Corporations are a popular business type for small and large companies. Formed under state law, corporations provide limited liability to the owners, known as shareholders, and make ownership interests easy to transfer. Although the life of a corporation can be perpetual, failure to comply with state filing requirements can result in the company losing its authority to continue doing business.
Most states require a corporation to file an annual report with the Secretary of State or equivalent state authority and maintain a registered agent for receipt of official correspondence. If a corporation misses the deadline to file or does not timely replace an agent who resigns, the state typically issues a notice of the noncompliance. Failure to comply with the notice by a certain date results in the corporation being labeled "delinquent" by the state. However, state laws vary, and sometimes different terms are used. For instance, Kentucky uses the label "inactive corporation in bad standing" to describe companies that would be labeled as delinquent in other states. Check with your secretary of state to see what terms are used by that office.
The effect of a corporation being declared delinquent means that the state has the authority to administratively dissolve the business. This action results in the company being unable to transact business within the state until a reinstatement application is filed along with a filing fee and all paperwork and other outstanding fees are brought current. Because the company is still technically in existence, administrative dissolution does not have the same legal effect as a voluntary dissolution. A voluntary dissolution removes the company from existence, and is accomplished by vote of the shareholders and the filing of articles of dissolution.
In contrast to delinquent status, inactive status means that the corporation has ceased conducting business transactions. The designation provides notice to the public, and in some states, reduces the company's licensing fees. However, if the corporation incurs expenses, purchases equipment, or opens bank accounts, it is still considered active even if no income is being generated. Although states vary, inactive status can be requested by filing a statement claiming that no corporate transactions were undertaken by the business within the previous year.
Read More: What Is an Inactive Corporation?
Inactive and Delinquent
A corporation that obtains inactive status must still adhere to state filing and reporting requirements. Failure to do so will result in the company being declared delinquent and subject to administrative dissolution. For this reason, if corporate activities have ceased, the shareholders of your business may decide that a better option is to voluntarily dissolve the company. The benefits to this method are that the company is no longer in existence and does not need to file reports. The downside is that you must go through the incorporation process a second time to start doing business again.
Wayne Thomas earned his J.D. from Penn State University and has been practicing law since 2008. He has experience writing about environmental topics, music and health, as well as legal issues. Since 2011, Thomas has also served as a contributing editor for the "Vermont Environmental Monitor."