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 entity operates.
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 , 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.