What happens if your business or LLC decides to stop doing business with a foreign state? As the last few years have posed more financial challenges for companies, many have been forced to reduce operations. Oftentimes the best financial option is to withdraw from business transactions with a foreign entity.
The Path to Withdrawing an LLC from a Foreign State
For most businesses and LLCs, the path looks similar. Most of the time the steps include:
- Starting small – doing business in just one state.
- Success leads to expanding operations to other foreign states.
- Financial or other circumstances make it necessary to close operations in one or more foreign entities that had been part of the expansion.
Choosing to expand business operations to multiple foreign states brings with it the need to comply with the LLC law in each state. In general, a foreign entity requires a company to:
- Make an application to the secretary of state (or other filing offices) and pay a qualification fee.
- Appoint and maintain a registered agent.
- File an annual or biennial report and pay fees or taxes for the franchise.
What if the business decides to stop doing business in a state, even though they qualified previously? Are there any related compliance requirements when deciding to stop business transactions?
Firstly, it’s important to check with the entity’s LLC or corporation statute. Most of the time if the company continues to exist, no further filing is required. Most entities do not require a business to make a notification of ceasing operations in the region. However, if the business is dissolving or merging totally out of existence, filing will need to be completed with the foreign entity. Each state defines a time in which the business must make notification of its being dissolved. For the purpose of this article, we are only considering businesses that continue to exist.
Voluntary Withdrawal or Cancellation
A corporation retains the option of remaining qualified even if they are not conducting business in the state. However, please note that the business still has to comply with the laws of the state. For instance, the corporation or LLC will still be required to file annual reports and maintain the registered agent. If you no longer wish to comply with these and other regulations, then a statutory procedure called a “withdrawal” or in some states, a “cancellation” must be filed. This action usually involves two steps:
- Paying all fees and taxes that are due along with filing any reports due
- Filing an “application of withdrawal” with the filing office
Statement of Tax Clearance
When a company files for withdrawal, they usually have to state that taxes and filings are current. Some foreign states require more than just a statement. Some entities require proof that there are no taxes or reports owed. This proof is also called a “tax clearance.” To obtain a tax clearance, fill out the appropriate form or send a request to the state tax department. Once the tax department determines the company is up-to-date, they will provide a certificate stating such. It can take weeks or months to obtain the proper certification. Make sure to continue paying taxes and filing annual reports during the waiting period.
State’s Service of Process
When a corporation or LLC withdraws from a foreign state, they are still subject to lawsuits for actions occurring before the withdrawal. How can a withdrawing company be served with process in the state? Usually, states require the LLC or corporation to revoke the authority of its registered agent. Then, they appoint the secretary of state as its ongoing agent for any service of process that may arise.
What happens if an LLC doesn’t withdraw?
A corporation or LLC is not subject to the compliance requirements upon withdrawal from the foreign state. Some companies choose to skip the expensive and time-consuming process of withdrawing. This creates a dangerous setting, especially if they decide to stop filing the required reports and don’t pay the franchise taxes as required. As long as the LLC remains qualified, they must continue to file annual reports and pay taxes as required. If not, they are subject to penalties. States may collect late fees, leverage finds, and charge interest payments they are due. The company may not be the only liable party. Statutes in some states allow them to extend liability to officers and employees of the business so that they are responsible for paying taxes and fees.
A delinquent LLC risks negative public records. Having this listing on a company’s record is not good for business. Potential lenders and business partners may refuse to continue pursuing business relations.