If you’ve spent any time researching how to start a business online, you’ve probably seen the same advice repeated everywhere: “Form your LLC in Delaware!” or “Wyoming is the best state for an LLC!” The pitch usually comes with promises of lower taxes, better privacy, and stronger asset protection. It sounds compelling, especially when you’re trying to make every startup dollar count.

I’ve been helping entrepreneurs form LLCs in all 50 states since 1997, and I can tell you the answer is controversial and rarely as simple as the headlines suggest. For most small business owners, choosing where to form your LLC isn’t really a choice between Delaware, Wyoming, and your home state — it should be a question of where you actually do business and what trade-offs you’re willing to live with year after year.

In this article, I’ll walk you through what each option actually offers, where the hidden costs hide, and the questions you should be asking before you file. CorpNet is a business filing service, not a law firm or CPA firm, so I’ll be giving you the framework — your attorney and tax advisor are the right people to make the final call for your specific situation.

The “Form Out of State to Save Money” Myth

Here’s the short answer most people don’t want to hear: forming your LLC in Delaware or Wyoming usually does not save a small business money or reduce its taxes. The reason is simple — your LLC pays taxes and follows the rules of the state where it actually does business, not just the state where it filed paperwork.

If you live and work in Ohio but form your LLC in Wyoming, you don’t get to skip Ohio’s taxes. You’ll likely have to register your Wyoming LLC as a foreign LLC in Ohio, file paperwork in both states, pay annual fees in both states, and maintain a registered agent in both states. The savings you imagined often disappear — and in many cases, you end up paying more than if you’d simply formed at home.

That doesn’t mean Delaware and Wyoming are bad choices. They’re excellent choices for the right business. They’re just not magic, and the right answer depends on details only you, your attorney, and your CPA decide.

What Delaware Actually Offers an LLC

Delaware is the most popular state for business formation in the country. According to the Delaware Division of Corporations, more than 60% of Fortune 500 companies are incorporated there. That reputation is real — but it was built largely on Delaware’s appeal to large C Corporations, not LLCs.

The advantages most often cited:

• Court of Chancery. Delaware has a specialized business court with judges (no juries) and a deep body of case law. This is a meaningful benefit for large corporations facing complex disputes — but its day-to-day relevance to a single-member LLC selling products from home is limited.
• Delaware does not require LLC member or manager names on the public formation record. Only your registered agent’s information appears.
• No annual report for LLCs. Delaware LLCs do not file a separate annual report. You simply pay the annual tax.
• Predictable annual cost. Delaware charges a flat $300 annual franchise tax on LLCs, due June 1 each year, regardless of revenue or activity.

The trade-offs:

• The famous Court of Chancery and General Corporation Law primarily benefit corporations. LLCs are governed by Delaware’s Limited Liability Company Act, which is solid but does not deliver the same competitive edge to a small business.
• If you operate outside Delaware, you’ll likely owe Delaware’s $300 annual tax plus your home state’s annual fees and taxes.
• You must maintain a Delaware registered agent — typically ranges $50 to $300 per year (depending on the provider).
• Missing the June 1 franchise tax deadline triggers an automatic $200 late penalty plus 1.5% monthly interest, and prolonged non-payment can lead Delaware to cancel your Certificate of Formation. A cancelled or administratively dissolved LLC is a serious problem: the company loses its good standing, which can block financing, contract renewals, M&A transactions, and banking; it can lose the right to bring or defend lawsuits in that state’s courts; and the personal liability protection (the “corporate veil”) that the LLC was designed to provide can be put at risk for business conducted while the company is out of good standing. Reinstatement is generally possible but typically requires paying all back taxes, penalties, and interest before the state will restore the company — and any damage to contracts, financing relationships, or the business name during that gap is much harder to undo.

If you’re curious about Delaware as your possible formation state, our guide to forming an LLC in Delaware and our Delaware state resources page walk through the specific filings and ongoing requirements.

What Wyoming Actually Offers an LLC

Wyoming is often pitched as the affordable, privacy-friendly alternative to Delaware. For a small LLC that genuinely operates in Wyoming or has a strong reason to base there, the math is compelling.

