Mr. I. N. Corporate and Ms. Elle L. Cee decide to form a business entity
in the State of California and their operations are going smoothly. Suddenly,
they hit a snag when they receive a notice that their business entity
(e.g., corporation or limited liability company) has been deemed “SOS/FTB
SUSPENDED” or “FTB SUSPENDED.” They scratch their heads
and wonder, what does that mean? Of course, this contemplates a hypothetical
scenario. However, it is a situation that occurs all too frequently.
A “SOS/FTB Suspended” designation essentially means that the
business entity has been suspended by the California Secretary of State.
The reasons for this suspension can vary and might include a failure to
file certain documents (e.g., a Statement of Information with the California
Secretary of State—more on that below) or a failure to meet certain
tax requirements, including the failure to file tax returns or important
exemption papers, pay taxes, penalties and/interest when due. Such failure
might be the result of a simple oversight. This article is not meant to
analyze the various reasons why such a failure might occur or to analyze
the various tax rules and regulations in place; as those issues are beyond
the purview of this article. Rather, this article is simply meant to warn
business owners of the potential consequences that might occur if such
a “SOS/FTB Suspended” status is leveled against their business
entity and corrective steps are not taken.
Most importantly, a “suspended” business entity loses many
of its powers, rights and privileges within the State of California. See
Rev. & Tax Code Sec. 23301. If the business entity is a tax-exempt
organization, e.g., a 501(c)(3), the California Franchise Tax Board (the
“FTB”) may also revoke such tax-exempt status. See Rev. &
Tax Code Sec. 23772, 23775, 23777. This is especially true if the business
entity fails to meet its tax requirements (as noted above). After a certain
period of delinquency, the business entity might receive the “SOS/FTB
SUSPENDED” designation on the California Secretary of State’s
business entity directory, which can be found online (https://businesssearch.sos.ca.gov/).
The consequences of this suspended status can include, without limitation,
the business entity being unable to sell, transfer or exchange real property
in California, as well as risking any contracts entered into by the business
entity during the time of suspension being voidable. See, e.g.,
Casiopea Bovet, LLC v. Chiang (2017) 12 Cal.App.5th 656, 662; City of San Diego v. San Diegans for Open
Government (2016) 3 Cal.App.5th 568, 577. Additionally, the suspended
business entity may lose its ability to prosecute or defend legal actions
(i.e., file or defend lawsuits). See
City of San Diego, supra, 3 Cal.App.5th at p. 577.
In other words, the suspended business entity becomes essentially prohibited
from legally operating within the State of California unless and until
such suspended status is withdrawn. Moreover, the lack of any functioning
legal entity, as a result of the suspension, could expose the suspended
business entity’s owners to
personal liability based on the debts, obligations and/or liabilities of the business
entity. Reason being, the “corporate veil” that normally protects
owners of limited liability entities (such as corporations and limited
liability companies or LLCs) from personal liability would be damaged
by the suspended status. As such, the consequences of this “SOS/FTB
Suspended” status could present dire consequences to the business
entity as well as its owners and operators.
Knowing this, Mr. I. N. Corporate and Ms. Elle L. Cee become fearful of
the potential consequences. They now want to know what they can do to
potentially fix this problem.
The first step toward rectifying this issue is to find out why the suspended
status has occurred. As noted above, this could be something as simple
as a failure to file a Statement of Information with the California Secretary
of State. As a quick primer, a Statement of Information is an informational
document that must be filed with the California Secretary of State within
90 days of registering the business entity in California and then every
year (if a corporation) or every two years (if an LLC) thereafter. A Statement
of Information is a relatively simple document that lists certain key
information about the business entity, i.e., the business address, list
of directors (if a corporation) or managers (if a limited liability company),
list of principal officers, and the type of business that the business
However, the “SOS/FTB SUSPENDED” status often turns on a potentially
more serious matter concerning the failure to meet tax requirements (as
noted above). These tax requirements might include the failure to pay
an annual FTB franchise fee of $800 plus any additional taxes, penalties
and/or interest that might be due to, for instance, the FTB. Obviously,
every taxpayer’s liabilities vary, and the taxpayer should consult
with experienced tax and/or legal counsel as it relates to such tax liability.
Be that as it may, a suspended business entity could be on the hook for
paying back taxes as well as fines and/or penalties that are due depending
on the nature of the suspended status.
The next step is to take corrective action if it is necessary and/or feasible
to do so. One method of taking corrective action is looking into “reviving”
the suspended business entity. This might include establishing a game
plan by figuring out why the suspended status occurred, how it can be
fixed (e.g., filing a Statement of Information and/or bringing the business
entity’s tax filings up to date), and how to avoid any unnecessary
liability in the interim. Hiring experienced legal and/or tax counsel
to advise on the best steps to remedy the issue is highly recommended.
Long story short, if Mr. I. N. Corporate and Ms. Elle L. Cee wish to continue
legally operating their business entity in the State of California, they
must note the following: DO NOT IGNORE an “SOS/FTB SUSPENDED”
status or otherwise fail to take corrective action against such suspension.
The alternative could be disastrous.
At Poole Shaffery & Koegle, LLP , we help numerous clients as it relates to
the formation and governance of their business entities in the State of
California. If you seek legal assistance as it relates to the maintenance
of your California business entity, please feel to call us.