What Is an Inactive Corporation?

By Larissa Bodniowycz, J.D.

What Is an Inactive Corporation?

By Larissa Bodniowycz, J.D.

The meaning of the term "inactive corporation" depends on the context. First, it can refer to an official status recognized by the state where the corporation formed. Exactly what that status means varies by state, and not all states recognize an inactive status for their corporations. More commonly, the term "inactive corporation" refers to a corporation that continues to exist but does not actually do business.

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Options for an Inactive Corporation

A corporation has two options when it has become inactive in either sense: become active again or formally dissolve the corporation. Sometimes a corporation's inactive status is temporary. Maybe the business owner has taken a break, or maybe the owner forgot to file a required document with the state. In this case, the corporation should take steps to become active again. If all of its paperwork with the local, state, and federal governments is up to date, it can simply start doing business again.

If the corporation is not up to date with its obligations, it should quickly come into compliance with local, state, and federal requirements. In some states, failure to do so within a certain period of time can result suspension or termination, even if that's not what the corporation wants. Once the corporation is in compliance, it can start doing business again. This usually involves filing past due documents, paying late fees, and sometimes filing official requests to be considered active and in good standing.

If the corporation has no plans to continue operating, it should wind up its affairs and formally dissolve. This process involves obtaining the consent of shareholders and directors, filing paperwork with the state where the corporation formed to terminate the corporation's existence, and selling off and distributing the corporation's remaining assets, if any.

Consequences of Indefinitely Remaining Inactive

Owners of corporations often believe that if they no longer wish to operate, they can simply stop doing business without taking any other action. Technically, this is true, but simply abandoning a corporation in this manner can result in negative consequences for the corporation and its owners. When a corporation does not formally dissolve, it still legally exists, and as long as it legally exists, it may face the following consequences:

  • Continued responsibility to comply with state and federal taxes and obligations such as annual franchise tax, annual reports, and tax returns
  • Additional financial penalties for not complying with state and federal regulatory requirements
  • Remaining open to suit for the corporation's past acts and having to use assets that would otherwise go to shareholders to pay any adverse judgments

It's not uncommon for people to be surprised years later by bills from state and federal authorities for a corporation they stopped operating years prior but never formally dissolved. Rather than just abandoning a corporation, putting a little time and money into formally dissolving it can prevent such surprises. Be sure to understand your state's requirements for dissolving your corporation, and follow the steps necessary to ensure that your corporation is properly dissolved.

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.