What this is: When businesses attempt to register, dissolve or terminate their authority to operate in a state, they may encounter delays due to missing agency approvals.
What this means: Tax clearance is required in many states before dissolution and withdrawal filings can proceed. Other agency approvals may be required on these and other types of filings. This clearance process can result in significant delays but can be mitigated with proper preparation.
It’s a common problem: A company is trying to register to do business in a new state or file incorporation or LLC formation documents, or perhaps, looking to dissolve or terminate their registration to do business in a state and they hit a roadblock. The filing office won’t file the presented certificate because a key component is missing: The approval of another agency. This comes up most frequently when a company is filing a Certificate of Dissolution in its domestic state or a Certificate of Withdrawal (also known as a Surrender of Authority) in a state where it once applied for authority to do business but has decided it no longer will be operating in that state. In many states, approval from the Department of Revenue or similar taxing authority is a required first step. The process to obtain the required clearances can often delay important filings and in some states and situations, those delays can stretch out for months, but there are ways to minimize the problems. Let’s take a look.
Tax clearance is a formal confirmation from a state’s tax authority (e.g., Department of Revenue or Taxation) that a business has fulfilled its tax-related obligations in that state. It certifies that the business has:
A tax clearance certificate is an official document issued by a state’s tax authority (such as the Department of Revenue or Taxation) that confirms a business or individual has fulfilled all their tax obligations in that jurisdiction.
It’s important to review the tax clearance requirements for dissolving or withdrawing as it can often depend on the type of entity and whether the entity is domestic to the state (dissolving) or a foreign entity from another US state withdrawing their authority to do business. The requirement for tax clearance comes up most frequently when a foreign corporation is looking to withdraw, so we will look at that in detail. However, please note that many of the states listed below also require tax clearance in the case of dissolution or when a company is merging or converting out of a state and for entity types other than corporations.
Thirteen states currently require a withdrawing corporation to request a notice from that state’s tax department that should be presented with the filing when looking to surrender the company’s authority to do business. These states include:
The notice or tax clearance certificate will be called different names in different states, including Tax Clearance, Certificate of Compliance, Certificate of Account Status, Statement for Withdrawal, etc. They all serve the same function, however, to certify that the withdrawing corporation has filed all required tax returns and made all required tax payments to the state.
There are also a few other states that have tax clearance requirements, but do not ask that a certificate be submitted with the filing.
In Louisiana and West Virginia, the certificates are required, but the Secretary of State reaches out to the other agencies to request clearance for the withdrawal of the corporation. While this often means long delays in receiving confirmation of the filing, the corporation itself does not have to reach out.
In Michigan, the application for withdrawal can be filed first and the request for clearance should be made to the Department of the Treasury within 60 days of the withdrawal filing.
In Ohio, the corporation can either choose to obtain tax clearance from the Department of Taxation or use the “Affidavit Method,” in which it advises the Department of Taxation and other agencies of its intent to withdraw and agrees it is liable for any taxes due.
Minimizing Delays
As mentioned, these clearance requirements can often delay a needed filing, sometimes for a year or more. And, in many cases, the company still continues to be liable for taxes while going through the clearance process. There are a few things that can be done to help.
The first and most obvious is ensuring the company keeps up to date with its required returns and payments as long as it remains on file with the Secretary of State. A common problem is that a company will cease operations but neglect to file a certificate of withdrawal or dissolution, so that it continues to be liable for annual franchise or minimum taxes.
In the case of a withdrawal due to merger, if the survivor will be continuing the business in a given state, qualifying the survivor first can often help the non-survivor to avoid the need for a lengthy clearance process. When the non-survivor files to reflect the merger, many states allow them to indicate that the survivor will assume any tax liabilities rather than requiring the non-survivor to obtain tax clearance.
Besides tax clearance when a company is dissolving, merging out or withdrawing, companies can also face the need for consents or approvals, when forming, filing applications for authority to do business or taking on a new name. This situation occurs primarily when a company is formed to engage in a regulated profession or industry or wishes to use a word in their name that might construe a regulated profession or industry.
Here are 2 common situations that arise:
Professional Corporations and LLCs are specific entity types in many states for the practice of certain professions. While each state maintains a different list of professions that can or sometimes must form a professional corporation or professional LLC, common professions are medical, law, accountancy and engineering. When forming a professional entity, many states require the principals to provide proof of licensure from the state board which regulates those professions or a letter of consent from that state board authorizing the formation or foreign qualification of the professional entity.
In many states, insurance producers must provide consent from the state’s insurance board for a corporate name that contains the word “insurance.” Even when the company name does not contain this word, it is a good idea to verify any naming requirements that the licensing board may have, as in some states the board may require the company name follows a particular format (for example, contains the words “insurance brokerage” or “insurance agency”) in order to become licensed in the state. States requiring approval or consent from the insurance board to be submitted when the company name contains the word “insurance” include Alabama, Georgia, Hawaii, Mississippi, Nevada, Pennsylvania, New York and Massachusetts.
Whether you are starting up a new business, opening up in a new state or looking to discontinue operations or dissolve, ensuring you are apprised of the requirements and the potential need to reach out to other government agencies in order to complete the filing you wish to make with the Secretary of State can help make the process smoother.
Unlike a general business corporation, a Professional Corporation is an entity structure with the purpose of providing professional services. It is established typically by a group of individuals who are licensed in the same profession. Each state varies on whether a specific profession must form a Professional Corporation or can provide its professional services through the usual entity types (i.e., business corporation, limited liability company, partnership, limited liability partnership). If you’d like to learn more about Professional Corporations, refer to our article, The Professional Corporation: Is it the Right Entity Type for Your Business?
Small punctuation and spelling errors in an entity’s name are easily avoidable causes for rejection. Make sure the name of the entity is consistent across supporting documents submitted with the filing or where the name is listed in other places in the documents. Proofread, proofread, proofread! Refer to our article, 7 Surefire Paths to Corporate Filing Approval, for more information.
Entity governance is a system of rules, practices and processes by which a company is directed and controlled. This important practice involves balancing the interests of a company's many stakeholders, such as directors, shareholders, customers, government and the community. The high-level goal of entity governance is to ensure accountability, fairness and transparency in a company's relationships with all of its stakeholders. To learn more, read our article, Business Entity Governance: An Overview.
This content is provided for informational purposes only and should not be considered, or relied upon, as legal advice.