California limited liability companies (LLCs) and California corporations are creatures of statute, and their failure to comply with statutory requirements can lead to their rights, powers, and privileges being suspended by the state.
Annual Report to Secretary of State
Each California LLC and each California corporation must file an annual statement of information with the California Secretary of State. In the case of an LLC, the annual statement includes the business address of the LLC, the names and addresses of the managers, the agent for service of process, and the LLC’s line of business. In the case of a corporation, the annual statement includes the business address of the corporation, the names and addresses of the directors and principal officers, the agent for service of process, and the corporation’s line of business. Concurrently with the filing of the annual statement, the entity must tender payment of the annual filing fee. If the fee is not tendered (or if the check bounces), the statement is not filed.
If a California LLC or California corporation fails to file the annual statement in a timely fashion, a $250 penalty can be imposed. The Secretary of State will usually send a notice to the entity’s mailing address on file with the Secretary of State advising of the failure to file, but the failure of the Secretary of State to send the notice (or the failure of the entity to receive the notice at the right address) has no effect on the penalty. For example, if a corporation moves from San Jose to Sunnyvale and does not update its mailing address with the Secretary of State, it may not receive any notice from the Secretary of State. In that case, it won’t be excused from paying the penalty if one is due. It is the responsibility of the entity to keep track of when its annual report is due and to file it whether or not it receives a notice.
If the entity continues to be delinquent in filing, the Secretary of State will send a notice advising that the entity will be suspended and giving 60 days to cure the delinquency. If the delinquency is not cured, the rights, powers, and privileges of the entity will be suspended.
Richard Burt offers the service of calendaring, preparing, and filing annual statements for clients who choose it. In the case of a corporation, this service is typically coupled with preparation of basic annual minutes, which satisfies corporate law requirements and can reduce the prospect of a shareholder becoming personally liable for the obligations of the corporation. If you have a California LLC or a California corporation, call or email Mr. Burt for professional assistance in the annual maintenance that such an entity requires.
Failure to File Tax Returns or Pay Taxes
Suspension of the rights, powers, and privileges of an LLC or of a corporation can also occur as a result of a failure of the LLC or the corporation to file tax returns or to pay taxes and, if applicable, penalties, fees, and interest.
Although an LLC is a pass-through entity and does not pay income tax, it must pay a minimum tax of $800 per year and file a California tax return, even if it is a single-member LLC that is a “disregarded entity” for income tax purposes. An S corporation must also pay taxes to California and file a California tax return even though it normally pays no federal income tax.
If a California LLC or corporation has its rights, powers, and privileges suspended by the state, the entity loses the power to conduct its business, it cannot sue in court to enforce contracts, and the parties operating the business run a substantial risk of being held personally liable for the obligations of the business.
Moreover, the Franchise Tax Board (“FTB”) is required to impose a penalty of $2,000 per taxable year whenever a California LLC or corporation fails to file a tax return within 60 days after the FTB sends the taxpayer a notice and demand to file the required tax return. The penalty can be abated if the failure is due to reasonable cause and not willful neglect.
Thus, the consequences of suspension are significant and should be avoided by complying with the legal requirements.
The suspension can be lifted, restoring the powers of the entity to conduct its business and restoring its right to sue to enforce contracts (and, not so incidentally, mitigating the risk of the parties operating the business being held personally liable for the obligations of the business). The lifting of the suspension is through a process (inaptly) called “revivor.” All state taxes, penalties, and interest owing will have to be paid to obtain a revivor.
Richard Burt has experience in helping business entities lift their suspensions and obtain certificates of revivor. If you have a California LLC or corporation that has been suspended, call or email Mr. Burt for professional assistance in obtaining a certificate of revivor.
Abandonment vs. Dissolution of the Entity
If the business of the LLC or corporation has been wound up, it is advisable to file for dissolution as soon as possible. There are a number of advantages to dissolving formally. The most immediate advantage is that the obligation to file annual statements and tax returns ends! Ignoring the statutory requirements and letting the state suspend the LLC or corporation (sometimes referred to as the “poor man’s dissolution”) is a bad idea. The president of the corporation has a statutory obligation to see that the tax returns of a corporation are filed, and failure to do so can personally expose the president to a penalty of $5,000 per year. Furthermore, the failure to dissolve formally can have consequences not intended or foreseen at the time the entity is abandoned.
Richard Burt has experience in helping business entities wind up and dissolve. If you have a California LLC or corporation that has gone out of business or is about to do so, call or email Mr. Burt for professional assistance in dissolving the entity and minimizing the exposure of personal assets to the claims of creditors of the LLC or corporation.
For answers to your questions about suspension of corporate powers in California, contact Richard G. Burt, Attorney and Counselor at Law.