Key Takeaways:

  • An inactive LLC still legally exists but is not conducting business activities.
  • Even if an LLC is inactive, tax filings and state reporting obligations may still apply.
  • Failing to close an inactive LLC properly can result in fines, fees, and potential personal liability for unpaid taxes.
  • Owners can dissolve an inactive LLC formally by filing articles of dissolution and fulfilling state-specific requirements.
  • In some cases, reviving an inactive LLC is possible, but it involves paying back fees and filing necessary paperwork.
  • Keeping an LLC inactive for future use can be beneficial, but ongoing costs and compliance requirements should be considered.
  • Consulting an attorney through UpCounsel can help with determining the best course of action for an inactive LLC.

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.

Legal Implications of an Inactive LLC

Even if your LLC is considered inactive, it is still legally recognized by the state. This means you may continue to be responsible for filing annual reports, paying franchise taxes, and maintaining your registered agent service. Failing to meet these obligations may cause the LLC to lose its good standing, which can result in:

  • Accumulation of late fees and penalties.
  • Administrative dissolution by the state, making the business noncompliant.
  • Increased risk of personal liability for business debts if the LLC is not formally dissolved.

Additionally, an inactive LLC can still be sued. If you are not monitoring the LLC’s legal standing, you may miss important legal notices, leading to default judgments against the company.

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.

To form a corporation, the necessary documents must be filed with the appropriate state agency and 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.

How to Properly Dissolve an Inactive LLC

If you decide to shut down your inactive LLC permanently, you must formally dissolve it with the state. The process generally involves:

  1. Member Approval: Secure formal agreement from all LLC members through a written resolution or vote.
  2. File Articles of Dissolution: Submit this document to the Secretary of State in the state where the LLC is registered.
  3. Settle Outstanding Obligations:
    • Pay any remaining business debts.
    • File final tax returns and notify the IRS of closure.
    • Cancel business licenses and permits.
  4. Close Business Accounts: Shut down business bank accounts and credit lines.
  5. Maintain Records: Keep copies of dissolution filings and tax records for at least a few years.

Failing to dissolve an inactive LLC properly can result in the LLC being held responsible for fees and taxes indefinitely.

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.

Reviving an Inactive LLC

If your LLC has been administratively dissolved but you wish to restart the business, you may be able to reinstate it. The reinstatement process typically involves:

  • Paying all overdue fees and penalties.
  • Filing delinquent annual reports.
  • Submitting a reinstatement application with the state.

Some states impose time limits on reinstatements, while others allow businesses to revive their inactive status at any time. Reinstating an LLC is often more beneficial than forming a new one, as it preserves the original tax ID, business name, and credit history, preventing disruptions in financial and legal records.

Filing Taxes for an Inactive LLC

Even if an LLC has had no business activity, it may still be required to file a tax return, depending on its tax classification:

  • Single-Member LLC (Disregarded Entity): If the LLC is taxed as a sole proprietorship, you may still need to report the LLC’s existence on Schedule C of your personal tax return.
  • Multi-Member LLC (Partnership): Must file Form 1065, even if there was no activity.
  • LLC Taxed as a Corporation: Must file Form 1120 or 1120S annually.

Filing a “zero income” tax return can help prevent future issues with the IRS, maintain the LLC’s status, and avoid potential fines.

Keeping an LLC Inactive for Future Use

Some business owners keep an LLC inactive for potential future use, such as:

  • Relaunching operations at a later date.
  • Reserving the business name.
  • Holding assets under the LLC’s legal entity.

However, keeping an LLC inactive still requires compliance with state regulations:

  • Paying annual fees or franchise taxes.
  • Submitting annual reports.
  • Maintaining a registered agent.

Before choosing to keep an LLC inactive, weigh the ongoing costs against the benefits of preserving the business entity.

Frequently Asked Questions

  1. What happens if I don’t dissolve my inactive LLC?
    • Your LLC will continue to accrue fees and taxes, and may face administrative dissolution. You could also face personal liability if the LLC is improperly handled.
  2. Do I need to file taxes for an LLC with no income?
    • Yes, in many cases. Even if your LLC had no income, it may still need to file a tax return depending on its tax classification.
  3. Can I revive an inactive LLC?
    • Yes, you can typically reinstate an LLC by paying outstanding fees and filing required documents with the state.
  4. How much does it cost to keep an LLC inactive?
    • Costs vary by state but may include annual report fees, franchise taxes, and registered agent fees.
  5. Can an inactive LLC still be sued?
    • Yes, an LLC remains a legal entity until dissolved, meaning it can still be subject to lawsuits.

If you need help with understanding the inactive business status, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.