The advantages most often cited:

• No state corporate or personal income tax. Wyoming does not impose a state-level income tax on individuals or businesses.
• No franchise tax. Wyoming charges an annual report license tax with a $60 minimum for most small LLCs (calculated as $0.0002 per dollar of Wyoming-based assets, whichever is greater).
• Wyoming, like Delaware, does not require LLC members or managers to be listed on the public formation record.
• Low formation cost. Wyoming’s Articles of Organization filing fee is $100, putting first-year state costs near the bottom of the national range.

The trade-offs:

• The income tax savings only matter for activity actually attributable to Wyoming. If you live and earn income in California, Wyoming’s lack of income tax doesn’t change your California tax bill.
• You’ll need a Wyoming registered agent and the same kind of foreign qualification compliance in your home state if that’s where you’re operating.
• Wyoming’s annual report is due the first day of your LLC’s anniversary month — easy to forget, and missing it for 60 days can lead to administrative dissolution by the Secretary of State.
• Administrative dissolution is not a minor inconvenience. When a state dissolves an LLC for missed filings, the company generally loses its legal status — which can mean losing the personal liability protection (the “corporate veil”) the LLC was created to provide, losing the right to sue or defend lawsuits in that state’s courts, and losing access to financing, lending, and most banking activity. The state can also release the business name for someone else to claim, so a name you built brand equity around may be gone by the time you try to reinstate. Reinstatement is usually possible, but it typically requires paying all back fees, penalties, and interest, filing reinstatement paperwork, and re-establishing relationships with banks and vendors who flagged the LLC during the lapse.

The Case for Forming in Your Home State

For most small business owners I work with, forming the LLC in their home state — the state where they live, where most of their customers are, where they have an office or storefront, or where they perform the work — is the simplest, cheapest, and cleanest path.

Here’s why home-state formation usually wins for small businesses with fewer than five members:

• One set of filings. One Articles of Organization, one annual or biennial report, one registered agent, one Secretary of State to deal with.
• No foreign qualification (if you don’t have nexus elsewhere). As long as your business operations stay inside your home state, you don’t have to register the same business in multiple states or maintain two compliance calendars. If your activity creates nexus in another state, the picture changes — more on that in the next section.
• Lower total cost. Even if your home state’s filing fee is higher than Wyoming’s, you only pay one set of fees.
• Tax simplicity. Your CPA only has to navigate one state’s tax rules, which is a real cost savings at year-end (unless determined that your business has nexus in another state).
• Easier banking. Most local banks prefer (and some require) that the LLC be registered in the state where you’re opening the account.

There are absolutely scenarios where forming out of state makes sense. But “I read on a forum that Delaware is better” isn’t one of them.

The Hidden Cost: Foreign Qualification

This is the part most articles skip, and it’s the single biggest reason out-of-state formation backfires for small businesses.

When you form an LLC in one state but conduct business in another, you typically have to register your LLC in that second state too. This process is called foreign qualification, and it doesn’t make your business “foreign” in the international sense — it just means it’s registered (formed) in another U.S. state. You can read more in our overview of foreign qualifications or our article on the best states to form a foreign LLC.

What “conducting business” means varies by state, but it usually includes having a physical location, employees, inventory, or even significant economic activity in that state — collectively known as having nexus there. Each state’s Secretary of State decides what triggers the requirement, and the standards for foreign qualification nexus and tax nexus aren’t always identical — another reason to loop in your CPA before assuming you’re in the clear.

Once you foreign qualify, you typically owe:

• A foreign qualification filing fee in your operating state
• Annual reports and fees in both your formation state and your operating state
• A registered agent in both states
• State income, franchise, or gross receipts tax in your operating state, depending on its rules

Two states means two compliance calendars, two filing fees, and two opportunities to fall out of good standing. Ask yourself if it’s worth it.

When Forming Outside Your Home State Actually Makes Sense

Forming in Delaware or Wyoming can be the right move in specific situations. A few common ones I see:

• Venture-backed startups. Investors and venture capital firms often prefer (or require) Delaware C Corporations because of the legal certainty Delaware offers. If you’re planning to raise institutional capital, this matters.
• Holding companies. An LLC that exists primarily to own assets (intellectual property, equity in other companies, real estate held passively) may not “do business” anywhere in particular, which can change the foreign qualification analysis.
• Real estate investors with property in that state. If your rental property is physically in Wyoming, a Wyoming LLC may be the right home for it. Our article on LLCs for rental property in another state digs into this.
• Online businesses with no fixed location. If you genuinely operate from no specific state, the analysis opens up. Our piece on where to form an LLC for an online business covers this in depth.
• Privacy is a top priority. Delaware, Wyoming, New Mexico, and Nevada are the four states that allow anonymous LLC formation — but privacy still has to be weighed against operational reality.

