Posted in Corporate Law
Under California law a corporation can “die” after it outlives its usefulness. There’s a procedure to wind down and dissolve the entity. A corporation can also be suspended if the corporate owners fail to keep up the formalities or file taxes to keep the entity legally viable.
If that happens the corporation is suspended by the Franchise Tax Board (FTB) and it can’t legally conduct business. The Secretary of State (SOS) may also suspend a corporation for failure to reimburse the Victims of Corporate Fraud Compensation Fund for a paid claim or failure to file the annual Statement of Information.
Suspension means the corporation loses its rights to its name. In California it’s also a crime (a misdemeanor) for someone to transact, or try to transact, business through a suspended corporation. Contracts involving a suspended corporation can be voided and it can’t sue or defend itself against lawsuits. If a suspended corporation loses those rights but if it enters into a contract while it’s suspended, the business cannot enforce that contract unless it gets relief from contract voidability.
What happens if the suspended corporation gets a check? If it’s large enough to be worthwhile in order to cash it you need to reinstate the corporation and breathe legal life back into it. This requires,
- Payment of unpaid taxes, applicable penalties, fees and interest, and
- Filing of delinquent returns and an Application for Certificate of Revivor to the FTB.
Along with this certificate the corporation can also request relief from contract voidability. To get this the FTB may assess a daily penalty of $100 for each day of the time frame for which relief is granted. This can’t be more than the total amount of tax owed for the time frame requested so this normally means you’ll be paying twice the tax you owe.
If your corporation was also suspended by the SOS, file the missing Statement of Information form and get a letter of proposed relief from suspension or forfeiture. Once you have received that letter, you should submit a copy to the FTB with an Application for Certificate of Revivor.
If your corporation is suspended and another party reserves its name or another entity is using the name during the suspension, you must change your corporation’s name, obtain a release of name reservation from the party who reserved it, get written approval to use the name or convince the other entity (offering money might help) to change its name. If you need to change your corporation’s name you can file the appropriate document or form with the SOS.
The fact your corporation was suspended could mean you genuinely no longer want to use it but failed to go through the process to wind it down, you actually want the corporation but you failed to do what’s necessary, you were indifferent, sloppy or lazy. Many people start businesses, are excited about their prospects, do the paperwork themselves and are ignorant of ongoing obligations or just can’t be bothered.
The fact their corporation has been suspended may become an issue if they learn another entity is using their name or they want to sue someone, or have been sued by another party, but learn the corporation has lost its rights to be involved in litigation.
Running a business takes a lot of time and energy, but without keeping on top of corporate formalities you lose the benefits you sought when you incorporated. If you have any questions about corporate law or need representation in a legal dispute concerning your corporation, contact our office so we can talk about the issue, how the law may apply and what you can do to protect your legal rights.