Key Takeaways:

  • A dissolved corporation typically loses its corporate powers, meaning it cannot legally operate as an entity.
  • Businesses can be dissolved voluntarily, administratively, or involuntarily due to failure to comply with state regulations.
  • Operating a dissolved company can result in personal liability for owners and officers.
  • Some corporations continue operating under a DBA, but this does not protect them from legal and financial risks.
  • Reinstatement is often possible through a process that varies by state.
  • Creditors can still take legal action against a dissolved or suspended company.
  • Tax obligations do not disappear upon dissolution; companies must settle outstanding debts and filings.

A dissolved corporation still operating typically has no corporate powers, meaning that the company has no legal rights as a corporate entity.

Dissolution

On occasion, a financially troubled business deals with tough decisions, such as which creditors to defer and which to pay. Creditors include federal and state taxing authorities, and if you opt to defer a payment of state taxes, you might encounter significant legal and economic consequences.

Unfortunately, a business might accidentally overlook a state tax payment or filing obligation. As a result, the business suffers dissolution of the corporation by proclamation. Under state law, the legal entity of the corporation ceases to exist and it does not have any legal rights as a corporate entity.

Voluntary vs. Involuntary Dissolution

There are two primary types of corporate dissolution: voluntary and involuntary.

  1. Voluntary Dissolution occurs when the company’s owners or shareholders decide to formally close the business. This process usually includes:
    • Settling outstanding debts and obligations.
    • Filing necessary dissolution paperwork with the state.
    • Notifying employees, vendors, and creditors.
    • Closing business bank accounts and canceling registrations.
  2. Involuntary Dissolution can happen when:
    • The company fails to meet state compliance requirements, such as annual report filings or tax payments.
    • A lawsuit results in a court-ordered dissolution.
    • Shareholder disputes lead to a forced shutdown.

The dissolution type affects how a company may handle reinstatement and legal responsibilities.

Suspended Corporation

There's a difference between a suspended and a defunct corporation. A suspended corporation could be one of the following:

  • It could be dealing with a state of suspension.
  • It could be clearing up issues that led to the suspension.
  • It could be working on proceedings to forfeit its charter.
  • It could be processing involuntary or voluntary dissolution.
  • It could be appointing a trustee.

When a corporation encounters a suspension, it is still an entity. However, it cannot legally transact any business and has its corporate powers suspended until it files for an entity revival. Once it fixes its deficiency, it can gain activation.

Sometimes a suspended corporation remains in business. If this occurs, the owners usually operate the business as a doing-business-as (DBA) entity. To check the status of a corporation, go online to your specific state's Secretary of State office.

A suspended corporation voluntarily shuts down, whereas a dissolved corporation means that officers shut down the company properly. While forfeited and suspended mean almost the same thing, the company failed in one regard or the other to file proper reports or pay taxes.

Consequences of Operating a Suspended or Dissolved Corporation

Operating a business after dissolution can lead to severe legal and financial repercussions, including:

  • Loss of Limited Liability Protection: Business owners and officers may become personally liable for debts, lawsuits, and contractual obligations.
  • Inability to Sue or Defend in Court: A dissolved corporation cannot legally initiate lawsuits or defend itself in court.
  • Tax and Penalty Accrual: Even if a business stops operating, tax obligations remain. The IRS and state tax agencies can still pursue unpaid taxes, penalties, and interest.
  • Bank Account Restrictions: Many banks will freeze or close corporate accounts upon learning of a business’s dissolved status.
  • Loss of Business Licenses and Permits: Operating without required business licenses can lead to fines and additional penalties.

While some businesses attempt to continue under a DBA, this does not provide legal protection and can increase personal liability risks.

Administrative Dissolution

Laws or business corporation laws defined by the state determine entity dissolution. When administrative dissolution occurs, a business can still operate, have bank accounts, and accept payments. However, a creditor cannot go after any possible assets of that entity.

If the suspended or defunct entity receives payment from clients, the checks must go into a corporate bank account. A debtor examination, or ORAP, can occur on the officer.

Businesses can continue to operate for years without applying for reinstatement. An administrative dissolution doesn't mean the entity has no responsibility in paying its creditors or that legal action cannot occur.

If you have a judgment against a suspended corporation that continues to operate, you can try to locate its bank. In levying its bank account, the corporation cannot claim an exemption or try to block you until it reinstates its corporate standing.

The corporation cannot defend any action you take in court against it as long as the suspension remains active. The only defense the entity has is to tell the court that the debtor principals will reinstate the company and ask for a continuance.

A voluntarily dissolved entity can decide it no longer wants to remain in business for a variety of reasons. It proceeded to follow all state and business corporation laws to shut down the business properly. Afterward, former officers or legal representatives apply to the Secretary of State for a certificate of dissolution.

How to Reinstate a Dissolved Corporation

Reinstating a dissolved corporation may be possible, depending on state laws and the reason for dissolution. The process typically includes:

  1. Filing a Reinstatement Application: Most states allow corporations to file a formal reinstatement request.
  2. Paying Outstanding Fees and Taxes: Businesses must clear any unpaid state fees, taxes, and penalties.
  3. Submitting Required Documents: Some states require the business to provide missing reports, statements, or other compliance documents.
  4. Obtaining a Certificate of Reinstatement: Once reinstated, the business regains its legal status and corporate rights.

Reinstating promptly helps avoid additional penalties and legal complications.

Carrying on Business in the Name of a Dissolved Corporation

Incorporating a business gives its officers and directors protection against personal liability. But failing to keep the corporate entity in good standing with the Secretary of State's office can lead to personal liability for the business owners who continue to conduct business under the defunct corporate entity's name.

When incorporating a business, there are benefits and disadvantages. Businesses must adhere to strict corporate formalities, even if there's corporate dissolution. The law dictates specific rights and obligations upheld by corporate officers upon dissolution.

If the corporate office conducts business on behalf of the dissolved corporation, the corporate officer holds personal liability on those transactions. This holds true even if the officer doesn't know about the corporate dissolution. Consequently, corporate officers must make sure the corporation maintains lawful existence and adhere to rights and obligations pertaining to corporate activities.

Personal Liability Risks for Business Owners

One of the biggest misconceptions is that a dissolved corporation shields business owners from legal responsibility. However, when a dissolved entity continues to operate:

  • Owners and officers can be held personally liable for business debts and legal claims.
  • Creditors can pursue personal assets to recover unpaid debts.
  • Customers and vendors may sue individuals instead of the defunct company.
  • The state may impose criminal or civil penalties for unauthorized business operations.

For those unsure about their company’s status, it’s advisable to check with the Secretary of State’s office and seek legal counsel before continuing operations.

Frequently Asked Questions

  1. Can a dissolved company still operate legally?
    No, a dissolved company loses its corporate rights and cannot legally operate. Owners may face legal and financial consequences if they continue business under the dissolved entity.
  2. How do I reinstate my dissolved business?
    The process varies by state but typically includes filing a reinstatement request, paying outstanding fees, and submitting missing compliance documents.
  3. What happens to business debts after dissolution?
    Dissolution does not eliminate business debts. Creditors can still seek repayment, and owners may be personally liable if they continue operations improperly.
  4. Can I use a DBA to continue operations after dissolution?
    While some businesses attempt to operate under a DBA, this does not provide legal protection, and owners may still face personal liability.
  5. Are taxes still due after a business dissolves?
    Yes. Businesses must file final tax returns and pay any outstanding taxes, even if they cease operations. The IRS and state agencies can impose penalties for non-compliance.

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