Your Association’s Suspension Of Corporate Status May Bite You!By Beth A. Grimm, Attorney (with help from Michael Gartzke, CPA)
I have been asked on many occasions in recent weeks to provide an attorney opinion letter so that homeowners’ associations can get a loan for reconstruction costs of various natures. As part of this process, my checklist includes checking with the Secretary of State to make sure that the association’s corporate status is “active” as opposed to “suspended”. If the association’s corporate status is “suspended”, this needs to be taking care of right away. The Corporation is not entitled to enter into a contract if it is not a valid, active (meaning state status) Corporation.
The response I am getting is not encouraging. In many cases, the association’s status is suspended, and I find that when I contact a managing agent, they are unaware. Most managing agents are on top of the filing of the statement required by the Department of Corporations for all corporations. This is called the “Statement By Domestic Nonprofit Mutual Benefit Corporation”. The requirement for this filing has been in place for many years. However, there is an additional filing that is required for incorporated homeowner associations. This is found at Civil Code Section 1363.6 (ASSISTANCE WITH IDENTIFICATION OF COMMON INTEREST DEVELOPMENTS, Etc.) That section requires filing of an extra form.
The Statute says: “To assist with the identification of common interest developments, each association, whether incorporated or unincorporated, shall submit to the Secretary of State, on a form and for a fee not to exceed thirty dollars ($30) that the Secretary of State shall prescribe, the following information concerning the association and the development that it manages:
A statement that the association is formed to manage a common interest development under the Davis-Stirling Common Interest Development Act.
The name of the association.
The street address of the association’s onsite office, or, if none, of the responsible officer or managing agent of the association.
The name, address, and either the daytime telephone number or e-mail address of the president of the association, other than the address, telephone number, or e-mail address of the association’s onsite office or managing agent of the association.
The name, street address, and daytime telephone number of the association’s managing agent, if any.
The county, and if in an incorporated area, the city in which the development is physically located. If the boundaries of the development are physically located in more than one county, each of the counties in which it is located.
If the development is in an unincorporated area, the city closest in proximity to the development.
The nine-digit ZIP Code, front street, and nearest cross street of the physical location of the development.
The type of common interest development, as defined in subdivision (c) of Section 1351, managed by the association.
The number of separate interests, as defined in subdivision (l) of Section 1351, in the development.”
And there are specific requirements about timing of this “registration form”. They are:
“By incorporated associations, within 90 days after the filing of its original articles of incorporation, and thereafter at the time the association files its biennial statement of principle principal business activity with the Secretary of State pursuant to Section 8210 of the Corporations Code [note this is the other required Statement mentioned above] ; and By unincorporated associations, in July of 2003, and in that same month biennially thereafter. Upon changing its status to that of a corporation, the association shall comply with the filing deadlines in paragraph (1).”
This is another requirement that is being overlooked: “The association shall notify the Secretary of State of any change in the street address of the association’s onsite office or of the responsible officer or managing agent of the association in the form and for a fee prescribed by the Secretary of State, within 60 days of the change.”
But here is the rub: The statute says “On and after January 1, 2006, the penalty for an incorporated association’s noncompliance with the initial or biennial filing requirements of this section shall be suspension of the association’s rights, privileges, and powers as a corporation and monetary penalties, to the same extent and in the same manner as suspension and monetary penalties imposed pursuant to Section 8810 of the Corporations Code.” So it would seem that Associations (those that are incorporated), have at least another half-year to get this form filed. However, associations are coming up with “suspended status” when the registration has not been filed. Thus, it is critical that managers and self managed Board of Directors get busy and get this registration form filed. Failure to do so could adversely affect the execution of any contract. Failure to do so could adversely affect the effort on the part of an association to amend its governing documents.
Associations that have followed up on this because of my warnings have told me that the Secretary of State office clerks claim the forms have been sent out to associations for the past few years. I suspect they may have this registration form confused with the former mentioned statement of business that is also required to be filed every two years. If not done already, it is time to pull the newer registration form from the Secretary of State’s website (www.ss.ca.gov) and GET IT FILED!
Now, what do you do if you find that your association’s corporate status is suspended? Rather than providing you with my summary from a legal standpoint, I think it more beneficial to hear from a CPA who has been involved in reviving corporate status in central California. If your association status is “suspended” this needs to be addressed. In some cases, if there is not a problem with the tax returns having been filed, the managing agent can take care of this, or a board member may take care of it in a self managed association. However, note that if it is not always just a matter of filing forms. Sometimes it requires a personal visit to the Secretary of State and/or a personal visit to the Franchise Tax Board to get someone’s attention (if you are anxious to get answers). Workers in either office can be frustrating. And satisfaction is not always achieved on the spot or overnight employees of those agencies are not required to answer your pleas immediately or go out of their way to help you.
