post useful please share it on Facebook, Twitter, Etc.
