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Recently, when onboarding a new client, we discovered that their business entity had been administratively dissolved prior to engaging us. This prompted us to put together this post explaining administrative dissolution, including its causes, implications, and the steps involved in rectifying the situation.
What is Administrative Dissolution?
Administrative dissolution is the formal process initiated by a state agency in a business’s domicile state to revoke its right to do business.
This type of dissolution is different from voluntary dissolution, where the management of the business elects to permanently cease business operations. Instead, administrative dissolution is often the result of the business's failure to meet statutory obligations, such as filing annual reports or paying taxes.
Causes of Administrative Dissolution
The primary causes of administrative dissolutions are:
- Failure to File Required Reports: Businesses are required to file annual or periodic reports with the Secretary of State. These reports typically include updated information about the company’s management, address, and registered agent. Failure to submit these reports on time can lead to administrative dissolution.
- Non-Payment of Taxes: Businesses must comply with various tax obligations, including income taxes, sales taxes, franchise taxes, and payroll taxes. Some jurisdictions require a business to file returns, even if no taxes are owed. Tax authorities may initiate an administrative dissolution if a business fails to file tax returns or resolve tax payment delinquencies.
- Failure to Maintain Registered Agent: Businesses are required to maintain a registered agent that has a physical address in that state. The registered agent must be authorized to accept service of legal documents on behalf of the business. Failure to maintain a registered agent can lead to administrative dissolution.
It is easy to focus on running the business and lose track of these legal obligations if a business does not have personnel and processes in place to adequately ensure compliance.
Implications of Administrative Dissolution
Once a business is administratively dissolved, it no longer legally exists and therefore cannot conduct business. Since many businesses are unaware of their administrative dissolution, it is not unusual for businesses to continue operating as a going concern. However, there are serious negative consequences that can occur if a business is dissolved in such a manner and continues to conduct business operations.
First and foremost, business owners and managers, including corporate officers, will be personally liable for the debts and obligations incurred from the point in time when the business was dissolved. These personal obligations can include the state taxes, penalties, and fines levied against the business.
Also, since the business can no longer legally conduct business, it is not permitted, amongst other things, to:
- prosecute or defend lawsuits;
- enter into legally binding contracts;
- apply for permits and licenses; or
- undergo conversions, mergers, or redomestications.
Other than those to wind up its affairs, a business’ actions after dissolution may be void or voidable.
The business’ name following administrative dissolution can also be permanently lost to a third party who can claim the dissolved entity's legal name for its own use. This could lead to significant adverse consequences for the dissolved entity, including having to rebrand under a new legal name, or seeking to purchase its legal name back from the third party who is now using it.
Steps in the Administrative Dissolution Process
The process typically begins with a formal notice from the Secretary of State or other regulatory authority. This notice informs the business of its non-compliance issues and provides a deadline for addressing the problems to avoid dissolution.
Businesses often have a grace period during which they can rectify the issues leading to the dissolution. This period allows businesses to file missing reports, pay overdue taxes, or address other compliance issues.
If the business fails to address the issues within the given timeframe, the state agency will proceed with administrative dissolution. This dissolved status will be indicated in the Secretary of State records.
Reinstatement Process
Businesses may be able to apply for reinstatement after an administrative dissolution. Reinstatement is the legal process to restore a business’ right and authority to conduct business. In some states, reinstatement is only available for a certain number of years after dissolution.
The first step for reinstatement is to identify the state where the dissolution took place.
Next, the business will need to identify the delinquency that caused the dissolution. A review of the Secretary of State’s record for the business will often shed light on the issue. If there are unpaid taxes or missing reports, the business will need to resolve these issues as part of the reinstatement process.
Once the delinquency is resolved, the business will need to complete and submit the required reinstatement forms along with payment of any penalties or fees to the Secretary of State. Every state has different forms and rules for reinstatement.
Establish Procedures to Prevent Administrative Dissolution
Once reinstated, to prevent future administrative dissolutions, businesses should regularly monitor their compliance with regulatory requirements, including filing deadlines and tax obligations, and implement a procedure for tracking and managing these obligations.
This procedure should include proper protocols for the discovery of a non-compliance issue, as well as steps and timeframes to understand and adequately address it. This includes filing missing reports, paying overdue taxes, and updating business records as required.
Compliance management companies and software technology can assist with tracking and complying with these legal obligations. Legal counsel can assist in helping your business understand the process, addressing compliance issues, and handling any legal ramifications. Financial advisers and accountants can and should also be engaged to help manage financial and tax business obligations.
Conclusion
Administrative dissolution is a result of a business’ failure to comply with state regulatory requirements. It has significant implications for the business’s legal status, operations, and financial health, as well as its owners and management.
Taking steps to put a procedure and experts in place in place to ensure your business is compliant with state law is paramount to avoiding administrative dissolution. To the extent, however, that your business is administratively dissolved the best course of action is to seek appropriate legal guidance to help you navigate the complexities of reinstating your business as soon as possible.
From supplying compliance technology to providing legal assistance, we at the 3H Compliance Group are here to help.