Even in these scenarios, the right answer depends on your industry, your goals, your tax picture, and how you plan to grow. This is exactly the kind of decision where a consultation with a business attorney or CPA is advised.

Delaware vs. Wyoming vs. Your Home State: A Quick Comparison

Here’s a side-by-side recap of the most common factors. Specific dollar amounts and rules change, so always confirm the current numbers with the relevant Secretary of State before you file.

Delaware at a glance

• Formation fee: $90 Certificate of Formation
• Annual cost: $300 franchise tax, due June 1 (no annual report required for LLCs)
• Anonymous LLCs: Yes — member and manager names are not on the public record
• Specialized business court: Yes (Court of Chancery), though it primarily benefits corporations rather than LLCs
• Foreign qualification likely needed if you operate elsewhere: Yes
• Best fit: Venture-backed companies, holding companies, businesses planning to raise institutional capital

Wyoming at a glance

• Formation fee: $100 Articles of Organization
• Annual cost: $60 minimum license tax, due first day of the anniversary month
• State income or franchise tax: None
• Anonymous LLCs: Yes — member and manager names are not on the public record
• Foreign qualification likely needed if you operate elsewhere: Yes
• Best fit: Privacy-focused entrepreneurs, asset protection structures, and businesses actually based in or doing business in Wyoming

Your home state at a glance

• Formation fee: Varies widely (roughly $50 to $520, depending on the state)
• Annual cost: Varies by state — most states require an annual or biennial report
• Anonymous LLCs: Only available in Delaware, Wyoming, New Mexico, and Nevada
• Foreign qualification needed: Not required as long as your business doesn’t have nexus in another state — this is the biggest cost advantage of home-state formation.
• Best fit: Most small businesses operating primarily in a single state

Once You’ve Decided, We’ll Handle the Filing

Whether you decide on Delaware, Wyoming, your home state, or somewhere else entirely, CorpNet can prepare and file your Articles of Organization quickly and accurately. We file LLCs in all 50 states, provide registered agent service nationwide, manage annual reports and other ongoing compliance, and handle foreign qualifications when you need to do business in additional states.

If you’d like to talk through your options before you file, we offer a free business consultation, or you can reach our U.S.-based filing experts at 888.449.2638. Our filing experts will happily walk you through how each state’s filing process actually works so you can make a confident, informed decision.

And if you’re still in research mode, our Annual Compliance Checklist and our article on common mistakes when choosing and registering a business entity are good next stops. The right state of formation is one of the most consequential decisions you’ll make as a new business owner — give it the attention it deserves.

In fact, Sole Proprietorships and General Partnerships – enterprises that are not registered with the state and thereby not formal business entities – make up a sizable share of all the companies operating within the United States.

A big problem with a Sole Proprietorship or General Partnership, though, is that there are no legal protections in place for the owner or owners, which can put their personal assets at risk.

If an entrepreneur running a Sole Proprietorship or a General Partnership is sued or can’t repay business debt, creditors can go after their personal bank accounts, homes, vehicles, and any other personal assets.

In my experience, many people who run Sole Proprietorships or General Partnerships aren’t aware of this risk until something happens and they find themselves facing a perilous situation.

Let’s take a closer look at the differences between a company that’s registered with the state and one that is not, and what can happen to a company operating without the benefits and protections of a formal business entity.

Unregistered Business vs. Formal Business Entity

Starting a business can be easier than you might expect. As soon as someone begins getting paid to provide a product or service, they have a business. So, if Ron cuts grass and trims shrubbery at eight of his neighbor’s properties and gets paid to do so, Ron is a Sole Proprietor operating a Sole Proprietorship.

If Juana and Julia work together to create wedding cakes and have built a clientele that keeps them busy baking and selling, they have a General Partnership. There’s no need to inform the state of what they’re doing, as they’ve started a business simply by selling the cakes they make.

These entrepreneurs are likely to need business licenses and permits, which can be issued by a local, state, or federal government. They don’t need to fill out any paperwork or pay any fees to start their businesses, however, and they don’t have to file annual reports or pay yearly fees to operate.

