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Administrative dissolution is an action taken by the Secretary of State that results in the loss of a business entity’s rights, powers and authority. Reinstatement is the action taken that restores an administratively dissolved business entity’s rights, powers and authority. This White Paper discusses how administrative dissolution can occur, what problems it can cause for the entity and its officials, and how reinstatement can solve many, but not all of these problems.
Administrative dissolution is the taking away of the rights, powers, and authority of a domestic corporation, LLC or other statutory business entity, by the state administrator overseeing business entities, due to the entity’s failure to comply with certain obligations of the business entity statute.
Administrative dissolution is one of the worst things that can happen to a business entity and should be avoided at all costs. Nevertheless, it happens to tens of thousands of business entities each year. Adding to the misery is that in many cases the people running the business have no idea the administrative dissolution happened and continue conducting business as usual.
Eventually, the business entity’s principals will learn what happened. This may be when they try to file documents with the filing office, bring a lawsuit, enter into a merger or asset sale, find investors, or another event occurs where proof that the business entity validly exists is required. At that point the entity’s principals are likely to seek the advice of a lawyer familiar with the compliance obligations of state business entity laws, who can advise them as to how the entity’s powers can be reinstated and tell them what the consequences are of their conducting business while their entity lacked the power to do so.
This White Paper will address these issues and more as it explores the topics of administrative dissolution and reinstatement. (It should be noted that although this White Paper will use the common and generic terms of “administrative dissolution” and “reinstatement” some statutes use other terms when referring to the taking away and restoring of an entity’s powers such as “forfeiture”, “cancellation”, “revival” and “renewal”.)
A business entity may be administratively dissolved for a variety of reasons. The exact grounds are set forth in the business entity statutes. The three most common grounds are:
Inadvertent administrative dissolution - The failure to comply with one of these obligations may be intentional or unintentional. In some cases the noncompliance occurs because the entity has been abandoned by its owners. However, often the noncompliance is inadvertent.
Inadvertent administrative dissolution can happen fairly easily and to business entities large and small. For example, the sole owner of a small LLC may have thought that because the LLC did not have to pay state income tax, it did not have to pay franchise taxes either. Or an overburdened corporate secretary, responsible for the annual report filings of hundreds of subsidiaries, may have allowed some to fall between the cracks.
Dissolution procedure - Before dissolving a business entity, the administrator – often the Secretary of State - must follow a statutory procedure. The procedure generally requires that notice be given to the business entity, along with a grace period in which it may correct each violation. If the violations are not corrected, the entity will eventually be administratively dissolved.
At common law, and under the early statutes, a business entity ceased to exist as an entity upon the effective date of its dissolution. However, today an administratively dissolved business entity continues to exist – generally until it winds up its affairs or the “survival statute” expires. A survival statute is like a statute of limitations. It gives a dissolved business entity a certain period of time (often two or three years) to prosecute and defend suits and take the actions necessary to wind up.
Perils of doing business after administrative dissolution - Once a business entity is administratively dissolved it is prohibited by statute from engaging in any activities other than those necessary to liquidate its assets and wind up its affairs.
But despite this prohibition, it is not unusual to see an administratively dissolved business entity continuing to operate as a going concern, because the people who are acting on its behalf are unaware that it has been dissolved.
If an administratively dissolved business entity continues doing business, the entity, and its owners and managers, can run into a variety of legal problems, including:
Case law on dissolution – The following cases illustrate those legal problems.
One of the first steps a lawyer will take on behalf of an administratively dissolved client is to seek reinstatement. This is a statutory procedure that restores an administratively dissolved business entity’s rights, powers and authority, thereby allowing it to resume doing business as before dissolution.
In order to be reinstated, a business entity must do the following:
In most states, reinstatement is only available for a certain number of years after dissolution. The period varies from state to state but is generally not less than two or more than five years.
The state statutes generally provide that when reinstatement is effective, it relates back to, and takes effect as of the date of dissolution. This creates a legal fiction that the administrative dissolution never occurred. By creating this fiction, many of the problems that arise due to the dissolution, such as personal liability for debts created during the period of dissolution, the voiding of actions taken, and the loss of the capacity to sue, are eliminated.
Case law on reinstatement - The following cases illustrate the impact of the relation back provision.
Although in many cases reinstatement extinguishes personal liability, restores a business entity’s capacity to sue and validates other actions, it is not always so – as these decisions illustrate.
Loss of name - Another problem an administratively dissolved entity can face that reinstatement may not cure involves the loss of its name. In many states one of the effects of administrative dissolution is that the name returns to the status of being available to other business entities. If, during the period of administrative dissolution, another business entity forms, qualifies or changes its name to the dissolved business entity’s name reinstatement will generally not give the business entity the right to get its name back. It will instead have to choose another name in order to be reinstated.
The right to do business as a corporation, LLC or other statutory business entity – and all the benefits that brings - is granted by state law. In return for granting that right the states impose certain obligations. If the business entity fails to comply the state may take away its rights through a process called administrative dissolution. However, the states do not want to see viable business entities dissolving so most have a statutory reinstatement process that can restore the business entity’s rights and powers.
Administrative dissolution is not an uncommon occurrence. Consequently, lawyers with business entity clients should be aware of the statutes and case law governing administrative dissolution and reinstatement for the states in which their clients are organized.
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