Reasons for Suspension. Associations can either be incorporated or unincorporated. If they are incorporated, their corporate status can be suspended by the the state of California if they fail to perform certain acts as described below. They do not cease to be an association but, instead, are penalized by the state (as described below) so as to encourage them to comply with state requirements. Associations can have their corporate status suspended for the following reasons:
- Failure to file tax returns (Rev. & Tax Code §23301).
- Failure to pay taxes (Rev. & Tax Code §§23301.5, §23775).
- Failure to file a "Statement by Domestic Nonprofit Corporation" with the Secretary of State. (Corp. Code §2205.)
- Failure to file a "Statement by Common Interest Association" with the Secretary of State. (Corp. Code §2205.)
Determine Corporate Status. Associations can check their corporate status by typing in their name in the Secretary of State's website. To find out why an association has been suspended, contact the Secretary of State's office and the Franchise Tax Board:
|Secretary of State
1500 11th Street
Sacramento, CA 95814
|Franchise Tax Board
PO Box 942840
Sacramento, CA 94240
Consequences of Suspension. Suspension of an association's corporate status means the association:
- Corporate Name. Could lose its corporate name if someone reserves their name during the suspension period;
- Litigation. Cannot initiate lawsuits or defend itself against lawsuits. Attorneys who engage in litigation for an association knowing it has been suspended can be sanctioned by the courts (Palm Valley HOA v. Design MTC.);
- Contracts. Loses the right to enforce contracts (any contract executed by a suspended association is voidable at the demand of the other party; Rev. & Tax Code §23304.5). ; and
- Tax Returns. Loses the right to get an extension to file tax returns.
See: Timberline, Inc. v. Jaisinghani (1997) 54 Cal.App.4th 1361.
Insurance Defense. Moreover, the association's insurance company cannot appear, answer or defend the association in litigation if the association's corporate status has been suspended. However, it could intervene in the case, becoming a party in its own name. Kaufman & Broad Communities, Inc. v. Performance Plastering, Inc. (2006) 136 Cal. App. 4th 212. While the association is reviving its corporate status, it can seek a stay of litigation proceedings. U.S. v. 2.61 Acres of Land (9th Cir. 1985), 791 F.2d 666, 672; Color-Vue v. Abrams (1996), 44 Cal.App.4th 1599, 1606.
Reviving Suspended Corporation. If your association's corporate status has been suspended for tax reasons, it can be revived by filing appropriate tax returns and paying delinquent tax balances, including penalties, fees, and interest. If the suspension is for failure to file Statements of Information with the Secretary of State, immediately filing the forms and paying any fees and penalties will revive the corporation. The state will issue a "Notice of Revivor" once the matter has been resolved.
- Duty to Pay Bills. Being suspended does not mean an association is relieved of its obligations. Even though suspended, boards should continue to make repairs and pay bills while the association goes through the revivor process.
- Additional Taxes. In 2013 the Franchise Tax Board (FTB) began revoking the exempt status of a corporation once the entity is suspended. If the revocation occurs for a past tax year the FTB will impose the annual minimum tax of $800 per year plus penalties and interest. To revive the entity, the association must file a new exemption application (Form FTB3500) with the Exempt Organization Unit of the FTB. The application which used to be five pages is now twenty-five pages. Along with the application you must file a copy of the endorsed articles of incorporation, executed bylaws, recorded CC&Rs and it requires five years of HOA financial information.
- Loss of Name. If an association loses its corporate name while suspended, it can no longer simply file a form with a new name. The Secretary of State now requires membership approval. That means further delays and additional expenses holding an election before the corporation can be revived.
Dissolution of Corporation. If an association fails to revive its corporate status, the Secretary of State can administratively dissolve any corporation that has been suspended for at least 48 months. (Corporations Code §§5008.9, 6610.5, 8610.5, and 9680.5; Revenue & Taxation Code §23156.) Dissolution could have a significant financial impact on an association because the cost to reincorporate is much greater than a revivor.
Recommendation: Boards should immediately check their corporate status with the Secretary of State and, if needed, promptly take appropriate action. Finally, all associations should annually file tax returns and should also set up recurring calendar events for filing annual and biennial Statements of Information so as to avoid losing their corporate status.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.