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

By River Braun, J.D.

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

By River Braun, J.D.

While a corporation can remain inactive, it makes the most sense to officially dissolve it. Once a business has been created under state law, it continues to exist until it is officially dissolved, even if the owners die or shareholders change. As part of the formation process, companies must disclose certain information and obtain an employee identification number or tax identification number so that the taxing agencies can collect appropriate taxes. Whether the business is active or inactive, it must remain in good standing with governing authorities to avoid penalties.

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Inactive Corporation

Inactive corporations are those that have ceased operations, but have not filed dissolution paperwork. While it is still a registered corporate entity under state law, the owners cannot utilize the business to enter into contracts, perform services, or make sales. In some states, an entity can only be deemed inactive if it has no employees and no real property in the state. Often, a company becomes inactive prior to dissolution, though until the dissolution documents are filed, they have the option to resume operations.

Good Standing Status

Regardless of whether the corporation is inactive, it must be in good standing in any state that it is registered. Good standing means that all corporate formalities are followed, including paying all corporate taxes and filing annual reports. A business may fall out of good standing if the owners relocate the principal address without telling the state, or if they fail to maintain a registered agent for service of process. If a corporation does not remain in good standing, the state may take steps to dissolve it.

If a company does not remain in good standing while it is inactive, the state may dissolve it and impose penalties. If the state dissolves it, the owners will not have the protection from personal liability they once enjoyed for any future business engagements. If not dissolved, the company will continue to incur penalties for outstanding taxes. Owners may become personally liable for any outstanding tax liability as a result.

Removal of Business Obligations

In most states, a corporation continues to incur penalties if it has not been dissolved. Only a few states, like New Jersey and Pennsylvania, allow inactive entities to file an inactive tax report. In states where inactive tax filings are not an option, the company must pay the minimum entity tax. While there is no legal requirement that a business dissolve within a specified time period of inactivity, there are financial reasons to do so. In short, it must be dissolved in order to avoid further liability.

To file for dissolution, the owner must file Articles of Dissolution with the Secretary of State where the company was formed. In some cases, states require the owners to provide public notice of the dissolution, in the form of a legal ad in a paper of general circulation. Before dissolution, the business must pay off all debts, including back taxes and fees. Finally, the company must distribute any remaining assets to shareholders.

Before choosing to simply stop doing business through your corporation, consider the potential legal implications of not formally dissolving it. Visit your Secretary of State's website to find out what you need to do to officially complete the dissolution process so that you can avoid penalties down the line.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.