Can an Inactive Corporation Conduct Business?

A corporation is a legal entity separate from its owners, a status that requires ongoing compliance to maintain. To legally conduct business, a corporation must remain in “good standing” with the state where it is incorporated by fulfilling specific administrative and financial obligations. When these duties are neglected, the state can change the corporation’s status to “inactive,” which jeopardizes its ability to continue operations.

Understanding Corporate Inactivity

Corporate inactivity is a formal status imposed by a state’s governing body, often the Secretary of State, when a company fails to meet its statutory requirements. This status is also known as “administratively dissolved” or “forfeited.” This is different from a “dormant” corporation, which has chosen to cease operations but remains in full compliance with the state by filing all reports and paying all fees.

An administratively dissolved corporation is also different from one that has been formally dissolved. A formal dissolution is a deliberate process initiated by the corporation’s owners to permanently terminate the company’s existence. In contrast, administrative dissolution is an involuntary consequence of non-compliance.

The most common triggers for a state to declare a corporation inactive are procedural failures. These include neglecting to file mandatory annual or biennial reports or failing to pay required franchise taxes. A corporation can also lose its good standing if it fails to maintain a registered agent or a registered office within the state.

Risks of Conducting Business While Inactive

Operating a business while its corporate status is inactive carries significant risks, the most severe being the loss of the corporate liability shield. This “corporate veil” normally protects the personal assets of owners and officers from business debts and legal liabilities. When a corporation is administratively dissolved, this veil can be pierced, meaning individuals can be held personally responsible for liabilities incurred during the inactive period.

If the company enters into a contract while inactive and later defaults, the other party could pursue a legal claim directly against the personal assets of the officer who signed it. This personal exposure applies to various business obligations, from loans and supplier debts to personal injury claims arising from business operations.

An inactive corporation also loses its legal standing to use the state court system, meaning the business cannot initiate a lawsuit to enforce its own rights. For example, if a client fails to pay for services rendered while the corporation was inactive, the business would be barred from suing that client to collect the debt.

Another risk involves the validity of agreements. Contracts entered into by an inactive corporation may be considered voidable by the other party. This gives the other party the option to either honor the contract or declare it void, creating uncertainty for the business.

The Corporate Reinstatement Process

To reverse an administrative dissolution, a corporation must undergo a reinstatement process with the state. The first step is to contact the Secretary of State’s office to determine the precise reasons for the inactive status. This inquiry will clarify which reports are delinquent, the amount of unpaid fees, and any penalties that have accrued.

With a clear understanding of the deficiencies, the corporation must then take several steps to prepare its application. These include:

• Gathering current data on directors, officers, and the registered agent to complete all delinquent annual reports.
• Obtaining the official reinstatement application form from the state’s website or office.
• Calculating the total payment due, including all back taxes, late filing fees, and any specific reinstatement fees.
• Acquiring a tax clearance certificate from the state’s tax agency, if required, to confirm all state tax obligations are met.

Once all forms are completed and the payment is ready, the entire package is submitted to the state, typically through an online portal or by mail. After the state processes the application and confirms all requirements have been met, it will issue a document, such as a Certificate of Reinstatement, which formally restores the corporation’s active status.

Legal Status After Reinstatement

The legal effect of reinstatement on actions taken during the inactive period varies by jurisdiction. Many states make the reinstatement retroactive, meaning the corporation’s legal status is treated as if it had never been dissolved. This concept, known as retroactive validation, restores the corporate liability shield back to the date of the administrative dissolution.

Under retroactive validation, contracts signed and business conducted during the inactive period are considered valid corporate acts. This can shield the individuals who acted on behalf of the corporation from the personal liability they were exposed to while the company was inactive.

However, not all states follow this model. In some jurisdictions, reinstatement is only effective from the date it is granted. This forward-looking approach means that while the corporation can legally operate again, a gap in liability protection remains for the period it was inactive, and officers may still be held personally liable for claims from that time.