Most associations are incorporated as Nonprofit Mutual Benefit Corporations under the California Corporations Code. Though corporate status is not required, associations incorporate to avail themselves of certain legal protections afforded to corporations under California law. An association may have its corporate status suspended for a variety of reasons, including:
- 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.)
- Failure to file tax returns. (Rev. & Tax. Code § 23301.)
- Failure to pay taxes. (Rev. & Tax. Code § 23301.5, § 23775.)
Verification of Corporate Status
An association may verify its corporate status online via the Secretary of State’s website. If corporate status has been suspended, the association should contact the Franchise Tax Board as well as the Secretary of State’s office.
Impacts of Suspension
“…[E]xcept for filing an application for tax exempt status or amending the articles of incorporation to change the corporate name, a suspended corporation is disqualified from exercising any right, power or privilege.” (Timberline, Inc. v. Jaisinghani (1997) 54 Cal.App.4th 1361, 1365.) A suspension of corporate status may have significant impacts on the association, including, among others:
- Association Litigation. A suspended association is unable to initiate lawsuits or to defend itself in lawsuits that are filed against it. Attorneys who engage in litigation for an association with knowledge that its corporate status has been suspended are subject to sanctions. (Palm Valley Homeowners Association v. Design MTC (2001) 85 Cal.App.4th 553.)
- Association Contracts. A contract that is executed by a suspended association is voidable at the election of the other contracting party. (Rev. & Tax Code § 23304.5.) A suspended association may therefore lose it’s ability to enforce its contracts with vendors and other third-parties.
A suspension of an association’s corporate status will not operate to relieve the association of its ongoing obligations (i.e., satisfying its maintenance requirements under the governing documents).
Reviving Corporate Status
A suspended association may revive its corporate status through various measures depending upon the reasons underlying the initial suspension. Suspensions based on tax issues may be resolved through paying delinquent tax balances and filing the requisite tax returns. Suspensions based upon failure to file the required statements of information with the Secretary of State may be resolved by filing those statements and paying any resulting fines and penalties.