Dissolution vs. Entity Lapse
A business entity is said to be in “good standing” when its charter (the documents on file with the Secretary of State that organized or registered the entity) has not been revoked, the entity has filed all periodic Reports and paid all taxes and fees to the Secretary of State. If an entity’s Reports (usually Annual, sometimes Biennial) are not filed, many jurisdictions will, after a grace period, “administratively dissolve” the entity by revoking its charter, which means terminating its legal existence and right to operate in the jurisdiction.
But should you formally dissolve your entity, or allow it to lapse? We often field questions on how to “revive” an entity that has had its existence terminated for failure to file Reports. But sometimes, we’re asked the opposite: what would happen if we just stop filing for an entity?
What is the value of the entity?
Sometimes business entities are organized, but then not used for their intended purposes. Others have fulfilled their purposes – maybe their lines of business have been wound down and assets sold, or their subsidiary business units have been wound down or spun off. When entities cease to be useful, there are two options: (i) affirmatively dissolve the entity, or (ii) stop filing for the entity and let it lapse. Part of the determination will hinge on whether the entity was highly active with assets, contracts and creditors, and whether the entity still has assets. States have varied requirements and procedures to apply to that analysis.
In the case of an unused, dormant entity with no assets, contracts and creditors, a lapse may be sufficient. (Note that required filings with Revenue Departments are not being discussed here.) In this situation, if there is no further or anticipated need for entity revival, the State may administratively dissolve the entity.
However whether to return to good standing and affirmatively dissolve, or let it lapse and wait for a state to administratively dissolve is a cost/risk analysis. Technically, leaving an entity open causes it to continue to accrue taxes, fees and penalties, leaving it vulnerable should the State ever decide to pursue the entity for payments owed (although we’ve never heard of that happening in 20+ years of paralegal work).
Therefore, many organizations do opt to just let an entity lapse and eventually be administratively dissolved by the jurisdiction. Frequency and speed varies by state. Some states immediately revoke a charter for failure to file in year two. Others have a revocation policy after a set number of years, but in reality, it’s whenever they get around to making a sweep of their records which could take many years. Failure to file in some jurisdictions doesn’t cause the Secretary of State to stop referring to an entity as “active” and they will simply note missing Reports on any Good Standing Certificate issued.
When It’s Time To Dissolve
If the preference is to affirmatively dissolve, statutory procedures must be followed. This requires that votes be taken by the entity’s governing body, and documents be filed with the Secretary of State. Required filings and fees vary widely (some will require current year Annual Reports to be filed as well and may require Tax Clearance). If an entity was revoked and one wishes to restore it and then affirmatively dissolve or withdraw, the “reinstatement” process will be the first step.
In our experience, attorneys vary in their preferred course of action, which is why this cost/risk analysis should be performed on a case by case basis and shouldn’t be a business/cost analysis alone. If an entity is in a highly regulated industry, that may tip the scales in favor dissolution rather than revocation.
As always, feel free to contact us about your entity dissolution questions. We are happy to provide information about state requirements, or refer you to an attorney who can help you run a cost/risk analysis for your specific situation.