Navigating regulatory compliance for your California entity

Legal entities, for example, corporations, limited liability companies, limited partnerships, and charities, are separate creatures with legal lives of their own. It is common for those who manage and control them to lose sight of the actions that must be taken annually to maintain good entity hygiene. To prevent unnecessary misadventures, an annual hygiene check is strongly advisable for all legal entities, particularly charities.

This alert is focused on entities formed in California, but these concepts generally apply to legal entities formed anywhere in the United States.

Why is annual compliance important?

Failure to properly manage an entity can threaten its legal existence, result in tax problems and penalties, loss of liability protection, and require significant fees for a return to “good standing.” Further, charities have special additional annual requirements, and the failure to meet those can jeopardize their tax-exempt status, ability to fundraise, and raise concerns with important donors and the attorney general.

California Secretary of State compliance

Legal entities are formed by the filing of a formation document with the California Secretary of State (SOS). The SOS assigns each entity an entity number, maintains records for all California legal entities, and enforces California corporate law when entities fail to comply.

• Corporations and Limited Liability Companies are required to file a Statement of Information (SOI) every year or every other year, respectively. The filing fee is just $20-$25 dollars and can be filed electronically in minutes, but the penalty for missing the deadline is $250.
• Every legal entity in California registered with the SOS must maintain an Agent for Service of Process (which is reported on their SOI) and if that agent ever changes an amended SOI must be filed as soon as possible.  The registered agent must be an individual with a business or residential address in California where they can regularly be found, or a special corporation that is qualified and has offices in California.

California Franchise Tax Board compliance

Legal entities have tax reporting obligations to the California Franchise Tax Board (FTB) in addition to tax reporting obligations to the Internal Revenue Service (IRS). The failure to file or timely file required returns or make tax payments can result in penalties and interest and/or loss of good standing. The SOS also reports compliance problems to the FTB which can prompt both agencies to penalize an entity.

• Legal entities generally have to pay a privilege tax of $800 per year, called the annual franchise tax, for the privilege of doing business in California. Even an inactive entity that generates no income in a calendar year must still pay this tax annually to stay in good standing.
• Legal entities generally have to file annual income tax returns (or annual informational returns in the case of charities), though certain entities are not required to file returns. It is important to work with a competent CPA to ensure all tax filings are timely made.

Attorney General Registry compliance (Charities Only)

The California Attorney General is required to provide oversight to charities who operate in California and primarily does so through its Registry of Charitable Trusts. Some charities are not required to register with this Registry, but the vast majority of charities must. Failure to maintain compliance with its annual requirements can result in loss of good standing and/or exempt status, and even legal action against the charity by the Attorney General.

• Charities required to be registered with the Registry must file annual reports (along with copies of their tax returns) and pay a registration renewal fee between $25 and $1,200 (depending on its annual revenue). This is most commonly done using the Annual Report form (Form RRF-1) but may also be required to file an Annual Treasurer’s Report (Form CT-TR-1).
• Charities who fundraise via raffle in any year must:

• Apply for a Raffle Registration (Form CT-NRP-1) 60 days before conducting the raffle.
• File a Raffle Report (Form CT-NRP-2) by February 1 in the following year.
• Report that they held a raffle that year on their Annual Report form (Form RRF-1).

• Beginning in 2023, charities who fundraise with the help of a “professional fundraiser” (defined to include something as simple as an independent contractor grant-writer, all the way up to hiring a company who directly solicits donations on the charity’s behalf) must now ensure that those fundraisers are registered with the Registry, paid their $500 annual registration fee, and filed all required reports. Charities must report that they use a professional fundraiser on their Annual Report (Form RRF-1).
• Any charity that receives over $2 million in gross revenue in any tax year (from donations, fees or investments) is required to hire an independent CPA to prepare audited financial statements using generally accepted accounting principles, and file those audited financial statements with their Annual Report (Form RRF-1).

Check your entity’s status online

It is essential that you carefully follow all these rules for your legal entities, especially any charities you operate. You can check the status of your California entity yourself using these online tools:

• The Secretary of State: use the Business Search tool and search by name. Look at the “Status” column (which you want to be “Active”) and then click on the organization’s name to get a screen hat shows the entity’s standing with the Secretary of State, Franchise Tax Board, and Registered Agent.
• The Franchise Tax Board: use the Entity Status check and search by name or California Entity ID (which you can get from the Secretary of State search above). Look at the “Entity Status” row (which you want to be “Active”).  For Charities only, also look at the "Exempt Status" row (which you want to be "Exempt").
• Registry of Charitable Trusts (for Charities only): use the Registry Search tool and search by FEIN (Federal Tax ID Number) for best results. Look at the “Registry Status” column (which you want to be “Current”).

What to do if you are out of compliance?

If your entity is out of compliance, it is important to act quickly to remedy the situation. Seek the advice of a competent CPA, attorney, or both as soon as possible. All the rules and regulations of the Secretary of State, Franchise Tax Board, and Attorney General can be hard to understand and follow without the help of professionals who guide legal entities for their careers. Your Withers team is here to help.

The article is authored by David Bawden.