Revenue Suspension at the North Carolina Secretary of State
Article Date: Saturday, May 25, 2013
Written By: Ann B. Wall
“Revenue suspension” is one of the consequences a corporation or limited liability company (LLC) eventually experiences if it fails to pay taxes due to the State of North Carolina. “Revenue suspension” is not a statutory term. It is shorthand for a serious statutory penalty for nonpayment of corporate or LLC taxes.
Revenue suspension occurs when the North Carolina Department of Revenue (DOR) notifies the North Carolina Secretary of State (SOS) to impose that status change on a corporation or LLC. G.S. §105-230. Generally, a revenue suspension immediately puts a company out of the business of doing its normal work and into the business of winding up its operations.
A revenue suspension can be resolved only by payment of taxes due plus payment of a statutory reinstatement fee of $25. Once the tax issues have been resolved, DOR notifies SOS to reinstate the business. If SOS has administratively dissolved the business’s charter, articles of organization, or certificate of authority during the revenue suspension period, then all dissolution issues also have to be resolved before reinstatement to good-standing.
The Revenue Suspension Process
Businesses are often understandably confused by the revenue suspension process. The process works as follows:
* A corporation or LLC (“the business”) fails to pay its taxes on time or otherwise fails to comply with DOR requirements.
* DOR communicates with the business in an effort to get the business to pay the taxes due and come into compliance.
* If the business does not respond within 90 days, DOR must send a notice to that effect to the Secretary of State.
* The SOS is required to promptly suspend the business’s certificate of authority or articles of incorporation or organization. The SOS must immediately send a notification of the suspension to the business by mailing notification to the business’s registered agent
* If the business wants to be reinstated, it must contact DOR directly and arrange payment of the overdue taxes. It must also pay DOR the $25 reinstatement fee.
* DOR then notifies the SOS that the business’s accounts have been squared and the fee paid.
* After SOS receives the DOR notification:
* If the entity would be in good standing with SOS but for the suspension, the entity’s normal status is reinstated shortly after SOS receives the DOR notice.
* If SOS has also administratively dissolved the entity, then the resolution of the DOR issues will not result in automatic reinstatement by SOS. The entity, now in good standing with DOR, will next have to resolve any remaining issues with the SOS. Only after the entity is completely back in good standing with the SOS will it be reinstated to good-standing.
The Import Of A Revenue Suspension
A business ignores a revenue suspension at its peril. The law is quite clear on the effects of a revenue suspension:
1. The business loses the benefit of any powers, privileges, or franchises which come with incorporation or a certificate of authority. G.S. § 105-230(a).
2. The business’s actions during the suspension are “invalid and of no effect”. G.S. § 105-230(b).
The core provision of the law regarding loss of benefit of powers, privileges, etc., has been much the same since enactment in 1939. As the North Carolina Court of Appeals said:
We reiterate that once suspended, a corporation simply may not “conduct ... business as usual,” [citation omitted] and “[a]ny act performed or attempted to be performed during [a] period of suspension is invalid and of no effect.”
South Mecklenburg Painting Contractors, Inc. v. Cunnane, 134 N.C. App. 307, 313, 517 S.E.2d 167, 170 (1999) In South Mecklenburg, the court held that the plaintiffs did not have to be paid for work they did pursuant to a contract because the plaintiffs’ company was under a revenue suspension. As a result, according to the court, the company lacked the authority to enter into the contract and was not entitled to be paid for work under the contract. Indeed, in at least one case, the court has said that, “[u]pon suspension under § 105-230, the corporation ceases to have a legal existence.” Piedmont and Western Investment Corp. v. Carnes-Miller Gear Co., 96 N.C.App. 105, 107, 384 S.E.2d 687, 688 (1989), rev. den. 326 N.C. 49, (1990) (deed could not convey title to corporation with no legal existence).
Personal liability for debts of the business has been imposed on a president of a corporation who knew about the revenue suspension when the business acted. In Pierce Concrete, Inc. v. Cannon Realty & Construction Co., 77 N.C.App. 411, 412, 335 S.E.2d 30, 31 (1985), the court said of officers and agents:
While corporate officers in North Carolina are not trustees, their fiduciary duty to the corporation is a high one. [citation omitted] This includes a duty not to continue to incur ordinary business obligations on behalf of the corporation when they have knowledge that the corporation’s charter has been suspended. The law will not permit a corporate officer to create obligations in the name of the corporation, knowing the acts are without authority and invalid, and then be permitted to use the corporate name as a shield against the creditors. (Emphasis in original)
77 N.C. App. at 413-414, 335 S.E.2d at 31-32. On the other hand, the court has held that where the officer had no knowledge of the revenue suspension at the time the debt was incurred, personal liability does not attach. Charles A. Torrence Co. v. Clary, 121 N.C. App. 211, 464 S.E.2d 502 (1995). However, it is not clear whether an officer or director would or would not be personally liable for actions of a suspended corporation or LLC if that officer or director essentially created a situation in which he or she would not find out about the suspension, e.g., by failing to keep SOS records current with correct registered agent and address information.
