CORPORATE TRANSACTIONS & COMPLIANCE BLOG

The Causes and Perils of Involuntary Dissolution

By: John Morrissey, COGENCY GLOBAL INC. on Wed, Sep 04, 2013

Involuntary Dissolution resized 600A quick review of almost any Secretary of State’s business entity database will reveal a number of revoked or voided entities that have been inactivated by action of the state, instead of the filing of dissolution or withdrawal documents by the entity.

The reasons for revocation of an entity are usually related to the failure of an entity to make a statutorily required filing, often as a result of poor entity housekeeping.

Three main reasons for revocation are:

  • Failure to file an annual/biennial report with the Secretary of State. This is probably the most common reason for a business entity to be revoked. In some states it is possible for an entity to be revoked relatively quickly after  missing a filing deadline. For example, Missouri may commence proceedings to revoke a foreign corporation for failure to file its report within thirty days after the
    due date. At the other extreme, Connecticut does not have a  provision for revoking a domestic corporation for failure to file a report.
  • Failure of the entity to file required tax returns or pay state taxes with the state tax department. In many states, this will not lead to revocation, but in some states, including California, Missouri, New Jersey and New York, failure to file tax returns and/or pay state taxes could result in revocation.
  • Failure of an entity to maintain a registered agent and/or office. This typically occurs when the entity’s agent resigns for non-payment of its annual fees or some other reason and the entity fails to promptly appoint a new agent.

Sometimes the revocation will result from the intentional decision of the struggling owner(s) of a failing business to allow the entity to lapse, rather than incur additional legal costs and filing fees to dissolve the business. At other times, the withdrawal or dissolution process may just be overlooked in the rush of day to day business.

Whatever the reason, the decision to allow a company to go void can lead to some admittedly rare, but serious consequences, including: 

  • Bank loans or contracts may be delayed while the entity rectifies the issue.
  • Taxes continue to accrue in many states.  
  • The entity remains vulnerable to lawsuits.
  • Corporate identity theft: Fraudsters have been reinstating revoked entities and using them for illicit purposes. The perpetrators count on the strong possibility that the owners are no longer monitoring the entity and they obtain control of an entity that appears to have been in existence for a number
    of years to facilitate their fraud. 

Based on these undesirable possible consequences of allowing a company to go void, an entity that is a going concern would be wise to meet all annual/periodic and tax filing deadlines while the owners of entities that are no longer active can reduce their risks by properly dissolving the company in the states where it was formed and qualified.

 

This article is provided for informational purposes only and should not be considered, or relied upon, as legal advice.

Topics: Registered Agent, Annual Report Compliance, Company Formation and Filing Considerations