Administrative dissolution occurs more often than you might think, for reasons as simple as not filing annual reports, overlooking the payment of franchise taxes, or losing and not replacing your registered agent. If it happens to your business, it’s important to act quickly to resolve the situation.
Let me tell you a little more about administrative dissolution and walk you through the process of getting a business reinstated after it’s been shut down.
Diving Into an Administrative Dissolution
A Corporation or LLC that’s been administratively dissolved does not immediately cease to exist, but until the issues that prompted the dissolution are resolved it cannot legally continue to operate as normal.
A business that’s been dissolved by the state loses its limited liability protection, putting owners at risk because their personal assets are no longer out of play if the business should be sued or is unable to repay debt.
The dissolution also would cause the Corporation or LLC to lose access to funding opportunities that are available to registered businesses, and it would no longer qualify for tax deductions or incentives.
A business that has been administratively dissolved may lose the rights to its name, as it could be made available to other businesses if the dissolution is not resolved in a timely manner. And a dissolved company almost certainly would lose credibility with customers, vendors, and other businesses.
If your Corporation, LLC, or other formal business entity has been administratively dissolved by the state, it’s important to address the matter and quickly take steps toward reinstatement. Ignoring state deadlines and delaying the process can decrease your chances of getting the business reinstated while increasing legal costs.
Six Steps to Getting Your Business Reinstated
The process of getting a business reinstated varies from state to state, but generally, you’ll need to follow the following steps:
- Identify the violations that led to the dissolution of your company. Check with the Secretary of State’s office to see exactly why the dissolution was enacted. You should be able to view the state’s notice of dissolution and see what compliance failures are listed.
- Determine your company’s reinstatement eligibility. Deadlines for reinstatement and eligibility criteria vary, so be sure you understand your state’s requirements and what you’ll need to do to resolve the issues that led to the dissolution.
- Resolve any compliance issues. This could include filing annual reports that were missed, paying missed taxes, reinstating a registered agent, paying fees and penalties, or filing industry-specific reports.
- Complete the reinstatement forms. Again, it varies from state to state, but most states require you to file an Application for Reinstatement, which includes information about your business, when it was dissolved, the name of your registered agent, and what you did to resolve compliance failures. Some states also enable you to update your business information on this form, such as updating an address or the name of a registered agent. You also may be required to include documents such as affidavits, proof of payments, and copies of tax returns.
- Pay all required fees, interest and penalties. The basic fee to file the reinstatement forms ranges from about $25 to $500 depending on where your business is based. You may also have to pay interest on unpaid amounts, penalties, late fees, and other charges, all of which can add up to substantial amounts.
- Submit your Application for Reinstatement. Most states allow you to do this online, which speeds up the process. You should receive a confirmation number when your application has been filed that will allow you to track the status of your reinstatement. Processing times vary, but once your application has been approved you should receive official notification of reinstatement.
Additional Ramifications for Nonprofit Corporations
Most nonprofit businesses are set up as Nonprofit Corporations and must be registered with the state. An LLC also can be structured as a Nonprofit LLC and registered with the state, but it is not as common as a Nonprofit Corporation.
Being recognized as a nonprofit at the state level, however, does not automatically qualify a business for federal tax-exempt status. That is a separate recognition that comes from the IRS – not the state.
A nonprofit can be administratively dissolved by the state for the same reasons as a for-profit business. And while that can negatively affect the nonprofit in the same ways it does a for-profit business, it does not mean that the nonprofit’s status as a 501(c) organization – the designation that exempts it from paying federal income taxes – is automatically revoked.
If action is not quickly taken to resolve the issue, however, it can put the nonprofit’s 501(c) in jeopardy in the following ways:
- Administrative dissolution removes the nonprofit’s ability to legally conduct normal business operations. Because the IRS requires a nonprofit to be “organized and operated” for a charitable purpose to maintain its tax-exempt status, it could argue that a non-operational business no longer meets that requirement and revoke its 501(c) status.
- Normally, a nonprofit must be in good standing with the state to legally seek contributions from donors. If the business continues to solicit funds after it’s been dissolved, it could be putting itself at risk for serious non-compliance issues that could lead to its 501(c) status being revoked.
- A nonprofit that’s been administratively dissolved may not be able to access its bank accounts or enter into legal agreements, resulting in failure to file IRS Form 990, a mandatory report that provides the public with information about nonprofits. Missing three years of these filings automatically results in the IRS revoking 501(c) status.
Just as with for-profit business, a nonprofit should act quickly to resolve the issues that resulted in administrative dissolution. The steps to getting the business reinstated are generally the same as those for a for-profit business. In addition, a nonprofit should verify its IRS tax status by using the IRS Tax-Exempt Organizations search tool, available on the IRS website.
If tax-exempt status has already been revoked, you’ll need to reapply for exemption the same way you did originally. Requirements for reapplication vary depending on how quickly you start the proceedings and the size of your nonprofit.
What Happens Once Your Business is Reinstated?
The state will restore the legal authority for your business to resume operations and reinstate the privileges that were put on hold, such as limited liability protection and tax deductions and incentives.
It will be up to you, however, to rebuild the confidence of customers, suppliers, and others who may have been affected by the dissolution. You also should plan for how you’ll avoid compliance issues in the future.
That could include:
- Tracking and setting alerts for due dates for annual reports, taxes, and other important obligations
- Having a reliable registered agent to keep you informed about legal and government notices
- Automating payments for fees, taxes, and other expenses to ensure they’re paid on time
- Reviewing all compliance regulations quarterly to check for any issues
While resolving the administrative dissolution of a business is usually possible, the most effective way of keeping your business operating smoothly is to avoid compliance issues before they arise. If you’re concerned about remaining in compliance with the state or worry that your business is at risk of being administratively dissolved, consider seeking professional help to get you back on track.
Reinstate Your Corporation or LLC
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