Inactive Dissolution: Everything You Need to Know
Inactive dissolution refers to dissolving a business that is inactive and it doesn't need to file an income tax returns or annual reports.3 min read
2. Forming a Corporation
3. Inactive Corporations
4. Disadvantages of Becoming Inactive
5. Dissolving a Corporation
6. Dissolve Your Inactive Business to Avoid Penalties
7. New California Law Governing Dissolution of Inactive California Nonprofit Corporations
Inactive dissolution refers to dissolving a business that is inactive. When a business dissolves, it no longer has to file income tax returns or annual reports, so those aspects are the main benefits of electing to dissolve, rather than simply becoming inactive.
Can a Corporation Stay Inactive or Does It Have to Be Dissolved?
A corporation is a type of business entity that removes the personal liability for the owners, called shareholders. A corporation can exist with just one owner, but it is a separate entity from its owner. Corporations must file income tax returns annually. If this type of business entity is no longer engaging in business activities, the owners can either allow the corporation to be inactive or file documents with the state to dissolve it.
Forming a Corporation
In order to form a corporation in any state, the owner must file articles of incorporation with the secretary of state's office. In certain states, a board of directors is required to be appointed as well. A corporation may need to issue certificates or shares of stock to the shareholders. In all states, a corporation must obtain a tax identification number for filings its income taxes, as well as to obtain all required local and state licenses to do business in the area.
In order to maintain an active status for a corporation, most states require the filing of income tax returns and reports every year. Some states also require the payment of annual fees. If a corporation doesn't meet the requirements, the state may render it inactive. Corporations that cease business operations can also become voluntarily inactive.
Disadvantages of Becoming Inactive
Although no legal requirement exists stating that a corporation no longer doing business must dissolve, allowing the corporation to become inactive without dissolving can have some disadvantages. As long as a corporation exists in the state, it is required to file federal and state income taxes, even if it had no income and engaged in no business activities during the tax year. In many states, minimum taxes are also levied on businesses, whether the company's status is active or inactive. Maintaining a corporation that is inactive may also require the payment of additional fees or penalties.
Dissolving a Corporation
In order to begin the process of corporation dissolution, the owner(s) must file the articles of dissolution, a document that outlines the plan to dissolve. This document is filed with the secretary of state's office. Some states also have a requirement to post a notice in a local newspaper that is generally distributed in the area. Prior to being able to dissolve, the corporation must also:
- Distribute any remaining assets to its shareholders
- Pay any outstanding taxes to reach a current status
- Pay off any outstanding debts
The process of corporation dissolution can be complex, so it's best to consult with an experienced business attorney to assist with each required step.
Dissolve Your Inactive Business to Avoid Penalties
In order to avoid penalties and dissolve, both LLCs and corporations must file articles of dissolution with the state. Failure to file for a dissolution of the business will result in the LLC or corporation to still be in existence. It must follow all required obligations, including paying fees and taxes, as well as filing annual reports and income tax forms. In order to avoid possible penalties, the owners of a business should tie up loose ends and file the articles of dissolution.
The owners of a corporation must also take steps to legally acknowledge the dissolution. This process involves informing the secretary of state's office in the state where the business is operating that the corporation or LLC is closing down. The next step is contacting the Electronic Federal Tax Payment System (EFTPS), which is the agency that manages quarterly tax withholdings for businesses. It's also important to contact the department of labor in the state where the business operates to inform that the business no longer has revenue streams or employees.
New California Law Governing Dissolution of Inactive California Nonprofit Corporations
A law went into effect in January of 2016 in California that impacted nonprofit organizations that became inactive. Under this law, nonprofit corporations that became inactive but were eligible for dissolution could either dissolve voluntarily or be dissolved by state authorities. If the nonprofit elected for an administrative dissolution, it could receive an abatement of any penalties, interest, and state franchise tax for the previous year.
If you need help with an inactive dissolution, 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.