Why does the “active” status of a California corporation get suspended, and how is this avoided?

The right to conduct business as a corporation in California is considered a privilege which can be forfeited or suspended. When the State of California suspends a California corporation’s “active” status it is more often than not because either:

• The corporation failed to file its Annual Information Statement with the California Secretary of State; and/or
• The corporation failed to pay its $800 annual minimum franchise tax to the California Franchise Tax Board.

Once suspended, a California corporation is adversely affected in several ways:

• The corporation loses the right to conduct its business in California. During the suspension, another company could register using the suspended corporation’s name, and as far as the California Secretary of State is concerned, that name will then belong to the other business;
• The corporation cannot initiate lawsuits, defend lawsuits or enforce legal contracts until the suspension is cured; and,
• The corporation loses the rights, power and privilege to conduct business in California. This means, among other items, if a corporation enters into contracts while suspended, it cannot enforce those contracts – even after it revives its status – unless it also applies for and obtains from the Franchise Tax Board, under Revenue & Tax Code Section 23305.1 relief from contract voidability.

The good news is that the mechanics for compliance with the obligations to file Annual Information Statements and pay the minimum franchise tax are straight forward. A designated officer calendars the obligations as recurring annual events with reminders on his or her and at least one other person’s, business calendar (Outlook, Google Calendar, etc.), and then each year consults the filing guidance on the California Secretary of State and Franchise Tax Board websites to make a timely filing. State filing guidance is summarized below.

Filing Annual “Statement of Information” with California Secretary of State.

A domestic (California) corporation must annually file with the California Secretary of State a Statement of Information on form SI-200 and pay the $25 filing fee. The form may accessed and completed on line and paid by credit card at https://businessfilings.sos.ca.gov/. At this URL, type the corporation’s Corporate Number where requested and “submit”. (The corporation’s number can be found stamped at the top of the corporation’s first filed Articles of Incorporation.) In the middle left of the next page that loads hit the tab “continue filing.” The Statement of Information will load and can be completed online.

If there are no changes since the last filing, check the appropriate box and follow the prompts to electronically sign and pay by credit card. If this is the first filing, or there have been changes to the members of the Board of Directors or to the office holder of the offices of President/CEO, Treasurer/CFO or Secretary, or a change in the corporation’s designated agent for service of process, complete the form in full before electronically signing and paying. The address of the officers and directors will be the corporate headquarters address in most cases. 

When is the Statement of Information due?

The form is initially due within 90 days after the California corporation first files its initial Articles of Incorporation, and annually thereafter. After the first year one must refile before the last day of the calendar month in which the corporation first filed its Articles of Incorporation. This filing can be done up to six months in advance, that is, during the final month or any of the preceding five months.

For example, if the corporation filed its Articles of Incorporation on January 2, 2014, its first Statement of Information becomes due by April 1, 2014, and, annually thereafter, by January 31 of each successive year. The earliest this hypothetical corporation could file for each successive year would be any time from August 1 of the preceding year (that is, either from August 1, 2014 through January 31, 2015 for statement due January 31, 2015).

A corporation is required to file this statement even though it may not be actively engaged in business at the time the statement is due. Filing late requires payment of a $250 penalty in addition to the $25 fee. 

Paying the Minimum California Franchise Tax.

The minimum Franchise tax in California is the amount a corporation must pay the first quarter of each taxable year, whether the corporation is active, operates at a loss, or does not do business. The current minimum tax is $800. 

For a new California corporation that incorporate with the Secretary of State during its first taxable year, the $800 minimum franchise tax does not apply and its franchise tax is measured based on its net income for the year and remains subject to estimate requirements. For subsequent years, the minimum tax is $800 – regardless of whether the corporation is doing business or has any income.

Beginning with its second annual tax year in California, the corporation needs to pay the minimum $800 franchise tax as of its first quarterly estimated tax deadline, to avoid owing an estimated tax penalty or having its corporate status suspended, even if the corporation is likely to be unprofitable for the year, The $800, or such larger estimated installment as applicable, is submitted on California 100-ES, due on or before the 15th day of the 4th month after the close of the corporation’s prior taxable year (April 15 for a corporation with a calendar fiscal year). Form 100-ES can be obtained at:https://www.ftb.ca.gov/forms/2013/13_100es.pdf.

By way of example, if a California corporation’s first tax year ends on December 31, 2014, even if it anticipates operating at a loss during 2015, it must pay the minimum $800 franchise as its first quarterly estimated tax installment of its second taxable year, submitting payment with a completed form California 100-ES by April 15, 2015.

Authored by Andrew (Drew) Piunti, drew@dpalawyers.com, ©2015