The Benefits of Formal Withdrawal When a Business is Leaving a State

The Benefits of Formal Withdrawal When a Business is Leaving a State

What must, or should, a corporation or LLC do if its management decides to stop doing business in a state in which it has qualified as a foreign entity? This is an issue with increasing relevance in today’s business environment. One of the company’s best options is to withdraw as a foreign entity pursuant to the foreign state’s corporation or LLC law.

CT Note: This article discusses a company that will continue to exist after it leaves a state. It does not discuss a company that is leaving a state because it is dissolving as an entity in its domestic state.

Voluntary LLC or Corporate Withdrawal

Although a corporation or LLC may remain qualified, even if it is not conducting any business in a state, it is important to remember that as long as it is qualified it must comply with the state’s laws. Thus, for example, the company has to continue to file its annual report (and pay fees) and maintain its registered agent. In order to avoid having to comply with these requirements, a corporation or LLC must enter into a statutory procedure generally known as “withdrawal”.

Withdrawal typically consists of the following steps:

  • The payment of all fees and taxes due and the filing of all reports due
  • The filing of an application for withdrawal with the filing office

Tax Clearance

A company applying for withdrawal typically has to state on its application that it is current in all of its state tax payments and report filings. However, in some states this statement is not enough. Instead, the company must provide proof that it does not owe any taxes or reports. This proof is known as a tax clearance.

A tax clearance is generally obtained by filing a form with, or sending a request to, the state tax department. After the tax department determines that the company is up to date it will provide a certificate - either to the withdrawing company or directly to the filing office.

CT Note: In some states it can take several weeks or months to obtain a tax clearance. It is important to continue to file annual reports and pay taxes during this period as a failure to do so can further delay receipt of the clearance certificate.

Service of Process

A corporation or LLC that withdraws from a state is still subject to suit there for causes of action arising before withdrawal. That raises the question of how the company can be served with process in the state.

Most states deal with this issue by requiring the corporation or LLC to state, in its application for withdrawal, that it revokes the authority of its registered agent and appoints the secretary of state as its agent for service of process for any proceeding based on a cause arising while it was authorized to do business.

Consequences of Withdrawing or Deciding Not to Withdraw

Upon the effective date of withdrawal, a foreign corporation or LLC is no longer subject to the compliance requirements of the foreign state’s corporation or LLC law. Because withdrawal is not required, some managers or owners of companies may decide to avoid taking the time and paying costs to withdraw. This can be a dangerous decision if they think they do not have to continue to file annual reports or pay franchise taxes or fees.

As long as a corporation or LLC remains qualified it is subject to the state’s compliance requirements. If it fails to file required reports or pay taxes the state laws provide for the imposition of penalties. And it is not only the company that may be liable. Some states have statutes extending liability to the officers or employees who were responsible for a company’s tax payments or returns and who willfully or knowingly failed to pay the taxes or file the returns.

Also, the corporation or LLC will remain on the state’s public records but will be listed as suspended, delinquent, or a similar term that indicates the company’s non-compliance with its statutory obligations. That can be a red flag for potential lenders or investors and a signal to business identity thieves that nobody is paying attention.

In sum, as discussed above, a corporation or LLC that stops doing business in a state in which it has qualified to do business may withdraw from the state. This is a process that involves satisfying tax and reporting obligations, filing an application with the secretary of state’s office, and authorizing the secretary of state to act as its agent for service of process. It is a process that every corporation or LLC should consider.

If you have any questions about withdrawals, as always, your CT Service team is ready to help. For additional information on withdrawing from a state, see our LLC and corporate withdrawal and dissolution solutions or feel free to contact us.


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