Sole Proprietors and General Partners are subject to pass-through taxation, which means all business income and losses flow through to their personal tax returns. The owners of an unregistered business simply file tax returns using their Social Security numbers – no Federal Tax Identification Number is required.

It’s likely that owners will have to pay quarterly taxes and they are responsible for self-employment tax, which is a combination of Social Security and Medicare taxes. While employers pay one half of those taxes for employees, people who are considered self-employed, such as Sole Proprietors and General Partners, must pay both halves.

Someone who does register a business with the state as a Corporation, LLC, or other type of business entity, on the other hand, must submit paperwork and pay fees to get the business started, and must take steps to remain in compliance with all state rules and regulations.

Those rules and regulations vary from state to state, but normally include such tasks as filing annual reports, maintaining a registered agent to accept and process important paperwork, filing timely tax returns, obtaining licenses and permits, and complying with labor laws and health and safety standards.

An LLC is taxed the same way as a Sole Proprietorship unless members choose to be taxed as a Corporation, which pays taxes on its profits at the corporate tax rate. In addition, the shareholders of a Corporation are taxed on any dividends they received, a system known as double taxation.

At this point, you might be questioning why anyone would bother to register a business instead of simply operating as a Sole Proprietorship or General Partnership, which doesn’t require paying fees or worrying about compliance issues. As you’ll soon read, however, there are some compelling reasons to do just that.

The Downside of Operating a Business Without Registering it With the State

As you’ve already read, the most significant risk of running a business without registering it with the state is the lack of liability protection you are exposed to.

While being registered as a C Corporation or LLC protects owners from personal liability if the business is sued or unable to repay business debt, the assets of entrepreneurs operating a Sole Proprietorship or General Partnership are left exposed.

If 100 wedding guests get sick after eating Juana and Julia’s cake, or Ron cuts through electric wires while trimming bushes, resulting in power outages and a fire sparked by the damaged wires, it’s likely they could be facing some serious legal consequences.

Without the personal liability protection afforded by a Corporation or LLC, Juana and Julia and Ron could be facing very serious financial issues.

Lack of personal liability protection is the biggest drawback of operating a business without the benefits of a formal business entity, but not the only one. Consider these other factors:

• Difficult to raise capital. Sole Proprietorships and General Partnerships often find it difficult to raise capital to cover startup costs or other expenses. While a Corporation can generate capital by offering ownership in exchange for money, a Sole Proprietorship or General Partnership has no shareholders and can’t sell shares, limiting the ability to generate funds. And many lenders view these types of business as risks because they may lack regular income, significant savings, or insurance to protect them against lawsuits.
• Limited opportunity for growth. A Sole Proprietorship is by definition a business owned and run by one person. If that person takes on a partner, the business becomes a General Partnership, which carries many of the same disadvantages as a Sole Proprietorship. If either of these types of businesses want to hire employees, owners will need to obtain an employer identification number for tax identification, deal with worker compensation insurance, and handle other paperwork when hiring. Also, hiring employees can be difficult if you’re not able to offer competitive salaries and perks.
• Sole responsibility. Very few people are skilled in every aspect of operating a business, but that is what Sole Proprietors and General Partners are called to do. That increases the possibility that mistakes could be made, further exposing the business to risk.
• There’s no employer backup. Sole Proprietors and General Partners don’t have the luxury of an employer who pays them a set amount of money at regular intervals. Instead, they take money out of the business to cover personal expenses – income that is transferred from a business bank account to a personal account and known as a “draw.” If the business is struggling to get customers and generate income, however, there may not be sufficient money available to transfer to the personal bank accounts of owners, making it difficult for them to cover costs of living.
• Difficult to sell the business. Because a Sole Proprietorship or General Partnership is not separate from its owner or owners, the business cannot be sold. Assets of the business, such as the name, licenses and permits, inventory, real estate, supplies and equipment, and raw materials can be offered for sale, but not the business itself. So, while owners can divest themselves of property and other assets, they remain burdened with any business liabilities a buyer doesn’t want, such as outstanding loans or unfinished contracts.
• The business dies with the owner. Again, because there is no legal distinction between an unregistered business and its owner, the business normally will cease to exist after the owner dies.
• Viewed as less legitimate. It may not be warranted, but a business such as a Sole Proprietorship or General Partnership that is not registered with the state is often viewed as less professional or legitimate than a Corporation or LLC.

