Beaumont Tashjian Law Blog

Monday, January 4, 2021

Maintaining Your Association’s Corporate Status: What’s the Big Deal? By: Tara Radley, Esq.

The vast majority of community associations in California are incorporated. This means they have filed Articles of Incorporation with the Secretary of State (“SOS”) and function as corporations within the meaning of the California Corporations Code. It also means the association must take on-going action to maintain its corporate status.

In order to keep the association’s corporate status in good standing, various administrative tasks are required. If these tasks are not completed and/or fall off the radar of the association, the consequences may be significant. 

At the outset, the association’s Board of Directors must file a Statement of Information pursuant to the instructions on the California SOS website every year to two years, depending on the type of corporation. Associations must also file a Common Interest Development (“CID”) Statement, regardless of whether the corporation is a residential/mixed use association under the Davis-Stirling Act or a commercial project under the Commercial & Industrial CID Act. The requirement for filing CID Statements extends to unincorporated associations too, so be sure to check with your association’s managing agent to determine this is being done. (See Civ. Code §§ 5405(a), 6760(a).)

Completing and submitting the forms to the SOS is a straightforward process, but the failure to timely file can result in fines, as well as suspension of the association’s rights, privileges, powers and corporate status. The association may receive a reminder notice from the SOS, but it is ultimately the Board’s responsibility to comply with the filing requirements regardless of whether it receives that reminder.

The association’s corporate status may also be impacted by the failure to meet requirements of the California Franchise Tax Board (“FTB”). If an association fails to file tax returns, pay taxes, penalties or other sums owed, FTB has the power to suspend and, ultimately, terminate the association’s corporate status. FTB suspension can be more serious and, typically, more expensive and time consuming to correct than a SOS suspension for failure to file the Statement of Information. Note that an association can be SOS suspended for failure to file a Statement of Information and FTB suspended at the same time.

If your association becomes FTB suspended, contact the FTB right away to determine what is needed to revive the corporate status. This may require working with the association’s CPA and/or legal counsel to provide missing documentation, as well as the payment of fees/fines.  

When the association is suspended, it cannot do the following:

Legally conduct business
Sell or transfer real property
Bring a legal action or defend against a lawsuit (Palm Valley Homeowners Ass'n, Inc. v. Design MTC (2000) 85 Cal. App. 4th 553, 560)

Further, if the association enters into a contract while the association remains suspended, the other party may void the contract. (Rev. & Tax Code §23304.1(a).) Keep in mind that there may also be exposure to liability from the membership for breach of the governing documents, breach of fiduciary duty, negligence, Civil Code and Corporations Code violations and the like.  

A suspended association should avoid taking on new projects or entering into agreements with vendors, undertaking collections against delinquent homeowners or making other significant business decisions until the corporation is brought back into good standing.  Anyone, including an attorney, who “attempts or purports to exercise the powers, rights, and privileges of a corporation that has been suspended” may be punished by fine and/or imprisonment (Rev. & Tax § 19719).

If the association becomes FTB suspended, this does not mean that it ceases to exist. (Gibble v. Car-Lene Research, Inc. (1998) 67 Cal. App. 4th 295, 310.) Rather, the association, through its Board, is effectively limited to performing the functions necessary in order to revive the corporate status. An FTB suspended corporation can regain its corporate powers by filing all required tax returns, paying the necessary taxes, penalties or fees due, and applying to the FTB for a certificate of reviver. (Rev. & Tax. Code §23305)

In sum, it is a big deal if a corporation fails to maintain its corporate standing. Therefore, it is crucial for an association to adopt internal procedures to ensure that its managing agent or other designated representative timely performs the tasks necessary to maintain the association’s corporate status. (Anyone can check an association’s corporate status; simply go to the SOS website and search under “Business Entities.”) Most importantly, if, as a Board member or manager, you receive notice that your association is SOS and/or FTB suspended, do not delay in taking action to correct the underlying reason for the suspension; otherwise, the association risks exposure to legal liability and substantial impairment of its business functions.  

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