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Life or Death Announcement for All Arizona Corporations

Beginning October 1, 2009, the Arizona Corporation Commission will no longer mail to an Arizona corporation its annual report.  Arizona law requires that all Arizona corporations, including nonprofit corporations, file an annual report every year with the Arizona Corporation Commission.  If an Arizona corporation fails to file the annual report, the Arizona Corporation Commission will administratively dissolve the corporation, i.e., terminate (kill) the corporation’s existence.

Administrative dissolution of an Arizona corporation could be a disaster for the corporation and its shareholders.  Some of the nightmarish legal consequences of an administrative dissolution are:

1. The shareholders lose the protection afforded by Arizona law from the debts and liabilities of the corporation.  Creditors don’t have to pierce the corporate veil because the dissolution removed the veil.  A nonexistent corporation cannot shield its shareholders from liabilities.
2. All of the assets of the corporation become vested in the shareholders in proportion to their ownership.  The IRS views this event as a taxable distribution of the corporation’s assets to its shareholders.
3. Real property previously owned by the corporation becomes vested in the shareholders, but no deed from the terminated corporation to the shareholders was recorded to evidence the transfer.  The only way the shareholders can sell or transfer the real property previously owned by the dissolved corporation is to file a quiet title lawsuit and get a court order that they are the owners of the land.

The slight good news is that a corporation that is administratively dissolved by the Arizona Corporation Commission may reinstate its charter (existence) by taking the appropriate corrective action within six years of the date of the dissolution.  See Arizona Revised Statutes Sections 10-1422.  When the reinstatement is effective, it relates back to and takes effect as of the effective date of the administrative dissolution and the corporation resumes carrying on its business as if the administrative dissolution had never occurred.  See also Arizona Revised Statutes Section 10-11422, which allows Arizona nonprofits to reinstate within six years.

Bottom Line:  If you own stock in an Arizona corporation or if you are a member of the board of directors or an officer of an Arizona corporation, you must create a tickler system for the corporation that reminds the appropriate people to obtain the annual report form from the Arizona Corporation Commission and file it on or before the due date.