The Case for Forming a Corporation or LLC

Many entrepreneurs run businesses without taking the time and effort to register them as a Corporation, LLC, or other type of formal business entity. And while I recognize the ease and attractiveness of doing so, I strongly recommend against that strategy.

Registering a business with the state does require that you file paperwork, pay fees, hire a Registered Agent, and be diligent about following all rules and regulations to remain in compliance.

When you consider, however, that running your company as a recognized business entity can protect your personal assets and ultimately increase your chances for success, completing those tasks becomes well worth the effort and expense. If you’re uncertain about how to proceed with registering a business and protecting your personal assets, consult a professional who can help.

When forming a business such as a Limited Liability Company (LLC), Corporation, or Partnership, you should apply for an EIN at the point at which the IRS requires you to have one, or before you complete key setup steps that depend on it.

Typically, the time to apply for an EIN is immediately after taking any of the following steps:

• Forming an LLC, Corporation, or Partnership (single-member LLCs may delay, but in many cases should not)
• Hiring or planning to hire employees
• Electing S-Corporation status
• Opening a business bank account
• Setting up payroll or registering for state taxes
• Applying for business licenses or permits
• Working with vendors or clients who require an EIN for reporting purposes

The bottom line is that you should apply for an EIN as soon as your business has been registered with the state and before any tax, banking, or payroll activity has taken place. It’s important to apply for an EIN without delay, as waiting to do so can slow everything down and keep your business from being able to operate.

Not every business entity type is required to have an EIN, but you’ll typically need one if:

• Your business has employees
• You operate as a Corporation or Partnership
• You file payroll, excise, or certain federal tax returns
• You withhold taxes on income paid to non-U.S. residents

Even though not required to have an EIN, a Sole Proprietor can benefit from getting one to avoid delays in getting the business operating, protect their Social Security Number from overuse, and keep their business ready to scale.

What is an EIN?

An EIN, often referred to as a federal tax ID number,  is a nine-digit number issued by the IRS to identify a business for federal tax and reporting purposes. It functions much like a Social Security Number for a business.

Once assigned by the IRS, an EIN never expires or is reassigned to another business, even if the company closes. That said, the IRS may deactivate an EIN when a business shuts down, provided all final tax returns are filed and outstanding taxes paid.

In certain situations, such as changing your business entity type (for example, closing an LLC and reforming as a Corporation), you may need to apply for a new EIN. Routine changes, however, such as changing a business name or address, do not require a new EIN.

What is an EIN Used For?

The IRS uses EINS to identify businesses that must file tax returns. A business also needs an EIN to:

• Open business bank accounts
• Apply for business licenses and permits
• Set up payroll and register for federal and state taxes
• Apply for business credit cards or financing
• Complete W-9s for vendors and clients

Just as importantly, using an EIN instead of a Social Security Number helps separate the business from its owner—a key element in maintaining limited liability protection. Blurring that line can expose owners to personal liability if the business faces debts, penalties, or lawsuits.

When is an EIN Required?

According to the IRS, a business generally must have an EIN if it will:

• Hire employees
• Operate as a Partnership or Corporation
• File excise, payroll, or sales taxes
• Change its business structure or ownership
• Administer certain trusts, retirement plans, or estates

A Sole Proprietor with no employees or retirement plans may use a Social Security Number instead of an EIN. Many sole proprietors, however, choose to obtain an EIN to keep business and personal finances separate and reduce SSN exposure.

What’s the Best Time to Apply for an EIN?

In most cases, the IRS recommends applying for an EIN after your business has been legally formed with the state. This ensures the information on your EIN application, such as entity type and formation date, is accurate and final.

A couple of things to remember include:

• Corporations and Partnerships cannot apply for an EIN until formation is complete
• LLCs that apply too early risk IRS processing delays or confusion with similarly named businesses

An exception to these timing guidelines applies to Sole Proprietors who are not forming a new legal entity. They may apply for an EIN at any time.

How Can You Apply for an EIN?

