Business entity administrative dissolution and reinstatement (2024)

Consequences of administrative dissolution

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 affairsor 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 the following:

Case law on administrative dissolution

The following cases illustrate those legal problems.

The Mississippi Supreme Court affirmed the dismissal of a lawsuit brought by a corporation that was administratively dissolved for failing to file an annual report while the suit was pending. The court interpreted the corporation law as not only preventing administratively dissolved corporations from bringing suits, but from maintaining those previously brought. Tellingly, the owner of the corporation, when asked why he did not file an annual report, responded that he didn’t have a business anymore and believed he didn’t need to file a report. Wayne Johnson Electric Inc. v. Robinson Electric Supply Company, Inc., 266 So.3d 643 (Miss. 2019).
A federal district court held that a member of an LLC was a proper party to a suit for breach of contracts entered into by the LLC where the LLC continued to do business after its administrative dissolution and the plaintiff alleged the member was actually aware of its administrative dissolution. S-Fer International, Inc. v. Stonestreets, LLC, 2016 U.S. Dist. LEXIS 190241 (S.D. Fla. 2016)
A breach of contract action was brought against a corporation. A default judgment was obtained. The corporation’s charter was forfeited at the time and never reinstated. The corporation filed a bill of review challenging the default. The Texas Court of Appeals held that a terminated entity may not be injured or have a then existing interest or right that was prejudiced by a default judgment. Thus, it lacked standing to file a bill of review. Donica Group, LP v. Thompson Excavating, Inc.,2020 Tex. App. LEXIS 39

Reinstatement of administratively dissolved business entities

The best way to avoid administrative dissolution is to make sure all annual reports are filed and other statutory obligations are fulfilled.

If that didn’t happen, then one of the first steps that should be taken by, or on behalf of, an administratively dissolved entity 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:

Impact of reinstatement - "relation back" provisions

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.

Homeowners sued the members of the LLC that built their home, claiming they should be personally liable for the defects because the LLC had been administratively dissolved. The court held that the members were relieved of personal liability when the LLC was reinstated as the LLC law states that any liabilities incurred after dissolution but before reinstatement will be determined as if the administrative dissolution never occurred. Brown v. Waldron, 186 So.3d 955 (Miss. App. 2016)
The District of Columbia Court of Appeals held that the reinstatement of an administratively dissolved LLC validated its filing an action to quiet title and its recording of a deed during the period of dissolution. The court reversed the trial court’s dismissal of the action on the grounds that the LLC was administratively dissolved when the claim arose. RFB Properties LLC v. Federal National Mortgage Ass’n, 284 A.3d 381 (D.C. App. 2022).
The California Court of Appeal upheld the renewal of a default judgment in favor of a corporation that was suspended at the time of renewal. The corporation’s powers were revived by its paying franchises taxes, filing an annual statement, and changing its name, which had been taken by another company during the period of suspension. The revival validated the renewal of the default judgment. Pacific West Group, Inc. v. Interlandi, 2018 Cal. App. Unpub. LEXIS 5920

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.

The California Court of Appeal ruled that a corporation that had its powers suspended and then revived could not assert a claim for fraud because it was not revived before the statute of limitations had run. Green Mutual Property & Investment Co. v. Wilshire Bank, 2018 Cal. App. Unpub. LEXIS 8162
A sole shareholder and officer was held personally liable for contributions the corporation should have made to a pension fund during the period it was administratively dissolved. The corporation’s reinstatement did not relieve him of personal liability, according to the court, because he operated the business as a sole proprietorship during the period of dissolution, so it was his debt and not the corporation’s. IBEW Local No. 150 v. Great Lakes Electrical Contractors Inc., 2022 U.S. Dist. LEXIS 162078 (N.D. Ill. 2022).
The sole shareholder and officer of a corporation was held personally liable on a contract the corporation entered into while administratively dissolved despite the fact the corporation was reinstated. The court acknowledged that reinstatement validates corporate acts and it was as if the corporation was never dissolved. However, the court held that the shareholder/officer in this case was acting as an agent of an undisclosed principal when he contracted with the plaintiffs and thus he was still personally liable. Cackowski v. Drake, 2023 Tenn. App. LEXIS 3.

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.

Conclusion

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, business owners, managers, and lawyers with business entity clients should be aware of the statutes and case law governing administrative dissolution and reinstatement for the states in which they, or their clients, are organized.

Some companies seek assistance in preparing, filing, or managing their annual reports from corporate service companies like CT Corporation. And CT Corporation can also assist in the reinstatement process. We identify the steps you need to take to regain your good standing, calculate any overdue fees owed to the state, obtain the necessary forms and audit them to spot errors, submit your completed forms to the right state agencies, and notify you as soon as reinstatement is complete. Learn more about how we can help you with your annual reports or reinstate your business.

Let CT Corporation help you

CT Corporation can help you dissolve your corporation or LLC properly and in compliance with state laws and local jurisdiction requirements. We provide business entity dissolution services for all 50 states and D.C. Contact CT Corporationtoday.