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

By Elizabeth Rayne

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.

Ready to incorporate your business? Get Started Now

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.

Ready to incorporate your business? Get Started Now
The Difference Between Delinquent & Inactive Corporations


Related articles

How to Change the State of Incorporation

Corporations have several options when it comes to expanding to new locations or relocating the home base. The state in which the corporation chooses to incorporate is known as its home base, or "domicile." The corporation is considered a citizen of that state. It is relatively easy to obtain the authority to operate in other states as a foreign corporation, while changing the domicile is a more complicated procedure.

What Is an Inactive Corporation?

An inactive corporation legally exists but has no business activity. A corporation is created by filing the necessary forms with the state business department and the IRS. Once a corporation is officially registered with the state and federal government, it's a legal business and remains so until the corporation is formally dissolved. A corporation that is inactive but not dissolved still has tax and state reporting obligations.

How to Transfer Liability From a Sole Proprietorship to a Corporation

A sole proprietorship is a business operated by a single individual and is not registered with any state as a corporate or limited liability entity. A sole proprietorship is easy to set up and maintain, but its major drawback is that the owner-operator is personally liable for the debts and obligations of the business. In contrast, a corporation is a business operated by one or more persons who are registered with the state; a corporation protects its owners from personal liability for company debts and obligations. Thus, most owners of sole proprietorships eventually convert, or consider converting, their businesses to corporations to avoid personal liability.

LLCs, Corporations, Patents, Attorney Help Incorporation

Related articles

Can I Reinstate an Inactive Corporation?

A corporation is an independent entity that exists with a legal life of its own. Every corporation is subject to the ...

How to Re-Open a Dissolved Company

In theory, corporations can exist forever, but they can also go out of business or be dissolved for other reasons. For ...

Corporation: Withdrawal Vs. Dissolution

A corporation is an independent business entity, formed under state law by filing articles of incorporation. The state ...

The Dissolution of an S Corp

An S corporation is a corporation that is subject to special IRS taxation rules. Except for certain taxation issues, ...

Browse by category
Ready to Begin? GET STARTED