Inactive Business Status: Everything You Need to Know
When a company has an inactive business status, this means that it still exists in the eyes of the law but that it has no activity taking place.3 min read
2. How to Form a Corporation
3. Things to Consider
What is an inactive business status? When a company has an inactive business status, this means that it still exists in the eyes of the law but that it has no activity taking place. It could also mean that it has had no business transactions take place in a particular year.
What Is an Active and Inactive Business?
A business is considered active if:
- Employees are being paid
- Credit or debit cards are being used
- Supplies are being purchased
- Expenses are being paid
If any of the above-mentioned activities take place, it would qualify a company as having an active business status. Even if a company has no income, if there are any types of transactions taking place, then it will still have an active status.
For example, let's say you have set up a limited liability company, also known as an LLC, and you are selling products or services on the internet. About a year after you open shop, though, you decide you don't want to continue. Shutting down the entire business may not suit your interests, so you leave it up and running and you pay for your website but you don't conduct any further action than that. This means you are still investing in the business, therefore, it's active. But if you let the website expire and you don't put any other effort into it, then it would become inactive.
When a sole proprietor is not registered with a state, this means there are no state fees to be paid. However, if the person has a federal tax number, or even a social security number, which he or she should, then any profits must be filed at the end of the year using a Schedule C tax form. In fact, this form must be filed regardless of whether or not the company had any income or expenses.
How to Form a Corporation
A corporation is typically formed for a number of reasons, with one being to shift the liability of a business away from the owner's personal assets.
The necessary paperwork must be filed in order to form a corporation, and it must be sent to the correct state business department as well as the IRS. In the eyes of the law, a corporation is completely separate from its owners. They can issue stock to their owners, but the business will have to file its own income tax return. And once it's actually registered with the state along with the federal government, it will remain a legit business until the proper steps are taken to dissolve it.
Also noteworthy is that most state laws will allow a business to stay in existence even if its shareholders or owners pass away. As stated before, steps must be taken to dissolve the business or it will remain in existence.
In order to start a small business, the owner must file articles of incorporation. This paperwork must be filed with the Secretary of State office in which the business is going to operate out of. Some states, however, mandate that a board of directors be appointed in order to officially start a small business. You will need to check with your state to see which requirements must be met.
You will also need to acquire a tax identification number, which is especially important because this is what separates you from having personal liability for the business in regards to your personal assets.
Things to Consider
To keep your business active, you will need to file annual reports along with your annual tax return. In addition, you will have to pay certain fees. If you don't, the state may deem your business as inactive. An inactive business still exists in the eyes of the law. It simply means that it does not engage in any type of transactions or business.
As noted before, until the company is dissolved, it will still exist. Even when a business is inactive, this doesn't mean it's not subject to certain reporting requirements. You will need to check with your state to see which reporting requirements must be met.
Also, some states may consider a corporation as inactive if it doesn't have any in-state employees or has no property within the state.
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