Obtaining “corporate status” for a company is an important step that has important implications for asset protection, taxation and general day-to-day operations. However, to obtain this coveted status, owners must submit a number of formal documents to their state authorities (usually the Minister of Foreign Affairs). To start a small business, the owner must file articles of association. These documents must be submitted to the Secretary of State`s office where the company will operate. However, some states require that a board of directors be appointed to officially start a small business. You`ll need to check with your state to see what requirements need to be met. Choosing (or changing) a business structure is an important decision for any owner. Most businesses start as sole proprietorships or partnerships, simply because new businesses tend to be small businesses with a relatively simple ownership structure. But what happens when a business thrives and wants to grow? If any of the above activities take place, this would qualify a company as a company with the status of an active company. Even if a company has no revenue, if there are types of transactions, it will still have an active status. For LLCs, these documents typically include the company`s articles of incorporation and operating agreement. For corporations, on the other hand, states often require the corporation`s bylaws, shareholders` agreements, and bylaws.
State laws require companies to complete planned filings to maintain their active legal status. For example, a corporation is generally required to file annual returns with its incorporation status. A company can be reclassified to inactive status if it does not comply with its state filing laws. Inactive status can also occur when a company makes a significant change, such as a name change or a merger with another company. The necessary documents must be submitted to form a company and they must be sent to the correct Department of State Affairs as well as the IRS. In the eyes of the law, a business is completely separate from its owners. They can issue shares to their owners, but the corporation must file its own tax return. And once it is effectively registered with the state with the federal government, it will remain a legitimate business until the right steps are taken to dissolve it. If a company has an inactive company status, it means that it still exists in the eyes of the law, but no activity takes place.3 min spent reading Again, obtaining corporate status is a significant achievement for a company, but make no mistake: this status is conditional. Registered companies (whether LLCs or corporations) must adhere to a set of state-imposed rules and formalities related to incorporation. In addition, some states may consider a company inactive if it has no government employees or no state ownership. A business is typically created for a number of reasons, one of which is to shift responsibility for a business away from the owner`s personal assets.
A company`s status may refer to its position in the state where it was incorporated or the tax classification it chooses from the Internal Revenue Service. In general, states classify enterprises incorporated under their laws as active or inactive. The IRS also categorizes the status of corporations as C Companies or S Companies for tax purposes. As mentioned earlier, the company will continue to exist until its dissolution. Even if a company is inactive, this does not mean that it is not subject to certain reporting obligations. You will need to check with your state what reporting requirements need to be met. For these reasons, understanding and following the incorporation rules applicable to your business cannot be overemphasized. Keep in mind that these rules are largely state-specific. It may be a good idea to contact your state`s local authorities (or consult with an experienced business attorney) to make sure your operation complies with your state`s regulations. These consequences are often just the tip of the iceberg. When a company loses its corporate status, it can also break through the protective barrier that once separated the owner and the business (in some situations, this protective barrier is called the veil, and its closure is called corporate veil penetration). Once the corporate veil is broken, owners are at risk for all responsibilities associated with their business, including unpaid loans, legal claims or other debts.
As a small business grows, so do its legal obligations, financial requirements, and operational complexity. In these cases, many professionals advise owners to consider involving their business. In this context, incorporation only means registering your business structure (usually) as an LLC or corporation. Although many companies start with a simple business structure, such as a sole proprietorship or partnership, it is wise to modify this structure to accommodate the increasing complexity of the business. Registered businesses that do not comply with these regulations may lose their corporate status, meaning that the owner(s) may be personally unstable for corporate actions or responsible for the refund of corporate taxes. To keep your business active, you will need to file annual returns at the same time as your annual tax return. In addition, you will have to pay certain fees. If you don`t, the state may consider your business inactive.
In the eyes of the law, there is always an inactive company. It simply means that it does not engage in any type of transactions or transactions. It`s also worth noting that most state laws allow a company to stay alive even if its shareholders or owners die. As mentioned earlier, steps must be taken to dissolve the company or it will remain. For example, let`s say you`ve formed a limited liability company, also known as an LLC, and you`re selling products or services over the internet. However, about a year after opening the store, you decide you don`t want to continue. Shutting down the entire business may not be in your best interest, so let it run and you`ll be paying for your website, but you won`t take any further action. This means that you are still investing in the company, so it is active. But if you let the site expire and make no further effort, it will become inactive.
If a sole proprietor is not registered with a state, it means there are no government fees to pay. However, if the person has a federal tax number or even a Social Security number that they should have, all profits must be reported at the end of the year using a Schedule C tax form. In fact, this form must be submitted regardless of whether the business had income or expenses or not. Removing the small but significant barrier of collecting, filling out and submitting these documents – if approved – will lead to the creation of your business. However, many owners do not realize that their business status is conditional and can actually be revoked if companies do not follow the rules and formalities associated with incorporation. Companies automatically have C status with the Internal Revenue Service when they are incorporated, regardless of the country of incorporation. Company shareholders can elect S status by filing Form 2553 with the IRS and meeting other IRS requirements. The S status allows corporate profits to be reported once in shareholders` personal tax returns, thus avoiding double taxation of personal income tax and corporate income tax on profits. Individual states may or may not recognize S Corp`s status for state tax purposes. If it is active (by far the most common value), it only means that the company exists and has not been dissolved, and that there is no proposal to abolish the company. The documents required to set up a business depend on: You will also need to obtain a tax identification number, which is especially important as this separates you from the company`s personal responsibility for your personal assets. Asset protection is not the only benefit of incorporation.
Many owners choose to establish themselves because of the different tax treatment (when a corporation is incorporated, its tax liability is treated separately from the tax liability of an individual owner, with another case where the corporation and owner are treated as separate legal entities). The status of the company does not depend on whether the company acts or not. A dormant entity will continue to appear active unless it has entered the dissolution process. See How to put your trading company to sleep You cannot change the status of the company.