For businesses with a principal place of business in the U.S. or a U.S. territory, the fastest method is the IRS’s online EIN Assistant, which issues EINs immediately upon approval. A couple of things to keep in mind include:

• The application must be completed in one session and will expire after 15 minutes of inactivity
• The applicant must be the responsible party (the person who controls the business) or an authorized representative

You’ll need the following information when applying:

• Responsible party’s name and Social Security Number or Individual Taxpayer Identification Number
• Legal business name
• Business purpose
• Entity type
• Mailing address
• Business start date
• Number of employees (current or expected within 12 months)
• Date payroll will begin (if applicable)
• Reason for applying

Companies with a principal place of business outside of the United States cannot apply online, but can do so by phone, fax, or mail through the IRS.

The IRS does not charge a fee to issue an EIN. Still, accuracy matters. Errors on an EIN application can cause delays in hiring, banking, licensing, payroll setup, and tax filings. If you’re unsure whether you need an EIN or want to avoid costly mistakes, working with a professional can help ensure everything is done correctly from the start.

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:

1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. 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.

A Corporation, Limited Liability Company, or other business that’s registered with the state must comply with all rules and regulations pertaining to how it operates to be considered in good standing.

A business that doesn’t remain in compliance can lose its good standing status, exposing it to serious consequences, including fines and the inability to secure financing or file a lawsuit. In worst case scenarios, a business could be administratively dissolved by the date—effectively shutting it down.

Why Should a Business Care about Good Standing?

A company that’s in good standing with the state can operate normally, without interference or obstacles from regulators. A huge advantage of remaining in compliance is uninterrupted limited liability protection, which protects owners from potential loss of their personal assets.

A business that’s in good standing can operate under its chosen name and take advantage of benefits such as the ability to expand into other states, renew permits or licenses, buy business insurance, seek financing, and transfer ownership of the business.

What a business must do to remain in good standing varies from state to state, but most states require businesses to file required reports, pay fees, maintain a registered agent, file taxes, renew business licenses and permits, and keep personal and business finances separate. You can read more about those requirements in CorpNet’s article, “How to Keep Your LLC or Corporation in Good Standing.”

When a business falls out of good standing for failing to comply with rules the state can step in, possibly taking action that disrupts business operations, jeopardizes the reputation of the company, and causes other problems that can be harmful to the business.

Possible Consequences of Loss of Good Standing

Taking all the steps necessary to remain in compliance with the state can be cumbersome, but not doing so can result in severe consequences. Consider what could happen if your business loses its status of good standing.

• Fines and penalties – States can issue fines and penalties on businesses that have not complied with their regulations and fallen out of good standing. The amounts of fines may increase if they’re ignored or not paid on time.
• Loss of limited liability protection – A company that’s not in good standing risks losing its limited liability protection and putting owners at risk. In certain situations, a court might decide to pierce the corporate veil, which is the layer of protection separating business assets from the personal assets of owners. If the veil is pierced, limited liability is eliminated and officers, members, and directors of the company can be held personally liable. A court generally rules in favor of piercing the corporate veil for serious noncompliance issues, such as co-mingling of business and personal funds and assets, borrowing money while knowing it cannot be repaid, or participating in criminal activity.
• Risk of business identity theft – Criminals increasingly take advantage of companies that have fallen out of good standing. Sensing vulnerability, they use the opportunity to steal business identity for the purposes of borrowing money, getting access to bank accounts, or making purchases under the company’s name.
• Difficulty getting financing – A business that’s not in good standing with the state is likely to have difficulty obtaining a loan or getting financing from a bank because it’s considered to be high risk.
• Loss of its business name – If a company is not in good standing, its right to its business name may lapse. If another company claims the name before the non-compliant business can retain good standing, it could lose its right to use it.
• Loss of access to the court – An LLC or Corporation that’s not in good standing may not be able to file a lawsuit until the standing has been restored. That could prevent it from filing a suit to claim compensation that’s owed to it, sue someone for breach of contract, or taking other legal action.
• Tax liens – A business that’s lost its good standing for not paying taxes may be subject to tax liens from the IRS or a state or local taxing authority. The lien acts as a legal claim against assets of the business, putting bank accounts, real estate, intellectual property, and physical property at risk. In the case of an entrepreneur who runs a business that’s not registered with the state, personal assets could be at risk. A record of a tax lien also can negatively affect a company’s business credit score, making it difficult to take out loans or secure credit.
• Administrative dissolution of the business – As noted previously, a state can remove the rights of a business to conduct business and force it to shut down. Even if the business is able to work with the state to eventually reopen, the dissolution can result in loss of customer confidence, a tarnished reputation, hefty legal fees, and other negative consequences.

