Can An Inactive LLC Conduct Business? The Facts You Need to Know

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For entrepreneurs and small business owners, forming a limited liability company (LLC) is a popular choice due to its liability protection and tax flexibility benefits. However, sometimes life happens, and your LLC may become inactive for a period of time. The question then arises – can an inactive LLC conduct business?

The short answer is no, an administratively inactive or dissolved LLC cannot legally operate and conduct business transactions. However, there are some important nuances to understand regarding the different types of LLC inactivity and the potential paths to reactivate and legally resume operations.

What is an Inactive LLC?

An inactive LLC refers to a company that has fallen out of good standing with the state, usually by failing to file annual reports, pay franchise taxes or fees, or meet other compliance requirements. Depending on the state and how long it has been inactive, the LLC may be classified as:

Administratively Inactive

This temporary status occurs when minor lapses in compliance like missing an annual report filing happen. The LLC still legally exists but cannot operate until reinstated.

Dissolved/Terminated

If inactive for an extended period, typically a year or more, the LLC may be administratively or voluntarily dissolved by the state. At this point, it no longer legally exists as a business entity.

While inactive, an LLC has no legal ability to conduct business activities like signing contracts, opening bank accounts, hiring employees, or other transactions. Doing so opens the members/owners up to personal liability – negating the limited liability protection the LLC was formed to provide.

Reactivating to Conduct Business

The specific processes for reinstating or re-forming the LLC to regain active status and legally operate again vary by state. Common steps include:

Filing Delinquent Reports/Returns

Catching up on any missed annual report, franchise tax, or fee filings and payments is typically required for administratively inactive LLCs. Once processed, the state will reinstate the LLC to active/good standing.

Applying for Reinstatement

For terminated/dissolved LLCs in some states, you must file a reinstatement application along with any missed filings/fees to reactive the company’s legal existence.

Re-Forming the LLC

If too much time has passed to reinstate, you may need to completely re-form the LLC by filing new articles of organization as if starting from scratch.

Avoiding Penalties & Other Considerations

Besides regaining the right to legally operate, reactivating properly avoids potential penalties and tax issues from operating an inactive LLC, including:

  • Personal Liability: All business liabilities fall on the members rather than being shielded.
  • Tax Penalties: Operating creates taxable income that must be reported, which the IRS can penalize heavily if not filed under an active entity.
  • Legal Problems: An inactive LLC has no standing to sue or be sued, enter into contracts, convey property, etc.

Additionally, certain other compliance steps may be required upon reactivation like publishing a notice of reinstatement, getting new licenses/permits, and opening a new bank account. The best practice is to be proactive about maintaining an LLC’s active status and good standing from the start. 

However, if you do find yourself with an inactive LLC, understanding these reactivation procedures is crucial before attempting to transact any business. An experienced lawyer can guide you through the proper steps based on your state’s laws and the LLC’s specific situation.

Takeaway

While operating an inactive LLC may seem tempting to try and avoid the hassle of reactivating it, doing so opens you up to significant legal and financial risks that negate the very liability protections the LLC was formed to provide. 

The proper course of action is to follow your state’s procedures for reinstating an administratively inactive LLC or re-forming one that has been terminated/dissolved. This allows you to legally resume business activities under the LLC’s corporate veil and asset protection umbrella. 

An experienced business lawyer can guide you through the reactivation process and any other compliance requirements based on your specific situation. Taking the right steps upfront to properly revive an inactive LLC is crucial to remain compliant and maintain your limited liability status going forward.

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