When is your Corporation Too Broken to Save?

As we wind down the 2012 calendar year, plenty of people are asking me about what to do with companies they aren’t using. The question is: keep the companies current, let them get behind, or close them up entirely. I also get asked a lot about whether or not you can make a company inactive.

The balance of this post can be summed up in three often-used words: Maybe. It depends.

On the inactive question … a lot of the time the answer’s going to be no. There’s either an annual report requirement or some kind of tax filing due every year, active or inactive. If you don’t file, the state will cancel your company.

That’s a real drag if you live in California or Massachusetts, who both have high maintenance fees, especially that yucky $800 franchise tax fee that California imposes. That’s because the franchise tax isn’t an income-based tax. It’s an existence-based fee – if you exist, you owe the fee.

But if you’ve got a business set up in Ohio or Missouri, you don’t have to file Annual Reports. So in theory if you are acting personally as resident agent for the company, you don’t have any renewal costs at all. In that case, you can inactivate your business without suffering any negative consequences.

And in still other states, like Texas, you may not have to file an Annual Report, but you have a tax filing due instead. Texas makes all companies file a Franchise Tax Return and a Personal Information Report by the 15th of May each year. You could make no money, and file a zero return – but you still have to file that return. Miss it, and ignore the reminder letters, and the Texans will cancel your business registration.

OK – so what happens when a company is cancelled?

Almost every state has some kind of reinstatement process. The cost to bring your company back to life will depend on your state. In Nevada, it can be expensive. You’ll pay $300 to resurrect the company, plus $500 for each year you didn’t file an Annual Report. In other states it’s a lot less – every state will be a little different.

So when is it not worth saving? Again, that’s going to depend on the circumstances. Lets look at Nevada again. By the time your company is 2 or 3 years cancelled, you’ve got a LOT of fees to pay. It’ll cost you more than it would to start up a new company. On the other hand, if the company has assets in it, or has a long history, or has (had) great credit … then maybe it’s worth paying the extra to bring it back to life.

You could also face some unexpected bumps along the road to reinstatement. For example, in Nevada, a company that has been dissolved for more than 1 year loses the ability to protect its name. It would be perfectly legal for me to incorporate a new company, either corporation, partnership or LLC with your old company name after that 1-year window has passed. I don’t need your permission or anything. In other states that waiting period can be longer or shorter. I think it’s about 7 years in Georgia, but only a few months in some other states. If that happens and you find your company name isn’t available anymore, you’ll have to restart it with a new name.

So, as with so many other things in the business structure world, there are rarely any one-size-fits-all answers. But there are some things you CAN do. For example, let’s talk about California. There is nothing to stop you from taking a CA-registered company with that name you love and don’t want to give up, and moving it to a low-cost state, like Wyoming, for ‘storage.’ Wyoming’s annual report fees + resident agent service should run you under $200/year. You can leave your CA company there, dormant, until you need to bring it back to life, and then re-register it back into California. The savings will more than offset the move fees, and you’ll keep it alive for future use.

My partner over at US TaxAid, Diane Kennedy, and I did a webinar this past Saturday, all about C Corporations, and why we think they’re about to become a critical tax-planning tool, no matter who wins the election. If you’d like to watch the webinar replay, go to www.CCorporationTax.com (it’s free!)

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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1 Comment

  1. Thanks for the information. It is really not easy to decide whether to give up your business or just continue it. It’s a tough decision. It would be up to you to determine if your business is still worth saving.

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