The anguished calls come with unfortunate frequency from bewildered, confused, or angry company owners.
“I stopped doing business in Tennessee (or another state) a while back, but today I got a call from the state revenue department saying I owe back taxes. That’s not possible, is it?”
Yes, it is. There’s a great administrative gulf fixed between ceasing doing business in a state and officially ceasing doing business in a state. This can happen to businesses with no experience closing down operations apart from no longer filing an annual report with the state government.
Three things separate a business from its state tax obligations: dissolution, termination, and withdrawal. Dissolution means dissolving or liquidating a company; termination ends an entity’s right to operate in the state where it was originally organized or incorporated. Withdrawal affects businesses organized or incorporated in one state but previously registered to do business in another state as a business “foreign” to that state.
Generally, if you stop filing tax returns and annual reports, states place your business on administrative dissolution status, effectively terminating your right to do business there, but not legally dissolving (or withdrawing) your company. Your business must continue filing tax returns and annual reports; any that fail to be filed become delinquent.
Here are some of the steps that may be required to officially unwind your business:
- State requirements and business owner responsibilities vary. Generally, step No. 1 is a resolution signed by the key persons (board of directors, management, shareholders, for example).
- Use correct legal language to prepare and file a “consent to dissolution” with the state.
- File delinquent annual reports with the secretary of state’s office. Tennessee’s procedure includes a form to dissolve a company after it’s administratively dissolved by the company’s owners and officials. Tennessee doesn’t mandate that past-due and unfiled annual reports must be submitted, but that isn’t true for every state.
- Request a state tax clearance certificate after all tax returns have been filed. Tennessee’s revenue department automatically issues a certificate when the company’s final franchise and excise tax return is filed unless the company owes business, sales, or other taxes. The certificate isn’t issued until those items are cleared up.
- The final step is for domestic companies to file articles of termination, and foreign companies to file articles of withdrawal, with the appropriate state agency. Companies domiciled, incorporated or organized in Tennessee are domestic; a foreign company is organized in another state or country, after which it registers with the Tennessee Secretary of State’s office to do business here.
As a non-required legal protection for Tennessee companies, the secretary of state suggests they publish an “intent to dissolve,” which gives creditors notice of the company’s plans. Creditors can then make eligible claims on the business. Not publishing an intent to dissolve potentially leaves the business’s officials to whom the company’s assets were distributed personally liable for potential claims.
Here’s a good general rule: if you went through legally required steps to start a business in a state, there are almost certainly legally required steps to end it as well.
Learning in advance what a state requires will eliminate anger, confusion, or bewilderment.
This article was originally posted in the Knoxville News Sentinel.