A California Corporation or Limited Liability Company (“LLC”) can be suspended for a number of reasons, including the nonpayment of taxes under California Revenue and Taxation Code or for their failure to file updated information under the Corporations Code.
When a corporation or LLC is suspended, it loses its rights and privileges under California law. Thus, the company cannot legally operate until revived (reinstated) with the Secretary of State.
Powers which the suspended company can no longer exercise include its ability to defend or prosecute any action in court. This creates a tricky problem when the company’s legal rights are at stake. A member attorney of the California State Bar Association cannot ethically represent a suspended company until they are “revived” with the Secretary of State. In fact, when a corporation or LLC has been suspended, it is required to close its doors, and stop all business related activity. Even its insurer, who may have a significant financial interest in the outcome of a lawsuit, may not intervene in the court action to take over the prosecution or defense of the company’s claims. In Palm Valley Homeowners Ass'n v. Design MTC, a law firm that continued to represent a suspended subcontractor in a construction defect lawsuit brought by homeowners was sanctioned more than $14,000 for its representation. (2000) 85 Cal. App. 4th 553.
In some cases a suspended company has been allowed to enter into certain types of contracts such as a release-of-liability. See Performance Plastering v. Richmond American Homes of California, Inc. (2007) 153 Cal. App. 4th 659.
So what is the “take-away” message? Whether you operate a grocery store in Eureka or a shipping corporation in San Francisco, make sure your company’s taxes are paid and that all informational filings are up-to-date. Attorneys at Janssen Malloy, LLP are available to assist both in litigation involving active California companies, as well as in corporate formation and governance issues.