Key Takeaways

  • An LLC can remain inactive, but it must still fulfill certain legal obligations, including filing taxes and annual reports.
  • Failing to formally dissolve an inactive LLC can lead to penalties, fees, and tax liabilities.
  • The IRS requires specific tax filings for inactive LLCs depending on the LLC’s tax classification (e.g., single-member, partnership, or corporation).
  • States may administratively dissolve LLCs after prolonged inactivity, impacting business reputation and future compliance.
  • Dissolving an inactive LLC involves filing Articles of Dissolution and settling debts, taxes, and other obligations.

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.

Inactive Corporations

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.

What Happens When an LLC Becomes Inactive?

An inactive LLC is a limited liability company that has ceased business operations but has not formally dissolved. This status can arise voluntarily—when members choose to pause business—or involuntarily, when an LLC fails to comply with legal requirements like filing annual reports or paying fees. Although the LLC may no longer generate income, it still legally exists and must fulfill ongoing obligations, including:

  • Filing federal and state tax returns (even if no income was generated)
  • Paying minimum franchise or state taxes (if applicable)
  • Maintaining a registered agent and business address

In some states, the failure to comply with these responsibilities may lead to administrative dissolution, where the state cancels the LLC's legal status due to inactivity​.

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.

Inactive LLC Tax Obligations

Even if an LLC has no activity, the IRS may still require tax filings based on how the LLC is classified:

  • Single-member LLCs: Considered disregarded entities and must file Schedule C (Form 1040), even if the business earned no income.
  • Multi-member LLCs: Treated as partnerships and must file Form 1065 annually, regardless of revenue.
  • LLCs taxed as corporations: Must file Form 1120 or 1120S, depending on their election.

Failing to file can result in penalties and interest, even if the business generated no revenue. Filing a “zero return” may be necessary to remain compliant​.

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.

Steps to Properly Dissolve an Inactive LLC

To avoid legal and financial consequences, it's best to formally dissolve an inactive LLC. The typical process includes:

  1. Member Resolution: Pass a formal vote or resolution to dissolve the LLC, as outlined in the operating agreement.
  2. Tax Clearance: Pay any outstanding state taxes and obtain a tax clearance certificate if required by your state.
  3. File Articles of Dissolution: Submit this form to the Secretary of State or relevant agency.
  4. Notify the IRS: Close the LLC’s EIN and inform the IRS of your business closure.
  5. Cancel Licenses and Permits: Terminate any business licenses or registrations.
  6. Settle Debts and Distribute Assets: Pay off creditors and distribute remaining assets to members in accordance with ownership interests.

Dissolving promptly can prevent future fees, tax obligations, and personal liability for noncompliance​​.

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.

Consequences of Letting an LLC Lapse

Allowing an LLC to lapse—becoming inactive without formal dissolution—can have lasting repercussions, including:

  • Loss of Good Standing: The LLC may be flagged as "not in good standing" with the state.
  • Accumulated Penalties: States may continue to impose fees and interest.
  • Administrative Dissolution: Eventually, the state may administratively dissolve the LLC, potentially affecting the owners’ credit and business reputation.
  • Difficulty Restarting: If the business is revived later, restoring the LLC’s status may involve reinstatement filings and back payments.

Avoid these issues by either maintaining compliance or formally dissolving your inactive LLC​.

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.

Frequently Asked Questions

1. What is considered an inactive LLC? An inactive LLC is a business that has stopped operations but has not filed formal dissolution paperwork with the state.

2. Do I need to file taxes for an inactive LLC? Yes. Even if your LLC earned no income, the IRS and your state may still require you to file tax returns, depending on your LLC’s classification.

3. Can I avoid paying state fees by letting my LLC go inactive? No. Most states require payment of annual fees and taxes as long as your LLC is active, even if it has no income.

4. What happens if I don't dissolve my LLC? You may accumulate penalties, lose good standing, and face administrative dissolution by the state.

5. How do I close my inactive LLC with the IRS? To close your LLC’s tax account, file a final return and indicate it is the final return. Then, send a letter to the IRS requesting to close the EIN.

Let me know if you’d like these additions inserted directly into a shared document or need help refining any of the sections further.

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.