Legal Question in Business Law in California

No, suspension of corporate powers is a result of failure to pay taxes. A corporation whose powers have been suspended for nonpayment of the corporate franchise tax lacks capacity to sue in California courts; and if sued, it lacks capacity to defend. (Rev. & Tax Code, sect. 23301)(Reed v. Norman (1957) 48 Cal.2d 338, 342.)

A corporation suspended under Corporations Code esctoin 2205 for failure to file the biennial statement required by Corporations Code section 1502 also lacks capacity to sue or defend itself. (Palm Valley Homeowners As'n, Inc. v. Design MTC (2000) 85 Cal.App.4th 553, 560.)

The purpose of the rule is to enhance tax collections, not to ensure enforceability of judgments. (American Alternative Energy Partners II, 1985 v. Windridge, Inc. (1996) 42 Cal.App.4th 551, 562-563.)

Courts usually grant the corporation a continuance in order to pay delinquient taxes and obtain a certificate of revivor. (Color-Vue, Inc. v. Abrams (1996) 44 Cal.App.4th 1599, 1606.) Once the delinquent taxes are paid, the corporations's powers are restroed, reviving its capacity to sue or defend. (Rev. & Tax Code, sects. 23305, 23305a.)

In enacting section 23301, the California legislature was only interested in putting additional bite into the collection of franchise taxes. (Peacock Hill Ass'n v. Peacock Lagoon Construction Co. (1972) 8 Cal.3d 369, 370) d 285, 286; Boyle v. Lakeview Creamery Co. (1937) 9 Cal.2d 16, 19.)

Before a court can hold that a corporation is the mere alter ego of its shareholders, two particular findings must be made. First, the court must determine that there is "such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist." (Watson v. Commonwealth Insurance Co. (1936) 8 Cal.2d 61, 68.) Second, however, it must be shown that the failure to disregard the corporation would result in fraud or injustice. (Id.) Failure to pay corporate franchise tax may, as indicated above, be relevant to the first of the two necessary determinations. But it is of doubtful, if any, relevance to the latter.

You would still need to plead and prove the alter ego doctrine.

You got a good answer from Mr. Roach. I just write to emphasized that not paying taxes hardly constitutes disregard of the corporate formalities. Just because a corporation is not fiscally sound and can't pay its bills doesn't mean it is not a valid seperate legal entity. If being broke and unable to pay taxes automatically pierced the corporate veil, what point would there be in incorporating? The whole point of incorporating is to insulate the owners from personal liability for debts. If the corporation going broke would pierce the corporate veil, incorporation would be pointless.