Suspension of a California Nonprofit
A surprisingly large number of nonprofits incorporated in California have had their corporate status suspended. This article looks at why a nonprofit corporation may be suspended, what it means to be in suspended status and what a suspended nonprofit corporation can do to return to good standing.
Why was my nonprofit corporation suspended?
A nonprofit corporation can have its powers, rights and privileges in California suspended in two ways: (1) by the Secretary of State for failure to file the required Statement of Information; and/or (2) by the Franchise Tax Board for failure to file a tax return and/or failure to pay taxes, penalties or interest.
The California Secretary of State (SOS) requires every domestic nonprofit corporation to file a Statement of Information (SI-100) within 90 days after filing its Articles of Incorporation, and biennially thereafter. It is required to file this Statement regardless of whether it is actively engaged in activities at the time the Statement is due. The filing fee is $20 and the form is available here. The Secretary of State also applies a $50 penalty for failure to file the SI-100, regardless of whether the nonprofit is tax exempt.
The California Secretary of State will send a Notice of Pending Suspension/Forfeiture if your nonprofit corporation is at risk of suspension due to failure to file the SI-100. To avoid suspension, the corporation needs to ensure that a current SI-100 is received and filed by the California Secretary of State no later than 60 days from the date that appears on the Notice.
The California Franchise Tax Board (FTB) has the power to suspend the rights, powers and privileges of a nonprofit corporation if it fails to file a tax return or fails to pay applicable taxes, interest, penalties and fees. Like the Secretary of State, the FTB is required first to send a notice of potential suspension (FTB 4974BC M) and if the corporation does not comply within 60 days, the FTB sends a final notice (FTB 2520BC M). If the corporation still does not comply, the FTB will suspend corporate status.
It is not uncommon that a California nonprofit corporation will fail to apply for and/or receive tax exempt status at the state level, or else have their California tax exempt status revoked, and be subject to California franchise tax of a minimum $800 per year. Many nonprofit corporations, unaware of the California minimum franchise tax or of their lack of tax exempt status, will fail to pay the tax and then have their corporate status suspended.
What effect does suspension have on my nonprofit corporation?
A suspended corporation loses its powers, rights and privileges as a California corporation. According to the Franchise Tax Board, this means that it cannot legally transact business, enforce contracts, bring an action or defend itself in court, be granted an extension of time to file, file a claim for refund or amended return, file or maintain an appeal before the Board of Equalization, begin or continue to protest an assessment, sell, transfer, or exchange real property or keep their exclusive rights to the entity’s name. It cannot borrow money, although it can receive money. In addition, contracts made by a suspended corporation may be voidable.
During the period of suspension, the corporation does have the capacity apply for revivor (the process to bring the corporation out of suspension), pay any tax balance due, file delinquent returns, apply for exempt status, amend their Articles of Incorporation to change their name or perfect their exempt application.
How does my corporation get out from under suspension?
Secretary of State (SOS) Suspension: If the sole reason for suspension is failure to file the Statement of Information (SI-100), the Secretary of State can revive the corporation after it files a current SI-100 with the Statement of Information Unit. More information is available here.
Franchise Tax Board (FTB) Suspension: The FTB recommends that you send Form 3557E, Application for Certificate of Revivor, to the Exempt Organizations Unit. The FTB will send back compliance information which will generally require payment of delinquent taxes, fees and penalties and filing of tax returns. Once the entity is in compliance, the FTB will send an Entity Status Letter that indicates your entity is now in good standing.
If the reason for suspension is failure to pay the minimum franchise tax due to the lack of California tax exempt status, and you believe that your nonprofit corporation qualifies for tax exemption, you may be able to file both the application for revivor (Form 3557E) and the application for tax exemption (Form 3500 or 3500A) at the same time. Again if this is a possibility, it is important to consult with an attorney to assist in the process.
Suspension by both SOS and FTB: The corporation should first comply with the Secretary of State requirements by filing a current Statement of Information and obtain an SOS proposed relief letter before applying for revivor with the FTB.
How do I know if my nonprofit corporation is in suspension?
The California Secretary of State maintains a database including nonprofit corporations at http://kepler.sos.ca.gov/cbs.aspx. The record for a corporation in this database should indicate whether it is active, suspended or dissolved. Additional information can be obtained by requesting a status report through filing the Business Entities Records Order Form with the Business Programs Division.