Can a Corporation Stay Inactive or Does It Have to Be Dissolved?

by Elizabeth Rayne
    After closing doors for business, a corporation still has obligations to the state.

    After closing doors for business, a corporation still has obligations to the state.

    George Doyle/Stockbyte/Getty Images

    In most states, corporations have an obligation to remain in good standing and avoid penalties, whether the company is active or inactive. A corporation is an independent entity formed and dissolved under state law, with an existence separate from its owners. State laws that allow a corporation to be formed often allow it to stay in existence perpetually until dissolved, even if the shareholders change or pass away.

    Inactive Corporations

    An inactive corporation is one that does not engage in any business, although it is still registered with the state and has not filed dissolution documents. When a corporation does not make any sales, enter into any new contracts or provide any services to the public, it is inactive. Some states will consider the corporation inactive only if it has no employees and no property in the state. Inactivity is often the first step of dissolving a corporation, but the company may choose to return to activity instead of dissolving.

    Good Standing

    All corporations, active or not, must remain in good standing in every state where the company is registered. Failure to remain in good standing may result in the state dissolving the corporation. In most states, to remain in good standing you must file annual reports and pay all corporate taxes. A state may find you are not in good standing if you do not inform the state when the corporation moves or do not maintain a registered agent to accept legal documents on behalf of the company.

    Effect of Inactivity on Good Standing

    A corporation may face penalties if it does not remain in good standing during periods of inactivity. A state may administratively dissolve the corporation, removing your authority to do business until the corporation is reinstated. If the corporation is dissolved, you may not have protection from personal liability for any new business you enter into. Further, the corporation may continue to accrue penalties and fees for taxes or other expenses owed to the state. In some states, if corporate taxes are not paid and the corporation has not dissolved, the officers of the company may become personally liable for the outstanding tax liability.

    Dissolution and Official Inactive Status

    The only way to completely remove a corporation's obligations to a state is to dissolve the corporation. However, a few states, such as Pennsylvania and New Jersey, allow inactive corporations to file an inactive tax report to avoid corporate tax liability for the years a company does not engage in business activity. However, not all states have this option for corporations and may still require inactive companies to pay the minimum entity tax for corporations.

    About the Author

    Elizabeth Rayne earned her J.D. from Penn State University and has been practicing law since 2009, advising clients on issues ranging from employment law to nonprofit management. For two years, she served as a contributing editor for the "Vermont Environmental Monitor."

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