A Last-Minute Word to the Wise for Soon-to-be Corporations and LLCs in CA

As we get closer to the end of the year, there are a couple of extremely important tax-related items to remember for anyone who may be getting close to starting a corporation or LLC, preparing to file their Articles of Incorporation, looking to expand their operations into California, or just may be thinking of doing so. The items I am referring to are the $800 minimum tax and the 15-day end of the year tax exemption. But first, with the holiday season now in full swing, let’s start off with a quick tale.

Once upon a time, there was a company called C&L Pacific, a newly formed S Corporation that had four shareholders and intended to do business in California. On December 12 th , 2011, C&L Pacific mailed its Articles of Incorporation to the office of the Secretary of State of California, with the intent of becoming “incorporated.” Their Articles were officially marked “filed” two days later, on December 14 th . However, they were not processed until March 24 th , 2012, and C&L Pacific subsequently did not learn about the Articles of Incorporation being processed until April 2012, after which the company then proceeded to conduct business operations.

Based on those facts, C&L Pacific assumed it did not have to file a tax return for 2011 or pay the minimum corporation tax of $800 for that year. However, it was mistaken. Outlined in the ruling from C&L Pacific’s appeal before the Franchise Tax Board (FTB), California’s Revenue and Tax Code (R & TC) §23153 states that “[A] corporation becomes liable for the $800 minimum tax when it incorporates in California, qualifies to do business in California, or if it is actually doing business in California.” So, when does a corporation’s existence, or “incorporation,” begin? Even though C&L Pacific did not start doing business in California until 2012 and the Articles of Incorporation were not processed until 2012, California’s Corporations Code § 200 says, “[a] corporation ‘incorporates’ in California on the date that its articles are filed with the Secretary of State,” meaning that C&L Pacific was incorporated on December 14 th , 2011 when the Articles were marked filed, rather than in March 2012 when they were processed.

As for whether the taxpayer was required to file a tax return for the 2011 tax year, if C&L Pacific had waited just a day longer to mail their articles, they would have qualified for the 15- day end of the year tax exemption, which would have excused the taxpayer from being required to file a return. “A corporation is not subject to the minimum franchise tax (and is not required to file a return) if it did not do business in California during the taxable year, and the taxable year was 15 days or fewer” (R & TC §23114).

So not only would the taxpayer have avoided needing to file a return, they also would have not been required to pay the $800 minimum tax for the 2012 tax year since C&L Pacific would have qualified under the “First-year-free” tax exemption rule, under R & TC §23153(f). The FTB did not assess the minimum franchise tax for 2011 because C&L Pacific qualified for the first-year-free exemption but this exemption was lost for 2012. The taxpayer was assessed a $432 per-shareholder penalty by the FTB, and ordered to file a tax return for the 2011 tax year, because the Board deemed the “taxpayer’s failure to distinguish between the importance of the filing date and processing date” to not be reasonable cause for failing to file.

As soon as a corporation or LLC files Articles with the Secretary of State of California, the taxpayer is formed in the state of California. So if you won’t be doing business until the new year, make sure you don’t file before the last two weeks of the current year. And as a side note – this all could have been avoided if C&L Pacific hadn’t mailed in its Articles for filing. We file documents over the counter in Sacramento to skip the months long wait for mailed filings and for clear tracking of filing dates.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

Is Blockchain Technology the Future? The State of Delaware Will Find Out

By: Robert V. Hawn, Esq.

Delaware recently enacted an innovative law recently to allow an incorporated business in Delaware to keep track of its shares, often referred to as a stock ledger, on a blockchain platform.

You may be wondering why this is such a big deal. For starters, two-thirds of all U.S. listed companies call the state of Delaware home. The state officially has more registered legal entities than residents. Delaware also contains a flexible business legislation and tax framework, and has a reputation for being the catalytic yardstick in corporate law.

Now consider what a blockchain may do. Blockchain technology allows the creations of distributed ledgers. A “distributed ledger” is a mutual, shared ledger between any number of parties that create a single record of transactions, providing one unchangeable, “golden copy” of data that all can trust as valid.

The new law allows an incorporated business to use distributed ledger technology to maintain its stock ledger. The new law, however, does not overturn a number of current Delaware requirements regarding stockholder ledgers. Provisions concerning the ability of the corporation to prepare a stockholder list, and provisions concerning the type of information to be recorded, for example, still remain. The law also does not yet add provisions concerning smart contracts, an automated software program that self-executes when a specific trigger occurs. Smart contracts could be used in a stock ledger application to allow the stock ledger to adjust when it receives trading information.

The law is Delaware’s first step in implementing the Delaware Blockchain Initiative, an effort started by then-Governor Market to use blockchain technology and smart contracts to streamline financial services around Delaware corporations. The hope is that the combination of distributed ledgers and smart contracts can streamline many financial services by automating, among other things, clearing and settlement functions.

You can find the actual law here: https://legiscan.com/de/bill/sb69/2017 .

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.

Corporation Alert! New Statement of Information Forms

By: Tamara Pow, Esq.

The California Secretary of State has updated business entity forms yet again this year. In July I wrote a blog referencing the changes to certain LLC forms including the Articles of Organization, Certificate of Dissolution, Certificate of Cancellation and the Short Form Certificate of Cancellation. The Secretary of State is at it again and has revised certain forms for foreign and domestic corporations.

Effective immediately, the California Secretary of State has the following new forms:

  1. Statement of Information (Domestic and Foreign Corporations);
  2. Attachment to the Statement of Information;
  3. Statement of Information (No Change); and
  4. Statement of Information (Non-Profit Corporations).

As part of this change there is now one form of Statement of Information to be used for both domestic and foreign corporations, instead of separate forms for each type of entity.

Many companies file their Statement of Information forms on their own. If you are filing your own Statement of Information, you must use the new form or the Secretary of State will reject your filing. Filings that are rejected by the Secretary of State waste time, money and if not corrected can result in late filing fees and ultimately suspension of your entity if not resolved.

Statements of Information for corporations can generally be filed online using E-file on the Secretary of State’s website. This will ensure that the correct form is being completed. However, if you must mail in your Statement of Information, be sure that you have checked the Secretary of State’s website at http://www.sos.ca.gov/business-programs/business-entities/forms#corp to ensure that you are using the current form. Either way, don’t forget to file on time. It is critical to keep your business entities up to date to maintain your liability shield.

Tamara B. Pow is a founding partner of Strategy Law, LLP in downtown San Jose, California where she practices business and real estate law including corporate formations, operations, maintenance (including filing Statement of Information) and dissolutions. Her consistent and extensive work with business entities keeps her up to date when advising business owners of Secretary of State updates and other changes in the legal requirements of maintaining business entity liability protection.

The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.