If you’ve received notice from the secretary of state that your corporate entity has been administratively dissolved, you’re not alone, and there’s no need to panic, but it’s definitely time to act. Administrative dissolution can happen for many reasons, and it can usually be remedied, but it is something you should attend to promptly. First, it helps to understand why dissolution occurs, how the process plays out in different states, and what your options are when seeking reinstatement.
Whether you’re working just in your home state or nationwide, your entity must be authorized to conduct operations in every state where you are active. This authority is granted by the secretary of state’s corporations office, and once granted, it must be actively maintained through all of the following means. Missteps in any of these areas can lead to dissolution.
Timely annual reports: Businesses and nonprofits must file periodic reports with secretaries of states by their due dates, generally every one to two years. Each state follows its own schedule, and while many states issue reminders, this isn’t always the case. For large organizations, this means tracking and filing reports more or less continually through the year, making it all too easy for a deadline to slip past unnoticed. Our Ultimate Guide to Annual Reports makes the task easier, with all the information you need to map out your due dates and file the reports on time.
An active registered agent: You must maintain a registered agent who is physically located within each state to receive legal documents and other important notices on your behalf. States communicate with your entity through your agent via physical mail as well as electronic means such as email and online interfaces. If your agent is no longer active or resigns their appointment, that is grounds for the state to dissolve your entity.
Current tax registrations and payments: You must also complete all required tax registrations and filings and pay all relevant taxes on time to maintain your entity’s good standing with state authorities. Sometimes, businesses and nonprofits are unaware of the full scope of tax reporting obligations that apply to their activities, which may include corporate income and privilege taxes, sales and use taxes, payroll taxes, franchise taxes, and more.
Many nonprofits don’t realize that even for taxes they are exempt from paying, they may need to file exemptions or fulfill other requirements annually with the state department of revenue. Our Guide to Nonprofit Tax Exemptions provides detailed breakdowns of these requirements in all 50 states.
If your entity misses an annual report, loses your registered agent, or misses a tax filing, you may or may not receive notice of the lapse. Most states do provide a grace period for addressing the issue and restoring the entity. If the state sends a notice, it will come to your registered agent, which is why the agent is so important to your business. If the registered agent is no longer accepting your documents, or fails to forward them properly, you can miss this critical opportunity to restore good standing.
When that happens, the state may dissolve your entity. Instead of good standing, your status may appear in state databases as dissolved or inactive. Upon dissolution, the entity may no longer carry on its business other than to wind up operations, liquidate, and pay off creditors. Unfortunately, many businesses and nonprofits are unaware that their good standing is in jeopardy until they are already at this stage.
In addition to losing the authority to transact business or other activities, your entity may lose important legal protections as a result of dissolution. “Limited liability” protections may cease to apply, leaving owners and officers personally liable for debts, contractual obligations, and legal judgments. The entity may also lose its ability to bring lawsuits or enforce contracts during the dissolution period.
In addition, once your entity is dissolved, your name is generally made available to other entities wishing to incorporate in your state. If you do decide to reinstate, you may no longer have access to your name.
Sometimes businesses will choose to abandon an entity in a state where they’re no longer active. Choosing this course does not stop the clock on your state obligations, however—on the contrary, it compounds them. The entity remains responsible for back taxes and any other unpaid fees due to the state, and with each missed filing, new penalties, fees, and interest are often added on.
In addition, your loss of good standing in any state can compromise your business’s credibility, prevent you from obtaining a certificate of authority in another state, or impede access to credit and financing.
For example, the North Carolina secretary of state’s office provides a database of corporate status online and urges businesses to use it to avoid contracting with administratively dissolved entities as they can increase risks such as “losing money if the business is, in fact, financially unstable; or, having difficulty serving the business with process in the event of a dispute.” In addition, the secretary of state advises businesses to add a good standing clause to contracts to provide legal recourse if the business is dissolved.
Even if you don’t want to continue operations in a state, it is far costlier to walk away than to make up your filings and restore your good standing. You can then dissolve the entity properly and walk away with a clean corporate record.
There is some good news when it comes to administrative dissolution. First, states recognize the challenges many organizations face in meeting all of their regulatory requirements, and build in time and means for relatively painless reinstatement in cases of simple oversights. All you have to do is address the issues that prompted dissolution by completing any missed filings, paying any overdue fees, and applying for reinstatement.
In many states, you will need to obtain a tax clearance form affirming that your taxes are up to date before applying for reinstatement. You may also need to foreign qualify again to reinstate your entity outside of your home state. Our online Reinstatement Guide has all the details, state by state, to help you sort through the details and plan a course of action.
If you need to restore good standing or dissolve an inactive entity properly, we can help. Our compliance specialists are experienced in dealing with state authorities to ensure prompt reinstatement or withdrawal and minimize damages to your organization. Simply get in touch or give us a call at 1-888-995-5895. We’re happy to help.