Read on for the benefit of CPA Michael Gartzke’s “take” on corporate “revival” (and I am not talking about a sermon or a songfest). This is from an Article circulated a number of years ago, but deals with issues that are very timely.
IS YOUR ASSOCIATION’S CORPORATE STATUS SUSPENDED?
BY Michael Gartzke, CPA, Goleta, California
What Is suspension?
Why is this important?
How does suspension occur?
How do you find out?
How to return the association to active status?
Do you have to disclose?
What is suspension? Every corporation formed in California, whether a mutual benefit corporation such as a homeowners association, a professional corporation or a major corporation, is registered with the California Secretary of State’s office. Upon incorporation, the corporation is assigned a corporate number and is required to file a statement of information (officers) on a biennial basis with the Secretary of State and to file tax returns with the Franchise Tax Board and pay taxes as required. Failure to meet either of these corporate filing obligations can eventually lead to corporate suspension or revocation of powers by the California Secretary of State or the California Franchise Tax Board.
Some commentators have opined that 10% or more of California’s homeowners associations are suspended. Some of these associations may only exist on paper (i.e. articles were filed to establish the association but the project has never been built). With over 30,000 homeowners associations in California, that means that 3,000 to 4,000 associations may be suspended. [And note from Beth Grimm this Article was written before the separate Association registration became law so this number may now be higher.]
Why is this important? Under California Revenue and Taxation Code (R&TC;) Section 23304.1(a), “Every contract made in this state by a taxpayer during the time that the taxpayer’s corporate powers, rights and privileges are suspended or forfeited pursuant to Section 23301, 23301.5 or 23775 shall, subject to Section 23304.5, be voidable at the instance of any party to the contract other than the taxpayer.” Section 23304.5 requires that a lawsuit be brought by the other party in order for the contract to be voided. This could be problematic for a suspended association corporation with regard to any contract.
How does suspension occur? Listed below are several scenarios that have occurred in my practice that I believe are not unique but occur regularly:
Suspension soon after incorporation The association was incorporated by the developer’s attorney in 1983 and suspended in 1985 for failure to file tax returns or pay the minimum tax. This 5-unit association was built, had a bank account with the manager’s tax ID number. Mailing addresses had changed from the attorney to one or more of the owners to the manager over the years. Notices sent by the FTB may not have been received or returned to the FTB due to the change in address. The suspension was discovered when management changed in 1999.
Suspension due to failure to file Statement of Officers As noted in the first scenario, association mailing addresses can change frequently. If the association uses an officer’s mailing address or its management company’s address as its mailing address, there is a strong possibility that the mailing from the Secretary of State will not be forwarded to the correct address when officers or managing agents change. Follow-up notices, penalty notices and suspension notices will likewise not be forwarded. This was a problem when the statement was an annual filing. Now that the statement is filed every two years, nonfiling will probably increase, resulting in more suspensions. Filing forms and requirements can be found at the Secretary of State’s website www.ss.ca.gov. Missing one filing but making the follow-up filings does not “revive” the corporation. The penalty for failure to file the nonprofit statement of officers is $50 and is assessed through the Franchise Tax Board.
RECOMMENDATION The Statement of Officers can be amended at any time during the two-year filing period at no cost. This form could be revised at the same time that signature cards are changed to reflect new officers, corporate mailing address change or change in agent for service of process. A fill-in form is available on the Secretary of State’s website www.ss.ca.gov
Suspension for failure to file form 199 Association was suspended in 1987 because it had not filed a 199 form for 1986. 1986 was the last year that filing of the 199 was required of all nonprofit corporations regardless of revenues received. The $25,000 minimum filing requirement was effective in 1987. In order to revive, the association had to file a 1986 Form 199 (in 2001!). My 1986 forms book was in storage so a colleague came to the rescue. The association did not have a 1986 income statement so we used a 1987 one. (The FTB suggested that the form be filled in with “zeroes”)
Suspension for failure to file forms 100 and 199 and pay resulting penalties While this can happen due to the address, officer or management changes noted above, it can also happen due to the negligence of the financial managing agent.
There are companies in California that provide financial management to associations. Some are owned by tax and accounting professionals who hold themselves out as providing all the necessary financial statement and tax preparation services needed by an association. This scenario can be attractive to a small association board as it allows them to feel confident that these matters are being taken care of by a professional and that the board has nothing to worry about.
