The Difference Between Delinquent and Inactive Corporations

By Laura Payet

The Difference Between Delinquent and Inactive Corporations

By Laura Payet

Corporations big and small are created and regulated under state law. The corporate format is popular with business owners because it shields them from personal liability for business obligations and because ownership interests are easily transferred.

Man wearing glasses and reading paperwork

States impose various filing and tax obligations on corporations doing business within their borders. A delinquent corporation is one that has failed to keep up with these obligations but may still be conducting business. An inactive corporation, on the other hand, is compliant with all its state obligations but is not currently conducting business.

State Filing Requirements

Every state places some kind of regular reporting requirement on the corporations doing business there. Many states demand an annual report, while others, such as New York, only require a report every two years. Whether annual or biennial, this report's purpose is to ensure that the state has current information regarding both the corporation and its registered agent. Typically, the corporation must pay a fee when filing its report.

Additionally, some states impose an annual franchise tax on each corporation, separate from any tax on corporate profits. Delaware, one of the most popular states for incorporation, levies this kind of tax. Beyond the franchise tax, a corporation may also have to file a state tax return and pay state income tax. Corporations which are up to date on taxes, fees, and reporting requirements are in good standing.

Delinquent Corporations

When a company is not in compliance with its state filing and tax obligations, it is considered delinquent, although some states may use different terminology, such as "not in good standing." A delinquent corporation maintains its legal existence and may be continuing to conduct business in the state but it faces a variety of potential consequences. These consequences include:

  • The state may impose additional fees and penalties.
  • The state may involuntarily dissolve the corporation, meaning that the company cannot legally transact business in the state until it files a reinstatement application, pays a reinstatement fee, and satisfies any outstanding filing or tax obligations and penalties.
  • Lenders may refuse to approve financing if the company cannot show it is in good standing.
  • The company may lose access to state courts to protect its rights while delinquent.
  • According to some specialists, the company risks becoming prey to business identity thieves, who troll state records for delinquent companies and, presuming that no one from the corporation is paying attention, may try to use the company's name to make purchases, borrow money, or take other potentially costly actions.

Inactive Corporations

In contrast to a delinquent corporation, an inactive corporation is one that is no longer conducting business in the state. Such a corporation can request inactive status, which may lower certain licensing or professional fees. An inactive corporation retains its legal existence and is still responsible for complying with all state filing, fee, and tax obligations, including annual reports, filing fees, franchise taxes, and income tax returns. An inactive corporation must also file a federal income tax return, even if it earned no income—although it may owe no tax.

Note that an inactive company is one that carries on no business activities at all in the state. It is not one that makes no profit or has no sales. Thus, for example, a company that purchases goods or opens a bank account would not be considered inactive. An inactive corporation's owners may choose to dissolve the company to avoid having to meet ongoing filing and tax requirements.

If you are considering starting your own business, a corporation might be the right business entity for your needs. An online service provider can help with filing the right paperwork with your state and creating the necessary internal documents to get you going.

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.