By: Tamara Pow
I was recently training a new attorney at my law firm. We were discussing some of the things to look for when reviewing a commercial real estate lease or any business contract where one or more of the parties is an entity. I reminded him to start with the basics – always check the name of the landlord and the name of the tenant to make sure they are correct, and go online to the California Secretary of State website to confirm that both companies are active (not suspended or canceled). If the entity is from another state, also check the website for the Secretary of State in its state of formation. This is important for several reasons, and provides us with additional information for our client. On occasion we discover that one of the parties is not an active business entity, or is not registered in California, or the LLC name is not accurate, which gives us information about the professionalism of the other party and provides us with valuable information to assist our client.
A California limited liability company (“LLC”) can be suspended by either the California Secretary of State or the Franchise Tax Board. The Secretary of State could suspend and eventually cancel the entity for failure to file necessary forms such as the biennial Statement of Information. The Franchise Tax Board can suspend (or for a foreign LLC, forfeit) an LLC for failure to pay California taxes, penalties, interest or fees, or failure to file a tax return. So, if you are not current with your Statement of Information filings, or you have not paid or filed franchise taxes for the LLC (different than your personal income taxes), your LLC is in danger of being suspended or even cancelled.
Here are some of the issues a suspended or forfeited LLC faces:
- The LLC cannot legally transact business in California.
- The LLC cannot enforce contracts or defend a lawsuit.
- The LLC has limited tax rights regarding filing extensions, requesting refunds, filing amended returns or appeals and protests.
- The LLC will not be able to transfer title to real property.
- The LLC can lose its rights to its name – someone else can form an LLC using that name despite the existence of your suspended LLC of the same name.
Suspension does not happen quickly. The LLC’s member or manager should receive two notices before the suspension or forfeiture takes place assuming the address on file for the LLC is up to date, which may not be the case if the LLC has not filed a Statement of Information recently. In order to avoid the suspension, the LLC will need to file all tax returns and pay all amounts due, and file any required Secretary of State forms.
Tamara B. Pow is a founding partner at Strategy Law, LLP in downtown San Jose, California. She has been practicing LLC, partnership and real estate law in the Silicon Valley for 20 years. Tamara has seen firsthand the complications that arise in real estate and business deals when an entity is suspended by the Secretary of State, and understands that it costs a lot more to fix the problem than to prevent it.
The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.