By Susan S. King
Too many California business owners and nonprofit operators are unaware of the devastating effects of being suspended by the Secretary of State (SOS) or the Franchise Tax Board (FTB). Many continue to operate for years without realizing their suspended or disqualified status until it becomes an unexpected roadblock at the most opportune time – perhaps while applying for a new business loan, reaching the end of a months-long negotiation process with a big client, or duking it out in court a lawsuit by or against the business.
Suspended business entities lose their rights, powers, and privileges to conduct business in California. Those “rights, powers and privileges” include the ability to enter into contracts, to bring or defend against a lawsuit, and to maintain its own name. That’s right; while your business entity is suspended, someone else can form a new entity with the exact same business name as yours and effectively block you from reviving your entity under the name that you may have used for years. Or you could suddenly find yourself unable to defend against a lawsuit and become subject to a default judgment. A nonprofit organization’s tax-exempt status under California law is automatically revoked as of the date of suspension.
What if you’ve been unknowingly entering into contracts while in suspended status? All contracts entered into during the period of disqualification are voidable by the other party and remain voidable and unenforceable unless the suspended business entity applies for and purchases Relief from Contract Voidability from the FTB – at a hefty penalty of $100 per day.
Suspension by the FTB occurs when business entities fail to file a return or pay taxes, penalties, fees, or interest. Suspension by the SOS occurs when business entities fail to file certain required information in a timely manner, either annually or biennially. “Reviving” suspended entities is generally accomplished by filing any past due reports or returns and paying any due taxes, penalties, fees, and interest.
Knowing the dire consequences of suspension in California is only half the battle. Keep vigilant against common pitfalls and avoid a suspension altogether with an accountant to assist with tax preparation and filing and with Young, Cohen, & Durrett LLP to assist with corporate maintenance.