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Be Careful When Terminating Your Business Entity

Author: Paul B. Gruwell, Esq.
June, 2012 Issue


Imagine the following scenario: You’re working with a bank to secure a business loan. The bank calls you with some startling news—your business entity is no longer active in California.

There must be some mistake. You quickly check the Secretary of State’s website, and sure enough, the information on your business entity reads: “dissolved” or “canceled.” Apparently, someone unrelated to your business filed documents to dissolve your corporation months prior. It turns out, that person was attempting to terminate his or her similarly named business, but mistakenly used your corporation’s information in the termination paperwork.

Because many businesses have nearly identical names, the mistake I just described happens more often than you might think. And, unfortunately, no quick call to the Secretary of State’s office can fix this problem. I’ve asked people there to undo what everyone agrees is an obvious mistake and simply reinstate an inadvertently dissolved or cancelled business entity. But their response to me is always the same: You’ll need to get a court order.

I’ve received calls (sometimes frantic ones) from people on both sides of this story. Understandably, each side has different concerns. Owners of inadvertently dissolved or cancelled business entities want answers: Who made the potentially costly mistake and will they, or can they, fix it? On the other hand, people who filed documents that accidentally terminated someone else’s entity want to know how to correct the mistake efficiently and avoid potential liability. Although the parties have some opposing concerns and tempers may flare, both sides can usually agree that step one to solving this problem is to get the business entity reinstated as quickly as possible. Reinstatement cannot be accomplished overnight, but with diligent efforts and reasonable cooperation of those involved, an inadvertently dissolved or canceled entity can be reinstated within a couple weeks.

California’s Secretary of State office must reinstate a business entity under certain circumstances. In particular, it must restore an entity’s active status on its records if a court finds any of the following: The termination documents contained materially false information; the termination documents were fraudulently submitted; and/or some other grounds warrant reinstatement (California Government Code § 12261).

It’s more than likely the case that at least one of these three criteria can be satisfied when a person mistakenly uses incorrect information on a termination document, such as a Certificate of Cancellation for a limited liability company or a Certificate of Dissolution for a corporation. The court documents that will need to be filed for reinstatement aren’t overly complicated, but the court will need to understand the full story. So it’s best, if possible, for the parties to have a frank discussion about what actually happened. Getting the business entity reinstated will go much more smoothly if everyone cooperates and if the key participants have a unified voice.

Unfortunately, as with most things, there’s a wrinkle. Reinstatement of a business entity under California law isn’t retroactive. The reinstatement is only effective on the date the Secretary of State files a certified copy of the court order (California Government Code § 12263). This means that there may be a period of time when the business was operating without an active corporation or limited liability company on the Secretary of State’s records. Operating your business without an active business entity can have serious business and legal implications, which may need to be considered. For that reason, it may be prudent to periodically check the Secretary of State’s website to ensure your business entity is currently active.

And for those people terminating a California business entity; a few words of caution: Prepare your termination documents with care and take the time to double-check your business’ complete name and entity number issued by the Secretary of State. A few extra minutes of caution here could save you from making a costly mistake. Or, if you find yourself on the other side of the situation, and discover a stranger has accidentally dissolved or canceled your business entity, take a few deep breaths, then get your attorney on the line.
 

Paul Gruwell is an attorney with Hanson Bridgett LLP, his practice emphasizes litigation on behalf of commercial and real estate clients. He also represents a number of public sector clients in tort defense cases. You can reach him at pgruwell@hansonbridgett.com.


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