California Secretary of State Processing Times

California Secretary of State business entity filing times have soared since the first of the year, as a result of the state budget crisis and resulting budget and staff cuts at the Secretary of State's office (which included the closing of some regional offices).

Alas, the Secretary of State also failed to notify practitioners or the general public about these changes before the fact, resulting in unexpected delays to the tune of 6-8 week turnaround for business entity (LLC, corporation, etc.) filings by mail and standard over-the-counter expedited filing times increasing to three weeks and sometimes more from an average of less than two.

Belatedly, the SOS issued this apologetic announcement earlier this month:

http://www.sos.ca.gov/business/pdf/processing-times.pdf [subsequently updated in 2011 to provide an update on the progress the SOS is making to work through these issues]

Indiana Secretary of State Corporate Minutes Mailings

From Indiana Secretary of State Todd Rokita. California may want to follow suit (although California's laws may be drafted differently than Indiana's, and it is not clear if these defendants are also behind some of the California mailings.

COMPLAINT FILED IN BUSINESS MAIL SCAM

May 21, 2009- An out-of-state operation sending deceptive solicitations to Indiana businesses for the last several months would face fines of over $1.5 million and be barred from doing business in Indiana if the state prevails in a lawsuit filed last week in Marion County court.

The complaint against Aaron V. Williams of Las Vegas, Lisa Diane Brown of California and several companies affiliated with the two was filed by Attorney General Greg Zoeller in Marion County Superior Court alleging several violations of the Deceptive Commercial Solicitation Act. The action comes after a multi-state investigation by the office of Indiana Secretary of State Todd Rokita which tracked the activities of a business operated by Williams and Brown known as "Indiana Corporate Compliance."

Indiana businesses have reported receiving letters from Indiana Corporate Compliance that appear to come from an official government source - specifically the Business Services Division of the Indiana Secretary of State's office. The letter solicits annual fees of $125 to $150 that it claims will be used for the record keeping and processing of the company's annual minutes. It also instructs businesses to respond by citing fictitious state law and including a "return by" date. The return addresses on the letters are rented mailboxes at UPS stores in Indianapolis, including one within steps of the Indiana Statehouse.

"The actions of these out-of-state scam artists to bilk Indiana businesses are deceptive, despicable, and likely criminal," said Secretary Rokita. "I will do everything I can to stand up for Indiana businesses and shield them from financial attack. I thank Attorney General Zoeller and his team for helping bring legal action."

Secretary Rokita has issued warnings through the media, sent e-mails to Indiana businesses and posted warnings on his Web page to ignore the letter. Still, businesses report falling victim to the scam and have sent money in response to the letter. No business has reported receiving any services from Indiana Corporate Compliance. Secretary Rokita's office continues to investigate and is developing a criminal case against Williams and Brown.

State law requires periodic business entity reporting, but with fees of only $30 every two years for for-profit entities and $10 every year for non-profit organizations. Businesses operating in Indiana can now securely perform this reporting online through the INBiz portal found on the Secretary of State's Web page, www.sos.in.gov/business.

If you believe you fell victim to this solicitation, please contact the Business Services Division Help Line at (317) 232-6576. Businesses wishing to check the validity of any mailing from Indiana's Business Services Division or any division of the Office of the Indiana Secretary of State should also call this number.

See also: California Corporate Compliance Minutes

Dangers of Internet Legal Research: Misinformation Aplenty

A client recently was conducted some legal research on the Internet, and came across the following, which he then showed to me and asked me about:

Subject: Re: Closing down a california S-corp
Answered By: taxmama-ga on 31 Jan 2005 14:38 PST
Rated:
Dear Yarbles,

The State of California would like you to believe that you must file each back year and pay the annual $800 fee AND all the penalties and interest related to that fee. They also will want all the fees and penalties for not keeping up with the annual report of officers taht the Secretary of State requires. (That's a $20 fee if you file it on time; $250 penalty if you don't.)

However, under the Ralite case, where the owner of the corporation was permitted to walk away from all these liabilities, by simply doing nothing. Do NOT file the closure paperwork with the State Franchise Tax Board or Secretary of State. Do nothing.

You can read the particulars here. http://www.boe.ca.gov/legal/pdf/90_sbe_004.pdf

You may want to have your tax professional review the case and make sure that you qualify. In fact, they may be happy to see this for their files. It's a very valuable piece of information that most people don't seem to know.

Just be patient. The notices will stop. Someday.

Best wishes,

Your TaxMama-ga

Google Answers: Closing down a california S-corp

My response to the client, who had hoped this answer proved that dormant California corporations would be dissolved automatically and that the corporate veil could never be pierced to provide for personal liablity to the shareholders for California corporate tax obligations:

Dear [Client]:

1 – There is no indication that the answerer is an attorney or accountant. What are their qualifications to be giving legal or tax advice? There are reasons why attorneys and accountants have to meet certain educational, training, and licensing standards.

2 - The annual report fee referred to in the answer is actually $25, not $20.

3 – While not invalidating the law as precedent, it is worth nothing that the case refers to tax year 1980, and to a California code section that no longer even exists (R & T Code Section 25701(a)).

4 – The answerer does not claim the corp. will be dissolved automatically by the state, only that the back taxes won’t have to be paid.

MOST IMPORTANTLY, THOUGH…

5 - Contrary to what the answerer, who apparently did not read or understand the case, the shareholders of the corporation in the cited Ralite case were found personally liable and ordered to pay the franchise taxes. See paragraph 2 of page 29 of the case cited: “the shareholders are liable for Ralite’s [the corporation’s] tax.”

However, this result was because of fraudulent transfers by the shareholders; otherwise, the case does indeed provide that shareholders will not be personally liable for corporation franchise tax non-payment. But (A) without the assistance of an attorney and tax advisor, fraudulent transfers may inadverdently be made by shareholders closing down a corporate business and (B) it is possible California's legislature will change the law on this at some point. Until that time, it is true that many shareholders walk away from their corporations and allow them to become suspended and continue to accrue franchise taxes, penalties, and interest. This is not the proper or legal way to do things, however, and I believe the majority of business attorney or tax advisors would not routinely counsel a client to do this.

6 - Note that the person asking the question comments at the bottom of that they consulted their tax professional, and their tax advisor told them to pay the tax and dissolve the corporation properly.

7 - A tax clearance certificate is no longer required to dissolve a corporation, so there is little reason not to dissolve the corporation, to stop the tax clock from ticking, even if taxes are owed and cannot or will not be paid by the corporate shareholders.

This is a perfect example of the legal misinformation and half-truths that are all over the Internet and a good reason why you should take “advice” like this with a grain of salt and consider its (unknown) source, as well as the the fact that the law may have changed, or the one person's circumstances may not match yours....