There are a number of other cases dealing with revenue suspension related issues and similar outcomes, including: Griffith v. Glen Wood Co., Inc., 184 N.C. App. 206, 646 S.E.2d 550 (2007) (impact of revenue suspension in another state); Outer Banks Water & Sewer, L.L.C. v. R.P.C. Const., Inc., 195 N.C. App. 597, 673 S.E.2d 799 (2009) (unpublished) (revenue suspension and quantum meruit); Ben Johnson Homes, Inc. v. Watkins, 142 N.C. App. 162, 541 S.E.2d 769 (2001), affirmed without precedential value, 354 N.C. 563, 555 S.E.2d 608 (2001) (foreign corporation could not enforce contract entered into while its North Carolina certificate of authority was revenue suspended).
A revenue suspended corporation or LLC may be allowed to collect payments for pre-suspension activities. “[A] suspended corporation can defend an action brought against it…” Robinson on North Carolina Corporation Law, 7th ed., Russell M. Robinson, II, Section 28.08[2], LexisNexis (2007). The General Statutes also include a provision for placing the suspended entity into receivership. G.S. § 105-232(b).
Other Significant Examples of Revenue Suspension Impacts
For a variety of reasons, government agencies regularly use the business entity data available on the SOS website to obtain information on the status of corporations, LLCs, and other entities. Here are just a few examples of the impact of revenue suspension on business dealings with state government:
The North Carolina Department of the Secretary of State will not accept and file any document from a revenue suspended business. Fees for document filings by revenue-suspended entities will be retained and applied when the documents are examined later, after the suspension is lifted by DOR.
Government agencies may deny applications for licenses and permits when they come from revenue-suspended corporations and LLCs. In addition, current licenses and permits may be suspended or revoked.
The Office of the North Carolina Commissioner of Banks uses a revenue suspension as a basis for a summary suspension of a mortgage lender license, followed by revocation of the license. In re Challenge Financial Investors Corp., Docket No. 07:006:MBB (May 20, 2008), https://www.nccob.org/Online/NMLS/CommissionOrderListing.aspx
The Division of Child Development and Early Education, in the North Carolina Department of Health and Human Services, reviews the status of corporate and LLC child care licensees and takes action if their status is revenue suspension. The division may deny a license to a suspended corporate or LLC applicant and may revoke or suspend the license of a current licensee whose status becomes revenue suspended.
A revenue-suspended corporation or LLC is not considered an eligible vendor or contractor by the state’s Division of Purchase and Contract in the North Carolina Department of Administration.
The United States Internal Revenue Service may consider revenue-suspension status in assessing tax liabilities and deductions and whether they apply to a corporate or an individual taxpayer. See, e.g., 1987 IRS NSAR 8318, 1987 WL 954574.
Reinstatement after Revenue Suspension
Once a suspended entity resolves its issues with DOR, then DOR then notifies SOS that the entity’s revenue suspension status should be lifted. G.S. § 105-232(a). Sometimes, the DOR notice does not lead to immediate full reinstatement. If the entity would be in good standing with SOS in the absence of the suspension, it is reinstated shortly after SOS receives the DOR notice. If, on the other hand, SOS has administratively dissolved the entity, the resolution of the DOR issues will not result in automatic reinstatement by the SOS. The entity, while now in good standing with DOR, will next have to resolve any remaining issues with SOS. Only after the entity is completely back in compliance with SOS, will it be reinstated.
For most purposes, reinstatement after a revenue suspension relates back to the date of the suspension, so that it is as if the suspension never happened. However, one glaring and important exception to that rule is that anyone who relied on the entity’s suspension status to their prejudice may continue to rely on it. G.S. §105-230.
Practice Tips
* When incorporating a business, and when assisting a business with a governmental contract, license, permit or grant, consider reminding the client about the full range of consequences for nonpayment of state taxes.
* When a client walks in with a copy of a revenue suspension notice letter from SOS, do not then call SOS about it. Go directly to DOR and resolve the issue there.
* After resolving a revenue suspension with DOR, make sure your client gets current (and stays current) on all other filings due to SOS. In that way, you probably will not later have to resolve an administrative dissolution. •
Wall is General Counsel of the office of the North Carolina Secretary of State.
Views and opinions expressed in articles published herein are the authors' only and are not to be attributed to this newsletter, the section, or the NCBA unless expressly stated. Authors are responsible for the accuracy of all citations and quotations.