Year-End Compliance
As 2022 comes to a close, most business owners are busy preparing for 2023 by finalizing and reviewing their business’s financials, setting budgets and establishing firm projections for the ensuing fiscal year. However, one crucial aspect that is frequently overlooked is ongoing corporate maintenance - and it is critical to the continued operation and existence of your corporation and liability protection.
Books and Records
Often forgotten, California corporations are required to keep the following:
Books and records of account;
Minutes of proceedings of its shareholders, board and committees of the board; and
Records of shareholders including the names and addresses of all shareholders and the number and class of shares held by each, which the company must keep at their principal place of business.
This includes annual meeting minutes of the shareholders appointing the board of directors and otherwise approving any other matters affecting the company, as well as annual meeting minutes of the directors, appointing the officers of the company and approving other operational or governance matters of the company (Cal. Corp. Code §§ 600; 1500.)
For example, the following actions should be documented by the shareholders or directors, as applicable:
Name Changes
Amending Bylaws
Reorganizations
Dissolutions
Executive Equity Compensation
Appointment of Officers and Directors
Other significant changes or transactions affecting or entered into by the company.
These meeting minutes and other books and records shall be kept either in written form or in another form capable of being converted into clearly legible tangible form or in any combination of the foregoing. (Cal. Corp. Code § 1500.)
Note also that professional organizations may have additional reporting requirements. For example, professional law corporations are required to submit an Annual Report to the California State Bar along with a $75 filing fee each year.
Annual Statement to Secretary of State
In addition, California corporations are required to file with the California Secretary of State an annual Statement of Information containing all of the following:
The name of the corporation and the entity number;
The names and complete business or residence addresses of the corporation's directors;
The number of vacancies on the board, if any;
Names and complete business or residence addresses of its chief executive officer, secretary, and chief financial officer;
Street address of its principal executive office;
Mailing address of the corporation, if different from principal executive office;
If the address of its principal executive office is not in this state, the street address of its principal business office in this state, if any;
If the corporation chooses to receive renewal notices and any other notifications from the Secretary of State by electronic mail instead of by United States mail, the corporation shall include a valid electronic mail address for the corporation or for the corporation's designee to receive those notices; and
A statement of the general type of business that constitutes principal business activity of the corporation.
If there have been no changes in the information in the last Statement on file with the Secretary of State, the corporation may, in lieu of filing the Statement, advise the Secretary of State, on a form prescribed by the Secretary of State, that no changes in the required information have occurred during the applicable filing period. (Cal. Corp. Code § 1502.)
The total filing fees are $25, made payable to the Secretary of State. The California Franchise Tax Board imposes a $250 penalty if you do not file your Statement of Information. In addition to the Statement of Information, publicly traded companies must file a Corporate Disclosure Statement (Form SI-PT).
Franchise Taxes
All corporations formed in (or doing business in) the state of California are required to file a California Corporation Franchise or Income Tax Return with the California Franchise Tax Board. The California Franchise Tax Board can suspend or cause the forfeit of a corporation's powers, rights, and privileges, including to use its name in the state, for failure to file a return, pay taxes, or pay required penalties or interest.
Failure to Maintain Adequate Books and Records
Ensuring your company is maintained in good standing is integral to maintaining liability protection. California law provides that “[a] corporate identity may be disregarded--the ‘corporate veil’ pierced--where an abuse of the corporate privilege justifies holding the equitable ownership of a corporation liable for the actions of the corporation.” (Sonora Diamond Corp. v. Superior Court (2000) 83 Cal.App.4th 523, 538 [99 Cal.Rptr.2d 824].) If the corporate identity is disregarded, the individual shareholders of the company may be held liable for the debts and liabilities of the corporation, otherwise known as the alter ego doctrine.
In deciding whether to disregard the corporate identity and hold shareholders liable for the acts of the corporation, courts consider a variety of factors, including the “commingling of funds and other assets of the two entities, the holding out by one entity that it is liable for the debts of the other, identical equitable ownership in the two entities, use of the same offices and employees, and use of one as a mere shell or conduit for the affairs of the other” as well as “inadequate capitalization, disregard of corporate formalities, lack of segregation of corporate records, and identical directors and officers.” (Id. at 538-539 (internal citations omitted)(emphasis added).) In addition, the failure to maintain complete and accurate records may impede your ability to sell your business and/or create uncertainty in potential buyers, who may perceive they are taking on more risk than initially anticipated.
So, while it may not be top of mind for most business owners, ensuring the company’s books and records are maintained and updated over time will, at a minimum, provide evidence that the company is complying with applicable California law, and at best, a defense to any assertions that the company’s individual shareholders should be liable for the corporation.
