In most states, corporations have an obligation to remain in good standing and avoid penalties, whether the company is active or inactive. A corporation is an independent entity formed and dissolved under state law, with an existence separate from its owners. State laws that allow a corporation to be formed often allow it to stay in existence perpetually until dissolved, even if the shareholders change or pass away.
An inactive corporation is one that does not engage in any business, although it is still registered with the state and has not filed dissolution documents. When a corporation does not make any sales, enter into any new contracts or provide any services to the public, it is inactive. Some states will consider the corporation inactive only if it has no employees and no property in the state. Inactivity is often the first step of dissolving a corporation, but the company may choose to return to activity instead of dissolving.
Read More: What Is an Inactive Corporation?
All corporations, active or not, must remain in good standing in every state where the company is registered. Failure to remain in good standing may result in the state dissolving the corporation. In most states, to remain in good standing you must file annual reports and pay all corporate taxes. A state may find you are not in good standing if you do not inform the state when the corporation moves or do not maintain a registered agent to accept legal documents on behalf of the company.
Effect of Inactivity on Good Standing
A corporation may face penalties if it does not remain in good standing during periods of inactivity. A state may administratively dissolve the corporation, removing your authority to do business until the corporation is reinstated. If the corporation is dissolved, you may not have protection from personal liability for any new business you enter into. Further, the corporation may continue to accrue penalties and fees for taxes or other expenses owed to the state. In some states, if corporate taxes are not paid and the corporation has not dissolved, the officers of the company may become personally liable for the outstanding tax liability.
Dissolution and Official Inactive Status
The only way to completely remove a corporation's obligations to a state is to dissolve the corporation. However, a few states, such as Pennsylvania and New Jersey, allow inactive corporations to file an inactive tax report to avoid corporate tax liability for the years a company does not engage in business activity. However, not all states have this option for corporations and may still require inactive companies to pay the minimum entity tax for corporations.
- Washington State Legislature: Domestic Corporations — Inactive Corporation Defined — Annual License Fee.
- Arizona Corporation Commission: Keep Your Corporation in Good Standing With the Corporation Commission!
- New Jersey Division of Taxation: Consequences of Not Dissolving a Corporation
- Pennsylvania Code: § 155.29. Minimum Tax
- Pennsylvania Department of Revenue: What Are the Filing Requirements for Inactive Corporations?
- Small Business Administration: Researching a Company
- Business Organization and Management; Maurice Henry Robinson
- State of New Jersey: Instructions for a Corporate Business Tax Return
Elizabeth Rayne earned her J.D. from Penn State University and has been practicing law since 2009, advising clients on issues ranging from employment law to nonprofit management. For two years, she served as a contributing editor for the "Vermont Environmental Monitor."