California business entities are required to periodically submit a Statement of Information to the Secretary of State (SOS). The Statement of Information lists basic information about the entity including entity name, business address, officers, and agent for service of process. It is required to be filed every year for corporations and every two years for nonprofit corporations and limited liability companies (LLCs).
The Secretary of State’s requirement that an entity name its chief executive officer in lieu of “board officer” positions traditionally associated with a board of directors has caused confusion for entity owners and management. For regulated entities such as health care providers that must report corporate officers on various licensure and enrollment forms, mistakes on these filings can be quite costly and have a crippling effect on being able to serve patients.
To understand the source of the confusion, it is worth reviewing the California Corporations Code in conjunction with the data requested on the various Statement of Information forms.
Although California statute requires a corporation to have (1) a chair of the board or president or both, (2) a secretary, and (3) a chief financial officer, the Statement of Information requires a chief executive officer to be listed rather than the president or board chair. (Cal. Corp. Code §312(a)). Most corporations operating today name a chief executive officer (i.e., the CEO) who typically is a salaried employee that leads the management team and reports to a board of directors, which in turn has its own board officer positions.
Adding to the confusion is the fact that Cal. Corp. Code Section 312(a) allows for the president or board chair to simultaneously serve as the chief executive officer, stating, “The president, or, if there is no president, the chairperson of the board is the general manager and chief executive officer of the corporation, unless otherwise provided in the articles or bylaws.” Therefore, if a corporation has an employed CEO that is designated as the company’s chief executive officer under its bylaws, then this is the individual that should be reported on the Statement of Information to the SOS. However, if the CEO role is not enumerated under the corporation’s bylaws, then the actual chief executive officer to be reported is the president or chair of the board.
Oftentimes a chief executive officer will attend board meetings as a non-voting, ex-officio member of the board. A president or board chair, on the other hand, presides over all board meetings and carries a voting position on the board. Therefore, the Statement of Information’s requirement to list the chief executive officer is misleading because it is unclear whether the SOS is seeking information about board officer or executive officer position. It is worth noting that prior iterations of the Statement of Information asked for the following officers to be reported: president, secretary, and treasurer.
Like for-profit corporations, California statute provides that a nonprofit corporation shall have (1) a chair of the board or a president or both, (2) a secretary, and (3) a treasurer or chief financial officer or both. (Cal. Corp. Code §5213(a)). Additionally, the equivalent language regarding the president or board chair acting as the presumptive chief executive officer of the corporation, unless the articles or bylaws specify otherwise, is also found in the nonprofit statute.
Making matters worse is the fact that many nonprofit, tax-exempt organizations have an “executive director” that is often employed as the chief executive and administrative employee for the entity but does not hold the specifically enumerated title of “chief executive officer.” In that instance, the nonprofit would more properly name its president or board chair on the Statement of Information, but in reality, many nonprofits erroneously name their executive director for this filing.
Not only are nonprofit corporations subject to the same confusion for reporting their chief executive officers as their for-profit counterparts, but they have an added challenge of reporting the proper financial officer if they have named both a treasurer and a chief financial officer. Where both titles have been named, the Statement of Information requires the executive officer (i.e., the CFO) position be named even though the default under the statute is that the board officer (i.e., the treasurer) serves in this role.
Secretary is typically the easiest officer to identify and name in the Statement of Information. However, certain organizations choose to enumerate a corporate/executive secretary in their bylaws to be distinguished from the board secretary. When this distinction applies, the entity will typically want to name the board secretary on the Statement of Information unless there is a compelling reason to name the corporate/executive secretary for the corporation.
Limited Liability Companies
California statute provides that officers of an LLC are optional, and, if the LLC chooses to appoint officers, such as a chairperson and/or president, chief financial officer, or secretary, it shall do so within the Operating Agreement for the company. (Cal. Corp. Code §17704.07). Although the role of the chief executive officer is permissible, there is no mention of such an officer in the statute governing California LLCs. And yet, the SOS recently included a line on the Statement of Information for LLCs that gives companies the option to name a chief executive officer.
While the chief executive officer position is optional for an LLC, the rights and duties of such a person, if appointed, should be carefully distinguished from those of the managers of the LLC in the company’s Operating Agreement to avoid any misunderstanding regarding control and management of the company. The decision by SOS to include the option of naming a chief executive officer on an LLC’s Statement of Information is perplexing. It has essentially imputed a modern corporate management title into an entity most often governed and managed as a partnership.
Ramifications on Regulated Business Entities
How a corporation’s officers are identified in bylaws and Statements of Information can have significant regulatory reporting impacts for organizations with health care facilities like primary care clinics. Carefully worded bylaws that distinguish between “board officers” and “executive officers” (or “corporate officers”)—and Statements of Information that accurately reflect these categories—can reduce how often changes must be reported. This results in a reduced volume of filings as well as a reduction in the amount of filing fees expended.
The Department of Public Health (“DPH”) requires reporting of changes to licensees’ principal officers within 10 days following the change. The Board of Pharmacy (“BOP”) requires clinic permit holders to report changes to corporate officers within 30 days of the change. Reporting these changes to DPH does not include a filing fee but reporting changes to BOP costs $130 per license. Thus, if a corporation owns 15 primary care clinics and sees annual turnover in at least one of its officers because they are a board member, the corporation will owe nearly $2,000 per year in regulatory filing fees alone.
Regulators like DPH and BOP are primarily interested in understanding who is responsible for the organization’s operations when they seek officer information. Separate discussions in the bylaws regarding executive officers and their functions make clear to regulators that these are responsible parties for the corporation. Bylaws and Statements of Information that reflect the executive officers as the responsible parties for the organization allow corporations to report their executive officers to regulators instead of board officers. Due to the lower turnover of executive officers versus board officers, this often results in fewer filing fees for the organization over time.
Best Practices for Compliance
Ideally, SOS’ Statement of Information forms would align with the language in California statute, but there is no indication of a remedy of this issue or even that the SOS recognizes the confusion. Nonetheless, it is important to understand the differences in the roles of executive officers versus board officers, titles of which can oftentimes erroneously be used interchangeably. Internal corporate documents should be drafted in such a way to carefully distinguish between these roles. The most important document by which to make this distinction is the bylaws of the corporation, which should clearly delineate the responsibilities, appointment, removal, and other characteristics of the key executive and board officers of the corporation. For LLCs, this distinction should be detailed in the company’s Operating Agreement. And for corporations that operate primary care clinics, adding language in the corporate bylaws to delineate between W2 corporate or executive officers and board members who serve as officers on the board, and ensuring that your Statement of Information reflects this delineation, can help reduce both the organization’s filing obligations with various regulators and the associated costs. Utilizing an experienced corporate attorney that understands the differences in your organization’s officer roles is always highly recommended.