Saturday, September 20, 2008

Prop 8 and Suspended Corporations

What follows below is a rather boring post about the significance of a corporation being in a suspended status. Rather than research the group behind any further, though, I will simply provide a link to Justin McLachlan's blog, which features excellent reporting on the subject.

As a lawyer who frequently deals with charitable organizations, I thought I would check into the organization collecting donations and otherwise managing the Yes on 8 Campaign. So far, I have been extremely dissapointed with what I have found. For full disclosure, I have donated to the " - Yes on 8" organization and have organized precinct walking and other activites in my ward.

First things first - donors to the Yes on 8 campaign are asked to make their checks out to "". "" is not a regular kind of legal entity in California, although it may be a registered election committee of some sort (I haven't checked this). I am unfamiliar with election laws and do not know what the legal status of such a committee would be.

A clue to the organization behind is in the campaign materials themselves, which state that in a project of California Renewal.

California Renewal is a recognized corporation in California, and is a registered with the California Attorney General's Office as a charitable organization. California Renewal is also recognized as a public charity and is listed on IRS publication 78 as a tax-exempt organization. (However, contributions to are not tax deductible because that is a political election activity.)

This is OK so far. However, the first warning sign is that California Renewal is currently suspended by the California Secretary of State. This means that it is not allowed to do business as an entity in California. The status can be checked at any time by searching for California Renewal at the Secretary of State's website.

Off the top of my head, I can think of two reasons why a corporation may be suspended in California: 1) failure to pay the annual state franchise tax; or 2) failure to file the biennual Statement of Information listing the current directors of the corporation. The annual franchise tax is $600 and the Statement of Information is only one page long. In other words, there is no excuse for continuing in a suspended status, unless you are truly an inactive organization and don't care about receiving a stream of notices from the Franchise Tax Board and Secretary of State.

I have formed and dissolved many corporations in California, both for profit and non-profit. I know from experience that having a suspended status is a serious hinderance to doing business and that it is technically illegal to hold yourself out as an organization while under suspension (although as a matter of enforcement, the state is understaffed in this area and real harm would have to be shown for there to be any consequence to doing business while under suspension).

I also know from experience that a suspension can be cleared within a matter of days by making the appropriate filing (1 page) or paying the franchise tax to the state. Literally, the Secretary of State's website is updated within days of the reason for suspension being removed. With that in mind, California Renewal has been suspended for at least the last 3 months prior to the date of this post, which is when I first checked its status.

I also know that having a suspended status would be a serious embarrassment to my non-profit clients and I work hard to avoid them being in this position. If any of my clients were to be suspended, I would immediately take steps to remediate the situation.

So why hasn't California Renewal fixed this - especially now that they are collecting millions of dollars, a significant percentage of which come from members of the church?

This is getting a little long, but I wanted to give some background on the legal standing of the organizations behind the Yes on 8 campaign and highlight why the ongoing suspension is so difficult to understand. In subsequent posts, I will discuss more serious problems with the management of the Yes on 8 campaign but, in the meantime, here is a preview:

The Orange County Register reports that the California Family Council, the sister organization with many of the same board members as California Renewal, spent 75% of the donations it received on salaries for its board members, and only 25% on program activities, from 2004-2006.