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Suspended or Forfeited Corporations

Many startups, entrepreneurs, and business owners will consider registering a corporation instead of remaining a partnership or a limited liability company. To become incorporated, an incorporator must file the company’s articles of incorporation with the state of choice, which provides information including the company’s official name. However, the status of being a corporation under California is not guaranteed to last indefinitely unless all the requirements are met. The lack of compliance may lead to the corporation being suspended or forfeited.

What is a suspended corporation?

A suspended or forfeited corporation does not stop being an association, but it loses all the rights and privileges of a corporation and cannot legally act as a corporation while suspended. The Secretary of State’s office or the Franchise Tax Board, which have the authority to suspend a corporation, use this power to sanction a company. Suspension occurs when the company fails to file its tax return under Revenue & Taxation Code § 23301, fails to pay taxes, or fails to file its “Statement by Domestic Nonprofit Corporation” or “Statement by Common Interest Association.”   The inconveniences of filing these documents or paying taxes are greatly outweighed by the consequences of not filing or paying what is required.

What are the repercussions for becoming a suspended corporation?

The repercussions of a corporation being suspended are significant. When a corporation is suspended, it loses its privileges and status. This includes the company losing its ability to enforce any of its contracts or getting an extension to file tax returns. The most substantial repercussions are that the suspended corporation can no longer file a lawsuit or defend itself against a lawsuit and it cannot be represented by its insurance company in any form of litigation. Additionally, it can lose its name should another company file under the same with the Secretary of State while the corporation is suspended, which means that the company would have to change its name in order to become incorporated again. These repercussions can cause the company to no longer continue business and the directors to become vulnerable because they are no longer protected by the corporation’s limited liability protection.

How do you revive the corporation?

In order for the company to revive its status as a corporation it has to file documents it failed to file and/or pay pending taxes or penalties.  An application then needs to be filed for a Certificate of Revivor with the Franchise Tax Board.  The Secretary of State has to re-approve the corporation’s name in case a new corporation took its name during the suspension. The name approval must happen before the Franchise Tax Board issues the Certificate of Revivor. Only then can the company try to salvage voided contracts and defend itself against pending litigation.

At our law firm, we assist clients in legal issues related to business and corporations. You may contact us in order to setup an initial consultation.