Staying in Good Standing

Keeping your business in compliance so it remains in good standing with the state is one of the most important tasks of running a company. Unfortunately, regulations and rules can be cumbersome, and it’s not unusual for them to be overlooked or forgotten.

As you’ve read, however, the consequences of failing to remain in good standing can be devastating to a business. Because requirements for good standing vary from state to state, you’ll need to make sure you know what rules apply to your business and make sure you adhere to them.

If you worry about forgetting to file an annual report, failing to get your taxes paid on time, or taking or neglecting another action that could cause your company to lose its good standing status, you might benefit from help from an individual or company that can make sure your business is always in compliance. Loss of good standing can be extremely disruptive, resulting in unnecessary expense and distracting you from the important tasks of operating your business.

When should you convert your LLC to an S Corp? The right time to convert an LLC to an S Corp is generally when your net business profit consistently exceeds $40,000–$50,000, you actively work in the business, and you can pay yourself a reasonable W-2 salary. Electing S Corporation status for your LLC can lower your self-employment tax burden because only your wages — not your profit distributions — are subject to Social Security and Medicare taxes. Below are the top signs it’s time to convert your LLC to an S Corp.

Financial and Tax Signs to Convert Your LLC to an S Corp

• You want to bring on investors. You’re ready to take the company to the next level and to do that, you need financial support from other sources. Sometimes investors are more willing to back an S Corporation than an LLC as they feel more confident in the company’s viability and legitimacy.
• Your net business profit (after taxes; before owner draws) is consistently at or above the range where your self-employment tax obligations (Social Security and Medicare taxes) start to exceed what you’d pay if splitting your business income into a salary and distributions. The range can vary but generally the threshold is when net profit reaches around $40,000 to $50,000 or above.
• You actively work in the business and could pay yourself a reasonable W-2 wage or salary for your role. Additional profits would be paid as distributions, subject to income tax but not Social Security and Medicare taxes.
• Your company’s financial projections indicate your business will have ongoing profitability. A trajectory that can justify the initial costs of S Corporation set up and ongoing compliance and payroll costs.

Compliance Considerations

• You feel prepared to manage payroll (or hire an accountant, bookkeeper, or payroll services provider), i.e., handle reporting and making payroll tax deposits, issuing W‑2s, and filing an annual S Corporation tax return (Form 1120‑S).
• You can justify and document your rationale for your “reasonable compensation” salary based on responsibilities, hours, industry pay for comparable positions, and business performance. The IRS has been known to scrutinize shareholder-employee wages and salaries, and anything that may represent underpayment in an attempt to game the system to disproportionately minimize Social Security and Medicare tax liability.
• Your LLC meets the IRS’s requirements for S Corporations. It must have fewer than 100 members because an S Corporation may have no more than 100 shareholders. Also, your LLC may not have any members ineligible to be S Corporation shareholders (such as nonresident alien owners, partnerships, or corporations).

When to Convert Your LLC to an S Corp: Timing Considerations

• You are prepared to file Form 2553 for the S Corporation election for the current tax year by the applicable deadline. For existing LLCs, this is typically within 2 months and 15 days after the start of the tax year (which is mid‑March for a calendar‑year business). Newly formed LLCs must file within 2 months and 15 days of their entity’s formation effective date.
• You want to lower your audit risk associated with Schedule C reporting. Various sources indicate that S Corporations are less likely to undergo IRS audits than LLCs, Partnerships, and Sole Proprietorships.

Learn More About Why and How to Switch to an S Corporation

• What Is an S Corporation?
• The 2026 S Corporation Election Deadline Is Right Around the Corner
• S Corporation Vs. LLC
• What Is Reasonable Compensation for an S Corporation

S Corporation FAQs

If you’ve been operating as a Sole Proprietor and are wondering if you should register your business with the state and form a Limited Liability Company (LLC), the answer is a “yes.”

Although Sole Proprietorships are the most common type of business entity in the United States, they come with significant risk for owners. That’s because a Sole Proprietorship is not a separate entity from its owner – there’s no legal distinction between the two. If a Sole Proprietorship is sued or can’t pay its debts, the personal assets of the owner are at stake.

An LLC, on the other hand, is registered with the state and considered a separate legal entity from the owner or owners. That separates owners from the business in the event the LLC is sued or can’t repay debt and protects their personal assets. For that reason alone, I argue that an LLC is normally a better – and safer – type of business entity under which to operate.