What happens when the tax returns are not filed. Demand notices and penalty notices are sent by the FTB. If no response is received, a series of letters threatening forfeiture of the corporation commence leading to the eventual suspension of the corporation.
I have seen a number of instances in recent years of the former financial manager providing 3-6 years worth of Federal and California income tax returns for filing by the association at the time of the changeover in financial management. I received two such calls in July alone from the concerned new managers who had just taken over associations from the same financial manager. The managers know that tax returns are due annually and the 1996 returns are now five years late. These associations are going to incur federal late filing penalties as well as late payment and interest charges on any taxes due. These associations have been suspended. Once these associations are revived, then they will have to go to small claims court if they want to take the time to recover the penalties and interest incurred as a result of the negligence of the former financial manager. This is not an isolated incident. Many notices have to be ignored and thrown away for a corporation to be suspended.
How do you find out if an association is suspended? Some information from the Statement of Officers filing is maintained on a database on the Secretary of State’s website www.ss.ca.gov. Access “business filings” through the California Business Portal from the Homepage. From there enter into “California Business Search”.
Enter the Corporation’s name or a portion of the name (even if you are not sure of the exact name) to obtain name matches and corporate information. If there are several corporations listed with like names, a “click” on the corporate name generated another report showing the corporation mailing address and the agent for service mailing address. It does not show when the corporation was suspended, just that it is suspended.
How do you return the association to active status? If your association is suspended, you need to get in touch with the Secretary of State and the Franchise Tax Board to determine what triggered the corporate suspension, and determine from communicating with them what is required.
Secretary of State – Officers@ss.ca.gov
1500 11th Street
Sacramento, CA 95814
My experience has been that you can get prompt email responses if you inquire why a corporation was suspended.
If the corporation was suspended by the Secretary of State simply because the Statement of Officers was not filed, you may revive the corporation by sending a letter to the Secretary of State along with the delinquent Statement of Officers and the payment of any fees or penalties imposed. The Secretary of State will send a “Notice of Revivor” to the association and notify the FTB. [Note from Beth Grimm: This applies with regard to the new registrations form as well, but you may not get an immediate reply.]
Franchise Tax Board
Phone – 800-852-5711
P. O. Box 942840
Sacramento, CA 94240-0000
My experience has been that speaking to one of the FTB Corporate telephone representatives has been fruitful in obtaining the information as to why the corporation was suspended.
The telephone representatives have information concerning why the FTB has suspended the corporation or whether the Secretary of State has suspended it. All required tax forms, tax payments, penalties and interest must be made under with the FTB Form 3557 “Application for Certificate of Revivor”.
If the association is small, with little or no taxable income, the process is fairly straightforward and should not be too costly. I did have an FTB representative contact me earlier this year regarding the filing of a Form 100 for an association that had less than $100 in nonmembership income in the year in question. The association is not required to file Form 100 when nonmembership income is less than $100 (See Form 100 instructions and Publication 1028 Guidelines for Homeowners Associations.) He wanted to know my authority. I cited the above FTB publications and never heard back from him.
Some associations, like the one cited in my first example, are suspended for failure to pay the minimum tax. This is because California tax-exempt status was not requested during incorporation. Form 3500 must be filed and approved by the Franchise Tax Board to obtain this status. It is not an automatic election like the IRS Section 528 election. A brief questionnaire regarding association activities must be completed and 4 years’ financial information and signed copies of the association’s governing documents much be provided with the application. Upon qualification, the FTB will refund up to 4 years’ minimum tax for associations that qualify. Most residential associations should have no trouble qualifying.
VI. Do we have to disclose the suspension? While the CIRA Guide does not provide any specific guidance, it is my opinion that an audited or reviewed financial statement should disclose suspended status in the notes to the financial statements. An association without corporate powers could have its financial situation severely impacted if it cannot collect its assessments or sue for damages incurred. This is a very significant disclosure.” [End of Michael Gartzke’s Article]
So you can see, it is important to make sure your Association corporate status is “active”. Why not check today, rather than waiting until you are in the middle of an important issue such as pursuing a rehabilitation loan, executing a multi-thousand or multi-million dollar contract, amending your governing documents, etc.?
By Beth A. Grimm, Attorney, Author, Speaker, Mediator, Expert Witness, CAI member and PR Chair of CLAC the legislative arm of CAI in Caliornia (with credit to Michael Gartzke, CPA, Goleta, and founder of the South Coast Homeowners Association group).