Creating a California LLC is an effective way to help you avoid personal liability for your company’s debts and other obligations. However, bear in mind that forming the business is only the first step in the process. There are ongoing requirements that you must follow.
Now, failing to follow these rules may lead to your LLC being suspended or even dissolved by the state. This means that you would no longer be considered in “good standing”, which can have negative consequences for your business.
Note that you must also file federal taxes. Further, if you have employees there are additional rules to follow. However, this article only covers the general state requirements for LLCs. If you need assistance with other legal issues it can be helpful to reach out to an attorney.
Required Filings and Tax
With that in mind, there are two main issues that can affect good standing status if ignored. The first is biennial filing. To comply with this requirement, you must submit a Statement of Information (Form LLC-12) every two years after the initial document is filed. This paperwork is given to the Secretary of State and informs the state regarding any changes that have occurred with your company.
Second, you must pay what is known as the minimum franchise tax and file the LLC Return of Income (Form 568). Note that this applies to all LLCs operating in California. The payment and filing are both submitted to the California Franchise Tax Board.
Currently, the tax is set at 8.84% of your company’s net income, or a minimum of $800, whichever is greater. It’s important to keep in mind that you must pay this tax even if you did not conduct any business.
Consequences of Losing Good Standing
Now, as mentioned, if you are found to not be in good standing it can have a detrimental impact on your company. First, you are prohibited from conducting any business in the state and contracts you enter into could be voidable. This means that you may not be able to enforce the terms of your agreements.
In addition, you can’t file a claim for a tax refund or maintain the right to use your business name. As a result, someone else can conduct business under your name while your organization is suspended, and you may be denied use of the name if it’s no longer available after you are reinstated.
Further, you may lose your limited liability protection. This is important and means that you could be held personally liable if you are sued based on something that occurred while your business was suspended. Your organization would also be barred from bringing a case to court. In other words, if the business wants to pursue a lawsuit against someone, it could be prohibited from doing so until good standing is restored.
Tax liens are another possible result of losing good standing status. In this case, the government may go after your business property to cover outstanding taxes. This can make it difficult for your company to secure lending in the future. Note that, generally speaking, banks and other lenders are typically unwilling to offer credit to companies that are not currently in good standing.
Finally, you could face fines and penalties and may need to pay a fee to have your LLC restored. In cases where you fail to complete the requirements for reinstatement, you run the risk of having your business dissolved by the state (referred to as an administrative dissolution).
How to Restore Good Standing
That said, fortunately, in most cases it is possible to have good standing restored. To initiate this process, you must file all past due tax returns and pay any outstanding balances. Note that you may be subject to a $2,000 penalty for each year that taxes were not filed.
Next, you will need to file a Statement of Information form with the Secretary of State and pay all fines (typically a $250 penalty). Once you are current on all filings and fees are paid, you would then submit what is known as an Application of Certificate of Revivor (Form FTB 3557 LLC).