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18 • 2012

Why Is Completing Secretary of State Filings Important?

Business entities are generally required to file certain documents with state regulatory authorities on an annual or biennial basis. In California, for example, every corporation must annually file with the Secretary of State, along with a $25 fee, a “Statement of Information,” on a form prescribed by the Secretary, setting forth a variety of information, including the names and complete business or residence addresses of the company’s directors and principal officers. See Cal. Corp. Code § 1502.  Filing each year might seem like nothing more than a small nuisance given the nominal fee. But the consequences of not keeping up with the filings can be quite substantial.

Upon a corporation’s failure to file the statement of information, the Secretary provides a notice of delinquency to the corporation. Cal. Corp. Code § 2204(a). If the statement is not filed within 60 days of such notice, the Secretary of State certifies the name of the corporation to the Franchise Tax Board. Id. The Franchise Tax Board, the state agency responsible for processing corporate returns and collecting the annual franchise tax, then assesses a $250 penalty against the corporation. Cal. Corp. Code § 2204(b); Cal. Rev. & Tax. Code §19141. If a penalty is assessed and the corporation has not filed a statement of information during the preceding 24 months, then, after a 60-day notice period, the “corporate powers, rights, and privileges of the corporation” are suspended. Cal. Corp. Code § 2205. In addition, if the $250 penalty, which is collected just like any other tax, interest, or penalty owed to the Franchise Tax Board, is not paid before the last day of the 11th month following the date the penalty was imposed, then the corporation’s powers, rights, and privileges may be suspended. See Cal. Rev. & Tax. Code §19141, 23301(c).

A corporation suspended under the Corporation Code or the Revenue and Taxation Code is not allowed to exercise any of the powers and privileges of a corporation in good standing, including the right to sue or defend a lawsuit. See, e.g., Performance Plastering v. Richmond Am. Homes of Cal., Inc., 153 Cal. App. 4th 659, 668, 63 Cal. Rptr. 537, 545 (3d Dist. 2007) (Revenue and Taxation Code); Palm Valley Homeowners Ass’n v. Design MTC, 85 Cal. App. 4th 553, 560, 102 Cal. Rptr. 2d 350, 354-55 (4th Dist. 2000) (review denied) (Corporation Code). In fact, a suspended corporation may not transact business “of any kind.” Leasequip, Inc. v. Dapeer, 103 Cal. App. 4th 394, 403, 126 Cal. Rptr. 2d 782, 789 (2d Dist. 2002) (review denied); see also Cal. Rev. & Tax. Code § 23302(d) (a suspended corporation cannot sell, transfer, or exchange real property during the period of its suspension). Moreover, any contract made by a corporation suspended under the Revenue and Taxation Code is voidable by the other party to the contract. See Cal. Rev. & Tax. Code § 23304.1(a); Performance Plastering v. Richmond Am. Homes of Cal., Inc., 153 Cal. App. 4th 659, 669, 63 Cal. Rptr. 537, 545 (3d Dist. 2007). It is even a criminal offense, punishable by a fine of between $250 and $1,000, or by a prison term not exceeding one year, or both, for any person to attempt to exercise the powers, rights, and privileges of a corporation suspended under the Revenue and Taxation Code. See Cal. Rev. & Tax. Code § 19719(a). Although a suspended corporation can seek relief from the voidability of its contracts by filing an application for such relief with the Franchise Tax Board and paying all unpaid tax, penalties, and interest, together with an additional penalty assessed by the Franchise Tax Board, see id. § 23305.1, the statute of limitations on any causes of action belonging to the corporation is not tolled during the period of its suspension, see Leasequip, Inc. v. Dapeer, 103 Cal. App. 4th 394, 403, 126 Cal. Rptr. 2d 782, 788 (2d Dist. 2002) (review denied) (if the statute of limitations runs out prior to revival of a corporation’s powers, the corporation’s actions are time-barred even if the complaint would otherwise have been timely). In sum, there are substantial legal consequences that may result if a corporation does not keep up with its Secretary of State filings.

And there are practical consequences as well. Even if the corporation is not suspended, parties to a proposed transaction will not close the deal if the corporation has not made all of its required filings and is not in good standing. It will, at least, be an enormous headache to obtain a costly legal solution to the problem at the last minute, and, if it cannot be resolved in time, the deal may even fall through permanently. Add to that the stigma of being perceived as doing business in a lax fashion by not making filings that are a matter of public record for all to see, and the corporation’s hard-earned reputation may take an unwanted hit. (For more on the practical consequences of not completing necessary filings in a timely fashion, see Risky Business: What You Need to Know About Corporate Compliance. These are risks that are not worth taking when it is a relatively simple matter to institute a corporate compliance program to insure that all Secretary of State filings are timely made.