The Difference Between Delinquent & Inactive Corporations

By Wayne Thomas

Corporations are a popular business type for small and large companies. Formed under state law, corporations provide limited liability to the owners, known as shareholders, and make ownership interests easy to transfer. Although the life of a corporation can be perpetual, failure to comply with state filing requirements can result in the company losing its authority to continue doing business.

Delinquent Corporations

Most states require a corporation to file an annual report with the Secretary of State or equivalent state authority and maintain a registered agent for receipt of official correspondence. If a corporation misses the deadline to file or does not timely replace an agent who resigns, the state typically issues a notice of the noncompliance. Failure to comply with the notice by a certain date results in the corporation being labeled "delinquent" by the state. However, state laws vary, and sometimes different terms are used. For instance, Kentucky uses the label "inactive corporation in bad standing" to describe companies that would be labeled as delinquent in other states. Check with your secretary of state to see what terms are used by that office.

Administrative Dissolution

The effect of a corporation being declared delinquent means that the state has the authority to administratively dissolve the business. This action results in the company being unable to transact business within the state until a reinstatement application is filed along with a filing fee and all paperwork and other outstanding fees are brought current. Because the company is still technically in existence, administrative dissolution does not have the same legal effect as a voluntary dissolution. A voluntary dissolution removes the company from existence, and is accomplished by vote of the shareholders and the filing of articles of dissolution.

Ready to incorporate your business? Get Started Now

Inactive Corporations

In contrast to delinquent status, inactive status means that the corporation has ceased conducting business transactions. The designation provides notice to the public, and in some states, reduces the company's licensing fees. However, if the corporation incurs expenses, purchases equipment, or opens bank accounts, it is still considered active even if no income is being generated. Although states vary, inactive status can be requested by filing a statement claiming that no corporate transactions were undertaken by the business within the previous year.

Inactive and Delinquent

A corporation that obtains inactive status must still adhere to state filing and reporting requirements. Failure to do so will result in the company being declared delinquent and subject to administrative dissolution. For this reason, if corporate activities have ceased, the shareholders of your business may decide that a better option is to voluntarily dissolve the company. The benefits to this method are that the company is no longer in existence and does not need to file reports. The downside is that you must go through the incorporation process a second time to start doing business again.

Ready to incorporate your business? Get Started Now
Can I Reinstate an Inactive Corporation?

References

Related articles

How to Dissolve a Corporation in New York With No Activity

Just as you must comply with filing regulations to form a corporation in New York, you must comply with final reporting requirements to dissolve your business. It makes no difference if there was little or no activity in the previous 12 months or even since start up. The New York Department of State does not recognize the dissolution of a corporation until the proper certificate is filed, the date of which is the date your corporation ceases to exist.

Closing an S Corporation in Georgia

S corporations are business entities that are closely held by a small number of shareholders. All corporations must follow the same dissolution procedures, but an S corporation is typically less expensive to dissolve than a C corporation because any gains on the distribution of corporate assets are taxed only once in an S corporation – at the shareholder level. Because Georgia corporations must register with the Georgia Secretary of State, the corporation must also formally file appropriate dissolution paperwork. If your corporation has not issued shares and has not “commenced business,” you can simply file Articles of Dissolution with the Georgia Secretary of State. Otherwise, you must file both an Intent to Dissolve and Articles of Dissolution.

What Happens to a Shareholder in a Dissolved Corporation?

A dissolved corporation ceases to legally exist and the effect this has on its shareholders depends on how it was dissolved. If the corporation is dissolved voluntarily and its assets distributed to the shareholders without paying all remaining corporate debts, the shareholders could become liable for the debts. If the corporation is dissolved involuntary by the court or administratively by the state, the shareholders can incur additional expenses and liabilities. Avoiding these negative financial consequences requires proper dissolution of the corporation.

LLCs, Corporations, Patents, Attorney Help

Related articles

What Is an Inactive Corporation?

An inactive corporation legally exists but has no business activity. A corporation is created by filing the necessary ...

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

In most states, corporations have an obligation to remain in good standing and avoid penalties, whether the company is ...

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 ...

Dissolution of Incorporation

In some cases, dissolving a corporation is more complicated than setting one up. A corporation that is winding down ...

Browse by category
Ready to Begin? GET STARTED