The California Franchise Tax Board (FTB) has recently announced that a report of the tax status of a business entity (limited liability company (LLC) or corporation) can be obtained online from the FTB for free. The report is officially referred to as an “entity status letter” (and is sometimes referred to as a “good standing certificate”).
An entity status letter discloses whether or not a business entity is in good standing with the FTB. Some of the principal uses of an entity status letter are to assure a lender to a company that the company is not delinquent on its taxes and to assure the buyer of a business (whether the transaction is structured as a merger, sales of assets, or sale of stock) that the company is not delinquent on its taxes. Knowing the tax status of the entity is important for these kinds of transactions because a corporation or LLC that does not file required tax returns and pay its taxes can have its powers suspended or forfeited by the Franchise Tax Board, which can affect the likelihood of repayment of a loan or the value of a business.
When a business entity such as a corporation or LLC transacts business in another state, it must typically “qualify” to do business in that state by registering with the secretary of state of that state, and the other state will often require proof that the business entity is in good standing in its home state.
The entity status letter will state whether or not the entity is in good standing with the Franchise Tax Board as of the date of the letter. Good standing with the FTB does not necessarily reflect the entity’s status with any other agency of the State of California, or with any other government, and the entity status letter will so state.
The entity status letter should not be confused with the certificate of status issued by the California Secretary of State. The certificate of status is also referred to as a “good standing certificate” (and in some states, there is only one good standing certificate, which is issued by the secretary of state of that state). The certificate of status issued by the California Secretary of State sets forth the entity name, the date of formation, and the status (such as active or suspended). If the corporate status is active, the words “good standing” appear parenthetically after the word “active” in the certificate. A certificate of status may be issued for either domestic (California) corporations or foreign corporations that have qualified to do business in California, and it indicates the jurisdiction of formation.
A corporation or LLC that does not file the annual statement of information can have its powers suspended or forfeited by the Secretary of State, even though it is in good standing with the FTB, though the suspension by the Secretary of State is usually easily remedied, and the monetary penalty is usually modest.
The status of a corporation or LLC with the Secretary of State can be checked online for free, and currently, the online records are updated weekly. A certificate of status may be obtained for a $4 fee by writing to the Secretary of State or by submitting a request in person at the Secretary of State’s office in Sacramento.
In some cases, a business entity’s powers may have been previously suspended or forfeited and then revived. Or the business entity may have been formed in another state and may have previously done business in California at a time when it was not qualified (registered) to do business in California. Neither the entity status letter nor the certificate of status will reflect those possibilities, and neither one of those documents will have any bearing on the status or voidability of any contracts made in California by the entity at a time when the entity’s powers were suspended or the entity was not qualified to do business.