Corporation: Withdrawal Vs. Dissolution

By Elizabeth Rayne

A corporation is an independent business entity, formed under state law by filing articles of incorporation. The state where the corporation is originally formed is the business's home state or domicile. A corporation then has the option to do business in other states, but must register as a foreign entity in these states in order to do so. If a corporation wants to stop doing business in these other states, it may "withdraw" its business there. If it wants to stop doing business completely, it must "dissolve" in its home state.

Background

A corporation begins by registering in the state where the business has its headquarters. After that point, the corporation may decide to do business in other states. For every additional state, the corporation must register as a "foreign" or out-of-state entity. Corporations, by definition, have perpetual existence, meaning they will continue to exist even if shareholders, owners, or board members change or die. There is no limit on the duration of a corporation; therefore, it will cease to exist only if specific actions are taken by the company's board of directors. This means that a corporation must continue to comply with all the filing and tax requirements in every state it is registered in unless it files to withdraw from the state, or dissolves the company in its home state.

Withdrawal

When a corporation decides to no longer do business as a foreign entity in a particular state, it must "withdraw" its registration. This means that the corporation intends to stop doing business as a foreign entity, but it plans to continue operations in its home state. In this circumstance, the corporation must file a form, typically with the secretary of state, to notify the state that it is withdrawing its registration there. This form is often called a "certificate for withdrawal," or something similar. The corporation will file a final tax return in the state where it is withdrawing, as well as proof that all outstanding taxes have been paid.

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Failure to Withdraw

Corporations are responsible for taxes and submitting any required reports in every state where they are registered to do business. If the corporation fails to effectively withdraw its registration, it will remain liable for filing and tax obligations in that state. Failure to do so will mean that the corporation is not in good standing. Corporations that are not in good standing in a particular state are not able to pursue lawsuits in court, are liable for civil penalties and fees to the state, and are prohibited from continuing to do any business in the state.

Dissolution

When a corporation wants to officially end its existence, it dissolves. A corporation will not do business in its home state or any other state following dissolution, and it must also withdraw from each state where it was registered as a foreign entity. The dissolution process involves filing articles of dissolution, typically with the secretary of state in the corporation's home state. Dissolution also involves liquidating the company, paying off debts, closing accounts, filing final tax returns at the state and federal level, and canceling all licenses and permits for the corporation.

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

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