The State of the Corporation

For many small corporations, keeping up with the requirements of maintaining the corporation’s (or LLC’s) existence seem to be administrative details. Those “details” can become substantial issues when they cause the state government, (that grants the corporation its right to exist) to take action for failure to keep those details accurate and complete. One of those actions is “administrative dissolution,” which essentially means that the state revokes the existence of the corporation, or in legal terms, “the involuntary cessation of the existence of the corporation.” This involuntary termination of the corporation’s existence appears to set in motion the end of the existence of the separate legal entity from its owners and sets into motion other entity changes for tax, liability, and other  issues surrounding “doing business.”[1]

Understanding the Issue

A corporation comes into existence through permission or recognition of existence under the rules and regulations of a particular state government. The corporation is created as a separate legal (and tax) entity based upon the state’s recognition of the new entity. To maintain the entity’s existence, the company must continue to meet the requirements of the state and comply with ongoing regulatory requirements. When a corporation doesn’t do this, the state notifies the corporation and gives it time to respond to the perceived (or actual) non-compliance. In the event the corporation doesn’t respond or doesn’t correct the issue, or continues to be outside the boundaries of the laws and requirements, the state can, and usually will, act to terminate the existence of the corporation: administrative dissolution.

This is a simplistic and non-legal explanation of the process, but you get the gist of the matter. What is important to understand is that corporations (of all sizes) are vulnerable to dissolution for not tending to the small “details” of their businesses and this can have far-reaching consequences.

In Good (Under) Standing

The consequences of being administratively dissolved are can be significant. For instance, another company may be able to begin doing business under a name very similar to your business name.[2] You may not be able to get the administrative dissolution reversed and may incur significant legal expenses in an appeals process, just to name a few examples. In addition, there may be tax and other business consequences related to the state’s dissolution action.

The Tax Man Watches and Waits

In a recent conversation with the U.S. Internal Revenue Service Corporate Tax Division discussing the consequences of administrative dissolution, there were a number of potential issues raised including change of tax entity, additional or proper filing of taxes, and a host of other potential ramifications, that all depend upon the particular situation of the corporation involved. From my conversations with tax advisors hold different opinions on what the implications of administrative dissolutions are and what actions are required by the corporation, but some actions are undoubtedly required because not responding to an administrative dissolution will allow it to stand.

For a corporation that has been newly administratively dissolved, rectifying the situation and returning to being a corporation in good standing with the state might be quickly executed. For another company, it may be much more involved and complicated. If the corporation didn’t rectify the issue for several years, the issues become more numerous and systemic as time goes by, becoming compounded by the implications of their impact on those “other” entity issues.  What were once simple details flow from legal entity issues into tax and other issues: not responding to government notices remaining in non-compliance is not a situation that is likely to go in the corporations favor.

When I discussed this with the IRS, using an example of a company being administratively dissolved four years ago and continuing to file documents and continue to do business without responding to the state, the IRS was clear that there were tax consequences with regard to the corporation no longer being a corporation at that point. This may be up to debate, perhaps, but it’s not a debate I would want to be having with the IRS or the state if I were in business. How about you?

It Depends: On You!

After many discussions with many tax attorneys, CPAs, state government officials, and even the IRS, my conclusion is that tending to the details and keeping your corporation in compliance are always the best approaches to doing business. Keeping in compliance means that you don’t have to be concerned about how the Federal and state tax agencies will classify you; your customers don’t have to worry about doing business with you; and nothing will be a “Well, it depends” response.

I also have to say, that in talking with the government resources, this is the first time I’ve received the same answer from every person and organization I asked. Administrative dissolution of a corporation is just a “detail” and has significant consequences for the legal and tax entity of the corporation…you may just not be aware of those consequences…you may also not be aware of whether or not your corporation or (LLC) has been “administratively dissolved”. One of those little details you may have overlooked is keeping the state informed of just where your business is located…so all those notices you should have been getting may not be getting to you. Want to know the status of your business? Check out the Secretary of State’s Web site for the state you set up your business in. Hopefully you won’t be unpleasantly surprised.[3]

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[1] Note: My research on the Web sites of various state legislations indicates that administrative dissolutions also apply to limited liability companies (LLCs). For simplicity, I’ll be referring to the corporate legal entity form throughout this article.

[2] North Carolina statutes related to the process of reversing an administrative dissolution actually cite what happens if another business has been granted a name similar to that of an entity that has been administratively dissolved that is seeking to be reinstated: the dissolved entity must find another name!

[3] Please note that this article is not legal or tax advice, and is based purely on research and conversations with IRS and other government officials on an example corporation. If you think you have a potential issue, seek competent tax advice from legal and accounting practitioners who can research the actual facts and details of your particular situation. And if you have an issue, deal one-on-one with the Secretary of State, Department of Revenue, and IRS involved with your particular entity’s setup.

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