It is April! That means taxes. Hopefully, by now, you have been in touch with your CPA and you aren’t waiting until the last minute!
In addition to your personal tax return, I want to make sure and remind you that you need to file a Business Privilege Tax for every entity you have in Alabama. This tax is due each year on April 15.
In Alabama, every new entity formed is required to pay an initial Business Privilege Tax within 2.5 months for forming. This tax is also assessed every year in April. The initial Business Privilege tax is designed to ensure the state of Alabama receives its money in the initial year of a business existing. It is not prorated. That means, you must pay $100 for the year you file whenever you file. If you file right at the end of the year, you will be required to pay the initial return within 2.5 months of filing and the annual return in April of the following year. The initial business privilege tax is imposed on formation. The annual business privilege tax is imposed for each additional year of operation.
That means, even if you have paid a BPT-IN this year for a business that was formed at the end of 2014, you still owe the 2015 Business Privilege Tax for your entity.
The requirement of the Business Privilege Tax is for any company that exists in Alabama. This is also true for any entities you created, but that you have not yet legally dissolved yet.
If you have any legal entities you started, but aren’t using any more, you need to know the continued cost of not dissolving the entity. Mostly, that is the Alabama Business Privilege Tax. The minimum tax is $100 each year. If you consider the fact that it costs about $200 and an initial Business Privilege Tax of at least $100 to create a new entity, you can calculate whether keeping an unused Alabama entity opened is a cost-effective endeavor.
Today, let’s look at the dissolution of an entity, so you can determine whether you should dissolve your unused entity or continue paying the Alabama Business Privilege Tax to keep it opened.
The process of dissolution involves two phases:
The dissolution of the business is a statement to the state (by filing Articles of Dissolution) that the company is no longer operating. This provides notice to everyone publicly that the business is no longer operating.
After the dissolution, the business will wind up. That means, the business will liquidate its assets and settle its debts. This is the important part of business dissolution, especially when one of the reasons for dissolving is overburdening debt. This is when the business negotiates any debts it has and accelerates the statute of limitation on any claims against the business that may exist. All creditors must be notified and given time to bring any claims and notify the company of any outstanding debts. Once the time of notification has passed and you have all of the creditors lined up, you can make proper determinations about how to handle the settlement of those debts. There is a statutory priority, but beyond that it is about settling debts and securing releases for claims (this helps the individual owners because the claims have been released). In many cases, this can help avoid issues down the road for individual owners. In some cases, it will not.
Shutting Your Company Down
Of course, if your business is not operating (or never did), there will not be much in the way of winding up the business because it hasn’t done anything and there are not creditors to notify or cash to distribute. In that case, you need to go through the simple process of dissolution.
In Alabama, you need to file Articles of Dissolution in the office of the judge of probate where the entity was originally formed. If you aren’t sure, you can run a records search on the Alabama Secretary of State website to determine where your company was originally formed. Each probate court has its own requirements for what you should bring for the purpose of filing. At a minimum, you will need the original Articles of Dissolution.
Once you have filed the Articles of Dissolution, you will need to notify your creditors. Technically, the dissolution is not effective until it is recorded by the Alabama Secretary of State. You can, however, state the date you want it to be effective on the Articles of Dissolution. This can sometimes be helpful if the date occurred before you filed the Articles of Dissolution, but it will not necessarily control over the date the Articles are filed with the Secretary of State.
There are many reasons to keep a company open, even when it is not operating. The primary calculation, however, should be on whether it is financially viable. Filing for dissolution of an entity costs somewhere between $150 and $200 depending on which county you must file in. That means, it is about the cost of forming a new entity to dissolve one. The business privilege tax is $100 each year of business, even if you are not operating. So, it is up to you to determine whether it makes financial sense to keep an entity open in case you use it one day.
A Note on Trademarks
Many business owners opt to keep an entity open simply to protect a trademark or a trade name. Keep in mind that, unless you are doing something with your trademark, you don’t have a lot in the way of protection. Especially if all you ever did was buy a parked domain and form an entity with the name. You need to do something to protect your trademark.
Make Sure You File!
So, make sure, with all of the other tax things you are worried about this month, that you don’t forget to file and pay the Business Privilege Tax for each company you have in Alabama.
If you haven’t spoken with a CPA yet or don’t know where to turn to prepare your taxes, let me know and I can point you in the right direction.