If you are investing in real estate through a suspended LLC or corporation, this is a bad idea.
Imagine that you have identified a fantastic real estate investment opportunity, and you have the purchase of this real estate under contract. However, before you close escrow, the seller develops sellers’ remorse. The seller tells you that unless you substantially increase the purchase price of the property, they will cancel the contract. As many real estate investors do, you have run the investment through your corporate entity. What do you do?
Well, assuming your corporate entity is in good standing, you can file a lawsuit for breach of contract, seek an order of specific performance, and record a lis pendens against the property.
Suspended Corporate Entities Face Challenges During Real Estate Investment Litigation
Operating under a corporate entity that has had its corporate privileges suspended by the Secretary of State creates problems for the corporate entity both inside and outside of the courtroom.
Outside the Courtroom
Under the California Revenue and Tax Code, a suspended corporate entity may not “sell, transfer or exchange” real property within California. Rev. & Tax.C. § 23302(d) Further, contracts entered into by a corporate entity during suspension are voidable at the option of the other party (but not at the option of the suspended corporate entity).
A number of factors can cause a corporate entity to have its corporate privileges suspended by the Secretary of State. Three of the most common factors that cause a corporate entity to have its corporate privileges suspended are:
- Failure to file a statement of information with the Secretary of State
- Failure to pay taxes
- Failure to file tax returns
Suspended corporate entities may seek relief from the voidability of their contracts by:
- Filing an application for relief from contract voidability with the Franchise Tax Board
- Designating the period for which relief is requested on the application
- Filing any required tax returns, including returns for the relief period
- Paying any tax, additions to tax, penalties, interest, as well as any other amounts that may be owing, including any amounts attributable to the relief period
- Paying any daily penalty
Rev & Tax Code §23305.1(c) Assuming the above conditions are satisfied, all contracts entered into during the relief period that have not been rescinded by final court order are enforceable.
Problems Inside the Courtroom
A corporate entity whose powers have been suspended for nonpayment of the corporate franchise tax cannot sue in California courts; if sued, it cannot defend. Cal. Rev. & Tax Code §23301. Similarly, a corporate entity that fails to file its statement of information with the Secretary of State lacks the capacity to sue or defend itself. Palm Valley Homeowners Ass’n, Inc. v. Design MTC (2000) 85 CA 4th 553, 560.
Looking at the example above, the corporate entity would not have legal standing to maintain a legal action to enforce the contract. What happens if your suspended legal entity is sued? Then your corporate entity will not be able to defend itself, and there is a good chance that it will lose the lawsuit.
Investors Should Take a Proactive Approach and Maintain Their Business’s Good Standing
If you find yourself in this situation, then you are not paying enough attention to detail and will likely need an attorney to assist you in obtaining relief from the voidability of your corporate entity’s contract with the seller of the subject property.
There is a proverb that states that an ounce of prevention is worth a pound of cure. Meaning, it is easier and frequently less expensive to stop something from happening in the first place than to repair the damage after it has happened. It is far easier and less expensive to prevent your corporate entity from being suspended in the first place than either losing a fantastic investment opportunity or paying a lawyer to repair the suspension.
As a business owner myself, I understand all too well how difficult it is to comply with all the rules that govern businesses.
I suggest that you simply place on your calendar the task of filing the Statement of Information every year to avoid forgetting about having to do it. What’s more, if you cannot do it yourself, hire a trusted and insured bookkeeper to keep your books up to date so you can timely file your tax returns and that you have money set aside to pay any tax liability. Follow these suggestions, and you will increase your chances of avoiding a suspension of your corporate entity’s privileges.
The Enochs Law Group: Experienced Real Estate Investment Lawyers
The Enochs Law Group’s team helps real estate investors resolve their complex disputes both in and outside of the courtroom. We’ve built a reputation for our practical approach and consider ourselves businesspeople and problem solvers – just like you.
If you’re dealing with a real estate investment matter, contact our office today. We’ll listen to your story, suggest a variety of possible solutions, and recommend some next steps. You can reach our San Diego real estate lawyer at 619-421-3956 or through our simple contact form.
The content provided here is for informational purposes only and should not be construed as legal advice on any subject.