In the fall of 2018, the California legislature passed three laws regarding entities and filings registered with the CA Secretary of State. The new laws introduce provisions for entity administrative dissolution and tax abatement, the use of blockchain technology for maintaining a corporation’s share ledger and recourse for individuals when their personal information is used illegally on business entity filings.
Administrative Dissolution of Corporations and LLCs
Effective January 1st, 2019, corporations and limited liability companies (LLCs) in California will be subject to administrative dissolution or cancellation. Previously, companies that did not pay required annual franchise taxes were suspended by the Franchise Tax Board (FTB), but continued to accrue tax penalties and interest if they did not file a Certificate of Dissolution or Certificate of Cancellation.
The new provisions added by Senate Bill 2503 (Sections 2205.5 and 17713.10.1 in the Corporations Code, and Sections 23310 and 23311 in the Revenue and Taxation Code) create an administrative process where the FTB can initiate an administrative dissolution (corporations) or administrative cancellation (LLCs) for companies that haven’t filed a Certificate of Dissolution or Cancellation and have accrued unpaid minimum franchise or annual taxes after otherwise “ceasing to do business”.
Companies meeting the following criteria will be eligible for FTB-initiated administrative dissolution or cancellation:
- Is a domestic corporation or LLC.
- Has been suspended by the FTB for 60 or more consecutive months (5 years).
- Has ceased doing business.
- Has paid all taxes and filed all returns due as of the date they ceased doing business.
The bill outlines the administrative dissolution and cancellation process as follows:
- The FTB will send written notice to the entity of pending administrative dissolution.
- The FTB will transmit the names and Secretary of State (SOS) file numbers of the companies to be administratively dissolved to the SOS.
- The SOS will post a notice of the pending administrative dissolution/cancellation for 60 days.
- A company can file a written objection to administrative dissolution/cancellation during that time and gain an additional 90 days to satisfy their tax obligations, file a current Statement of Information, apply for revivor and fulfill any other requirements. This period may be extended for an additional 90 days.
- If there is no objection, or the objector does not revive, the company will be administratively dissolved/cancelled.
- Upon this dissolution/cancellation, the taxes, interests and penalties will be abated.
In addition to the FTB-initiated procedure outlined above, companies may also make a written request for tax abatement provided they never did business in California or if they certify, under penalties of perjury, that they have ceased to do business in California. In the latter case, all taxes due for the years prior to the date of cessation must be paid.
Note that administrative dissolution or cancellation will not affect the ability of the Attorney General to enforce liability as otherwise provided by law.
Blockchain Technology for Share Ledgers
Senate Bill 838, effective January 1st, 2019, authorizes the use of blockchain technology for recording the issuance and transference of stock with amendments to Sections 204 and 2603 of the California Corporations Code. The author of the bill, Senator Herzberg, views the use of blockchain technology as a means to help protect consumers and corporations from cases of fraud and theft.
Corporations intending to use blockchain or distributed electronic networks for record keeping must establish this in their Articles of Incorporation, after which items standardly included on a share ledger — the name, address and number of shares held by each shareholder plus all issuances and transfers of stock of the corporation — can instead be recorded and maintained using the stated technology.
The blockchain technology used must meet the following requirements:
- The records can be decrypted into a clearly readable format within a ‘reasonable period of time’. (Note that ‘reasonable’, in this context, has yet to be defined.)
- The records can be used to prepare a list of shareholders.
- The information required to be included on a stock certificate can be recorded.
- The records can be used to record transfers of stock.
California has included a sunset provision for SB 838. The new sections will only remain in effect until January 1st, 2022 to allow for review of the new provisions’ effects and to determine what changes should be made in the future.
Identity Theft in Business Entity Filings
According to the FTC, California had more identity theft complaints in 2017 than any other state. Addressing this trend, Senate Bill 1196, effective January 1, 2019, amends Title 1.81.6 to Part 4 of Division 3 of the Civil Code, providing rights for individuals who believe that their personal information has been used unlawfully on a business entity filing.
Once an individual has contacted law enforcement to initiate an investigation into suspected identity theft, he or she may petition the court to order the alleged perpetrator to appear at a hearing and provide justification for the use of the individual’s information on the filing and why it should not be considered impersonation of that person’s identity.
Based on the information received from the petitioner, the alleged perpetrator, law enforcement and other relevant material submitted, if the court determines that the personal information was used unlawfully, it must issue an order certifying the decision and file orders with the Secretary of State that the following steps be taken:
- The name and associated personal identifying information for the individual must be redacted or labeled as impersonated in the business entity filing.
- The fraudulent data must be removed from any publicly accessible databases and records.
Since these laws all come into effect on the first of the year, we thought this brief synopsis might be helpful to keep our readers informed on what’s new in California for 2019.
This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.