About Sole Proprietorships

If you’re operating as a Sole Proprietor, you, essentially, are your business. The assets and liabilities of the business are also your personal assets and liabilities, as there is no legal separation between the two. If someone starts getting paid to make wedding cakes or build decks and patios or provide childcare, that person is, by default, a Sole Proprietor.

Many people like Sole Proprietorships because they’re easy to get up and running – no paperwork required. A Sole Proprietorship is not registered with or recognized by the state, meaning the owner doesn’t have to file any paperwork to get started, or submit annual reports and pay yearly fees.

Sole Proprietorships are subject to pass-through taxation, meaning that all income and losses of the business flow through to the personal tax returns of owners, who use their own Social Security numbers to file.

It’s likely that a Sole Proprietor will have to pay quarterly taxes, and they’ll be responsible for paying a self-employment tax, which is a combination of Social Security and Medicare taxes. While employers pay half of the Social Security and Medicare taxes for their employees, someone who is self-employed, like a Sole Proprietor, is responsible for the total amount.

A Sole Proprietor also may be required to obtain business licenses and permits, which may be issued by the local, state, or federal government. The types of licenses and permits needed depend on where you live and the type of business you have.

Also, a Sole Proprietorship that operates under a name that’s different than the legal name of the owner will need a DBA, or “Doing Business As” from the state.

About Limited Liability Companies (LLCs)

A Limited Liability Company is a business entity that registers with the state by filing Articles of Organization, which is a public document that provides information about the company. An LLC with one owner, known as a member, is called a single-member LLC, while a business with more than one owner is known as a multi-member LLC.

Once it’s registered with the state, an LLC must file annual reports and pay yearly fees to remain in compliance. It also must have a Registered Agent, which is an individual or company designated to accept and process important correspondence for the company. As the owner of an LLC, you’re responsible for obtaining all necessary business licenses and permits.

An LLC is taxed the same way as a Sole Proprietorship unless members choose to be taxed as a Corporation. In that case, the company would pay corporate income taxes, and members would be taxed on distributions they receive, a method known as double taxation. There are advantages and disadvantages to both methods of taxation, and I’d advise you to consult a tax professional if you need help.

Although it’s not legally required, all LLCs should have an Operating Agreement, which is a document that describes how the business will operate based on the needs and wishes of its owners. An operating agreement describes how the LLC will be managed, what happens if one member leaves the company, how members will vote, how money is handled, how the business will be taxed, and many other situations that could affect the company and its owners.

Making the Case for an LLC

Imagine that you’ve been operating a food truck business as a Sole Proprietor for five or six years. After a rocky start and several very lean years, you’ve finally developed a dedicated following and are making some good money.

And then, on a Friday morning shortly before the lunch crowd is expected, the brakes on the truck fail, resulting in a crash that damages property and injures two people. Suddenly, you’re facing several lawsuits and all your years of hard work to build a business are in jeopardy because your personal assets are not protected.

If you had registered the business as an LLC and complied with all laws and regulations, your business assets may be threatened, but your personal assets, including your home, savings accounts, vehicles, and others, would be protected.

While liability protection is the primary argument I make for LLCs, it is not the only one. Other reasons to consider changing your Sole Proprietorship to an LLC include the following:

• An LLC inspires greater confidence with customers, lenders, suppliers, and others than a Sole Proprietorship.
• An LLC can get business credit that is not tied to personal accounts.
• Members of an LLC can choose how they want the business to be taxed.
• An LLC has greater opportunity for growth than a Sole Proprietorship, which cannot expand. without changing to a different type of business entity.
• Members of an LLC have the option to hire an outside manager or to have members manage the business.
• An LLC normally will find it easier than a Sole Proprietorship to raise capital, as many lenders are reluctant to loan to a business without a history of reliable income and savings.
• An LLC may be able to take advantage of local, state, or federal tax benefits.
• It’s typically easier for an LLC than a Sole Proprietorship to keep business finances separate from personal finances.

I understand that someone considering changing their Sole Proprietorship to an LLC may hesitate due to the need to file paperwork, pay fees, hire a Registered Agent, and take steps to remain in compliance with the state.  I argue, however, that the effort and expense is well worth the peace of mind that comes with knowing that your personal assets – those that you and any dependents you might have rely on – are protected.