What is an Inactive Business?

When a Business is Inactive - Answers to Common Questions

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What is an inactive business? What makes a business inactive?

An inactive business is a business that still exists but it has no activity, no business transactions during a specific year. If a business has transactions - pays expenses, pays employees, writes checks, uses a debit/credit card, buys equipment or supplies, for example - it is not inactive. Even if the business has no income, it is still active.

For example, you may set up an LLC to sell products or services online, but after a year or so you don't have any interest in the business. You may want to keep the business but you don't want to put any time or expenses into it. The business becomes inactive.

Does an inactive business have to file income taxes?

Yes, all existing businesses must file a federal income tax return even if the business had no income or activity during the year. States also require businesses to file income tax returns every year, even if the business is inactive.

Does an inactive sole proprietor business have to pay taxes?

Since a sole proprietor is not registered with a state, there are no state fees that must be paid. But if the sole proprietorship has a federal tax number (EIN), a tax return must still be filed for the sole proprietorship, on Schedule C. Filing a Schedule C is required even if the business had no income or expenses for the year.

What are the penalties for not paying taxes on an inactive business?

  • Federal - The IRS may penalize your business for not filing a federal tax return.
  • State - Your state may also penalize your business for not filing a state tax return. In addition, some states penalize businesses for being "inactive." 

    You may also need to notify your state department of revenue or state taxing authority that you are not collecting sales taxes.

    Do I have to notify the IRS or anyone else about my inactive business?

    There is no formal notification process for the IRS. Since most business types (corporations, partnerships, and LLCs) are set up through a specific state, you will probably need to notify your state that your business is inactive.

    Most states require an annual or biennial report or a state business tax for businesses registered with the state (corporations, S corporations, LLCs, and different types of partnerships). Check with your state's business department (usually this department is under the state Secretary of State) for more information.

    What about inactive S corporations?

    Legalzoom says, "The IRS has a special failure-to-file penalty for S corporations that miss the tax year filing deadline for returns. The penalty is $85 multiplied by the number of shareholders the S corporation has."

     Can a business stay inactive indefinitely?

    There is no legal requirement that you end an inactive business, but at some point you will probably want to stop filing federal and state tax returns and avoid paying annual fees and possibly penalties to your state for being inactive.

    How do I end an inactive business?

    The process of ending a business depends on the type of business. Corporations, LLCs, and partnerships registered with a state must go through a formal process if dissolution with the state. In addition, there are other tasks which must be performed. Read more about the steps to ending a business.

    If you want to end your sole proprietorship, you should close out your EIN and indicate on the tax return that it is "final."

    Disclaimer: The information in this article and on this site is intended to be general in nature, and is not intended to be considered as tax or legal advice. Every business situation is different, laws, taxes, and regulations change. Before you make any legal or tax decisions, be sure to consult your tax and legal advisors.