DAYTON — A hole in how state law is enforced allows incorporated businesses to keep operating even if the state revokes their articles of incorporation and they owe back taxes to the state.

Articles of incorporation are legal documents a business files with the state to operate as a corporation. In most instances, operating as a corporation allows a business to limit the liability of its shareholders and employees for any debts owed by the corporation.

It’s against state law to keep operating an incorporated business without proper, up-to-date articles of incorporation. Businesses that do so face fines up to $5,000.

Yet businesses continue to operate after their articles of incorporation have been revoked, say for failure to pay taxes, in part because the state has no established system for monitoring whether those firms have ceased operating as required by law until their corporate status is restored.

The Secretary of State’s Office, which is responsible for maintaining articles of incorporation and other business documents, does not keep a list of businesses whose articles of incorporation have been canceled, according to Luisa Barone, spokeswoman.

Spokesman for other state offices that deal with businesses also said they do not monitor whether firms that have had their articles revoked are obeying the law.

“This is not an area we felt that we could realistically monitor on an active basis,” said Gary Gudmundson, spokesman for the Department of Taxation. “We were not out there checking door-to-door on an active basis to make sure everybody whose articles have been canceled were complying with the law.”

Instead, the state usually relies on some future transaction to trigger corrective action.

“What normally brings this to our attention is when one these taxpayers who have had their articles canceled attempt to get a loan, buy some property or sell the business,” Gudmundson said. “This is typically unearthed when the lenders or sellers are doing their due diligence. They will often come across this cancellation and say we cannot proceed” until the matter is cleared up.

The Dayton Daily News recently discovered that two local funeral homes continued to operate for years after both had their articles of incorporation canceled for failing to file necessary corporate franchise tax reports or pay timely taxes.

McLin Funeral Home, Inc., 2801 N. Gettysburg Ave., had its articles of incorporation canceled in 2009, but continued to do business, as did Magetti Gavin Funeral Home, Inc., 1508 Valley St., which had its articles of incorporation canceled in 2006.

Anne Frayne, attorney for McLin, and David Jablinski, attorney for Magetti Gavin, both said their clients were unaware of the cancellations until contacted by the Dayton Daily News. Shortly after being contacted, Magetti Gavin had its articles of incorporation reinstated on May 12.

Malik Hubbard, director of the state Board of Funeral Embalmers and Funeral Directors, which governs the operation of funeral homes in Ohio, said the board was unaware that the Magetti funeral home’s articles of incorporation had been revoked five years ago.

“There is currently no system in place that would immediately notify the board when the secretary of state has an issue with a business in (the state),” Hubbard said.

Hubbard sent a letter to Magetti Gavin on May 4 that stated the board was aware of the cancellation and emphasized that state law requires that the funeral director must notify the board about a change in ownership. The board considers a funeral home that is no longer a corporation to have undergone a change in ownership. Funeral owners Hugh and Michelle Gavin were able to get their articles of incorporation reinstated before the board’s May 13 deadline.

The Gavins have made payment arrangements with the state, according to Jablinksi. However, he could not say when the arrangement had been made.

Gudmundson said he could not confirm or dispute if the funeral home is on a payment plan, citing confidentiality laws. He did say, however, that “payment plans are not something we typically engage in.”

“Before they can get (the articles of incorporation) reinstated, they would have to pay all of their taxes,” Gudmundson said.

Meanwhile, Montgomery County treasurer records show that Magetti Gavin’s property at 1508 Valley St. is delinquent in property taxes by $3,324.19. The county has the funeral home owners on a payment plan, said Phyllis Hewitt, supervisor of the county’s delinquent tax department.

As for the McLin Funeral Home, which has been shut down by order of the funeral board, its articles of incorporation had not been reinstated as of Friday. Local attorney Anne Frayne said last week that funeral home owner Scherrie McLin is negotiating to sell the business.

The McLin Funeral Home shut down in March after the state board suspended McLin’s funeral director’s license and suspended the funeral home’s operations. The board accused the funeral business of violating nine state laws and administrative codes.

McLin is disputing the allegations and has requested a hearing before the state board. That hearing is scheduled for June 16 in Columbus.

Steve Gehlert, executive director for the Ohio Funeral Directors Association for 27 years, said prior to being contacted by the Dayton Daily News he had never heard of a funeral home continuing to operate after losing its articles of incorporation.

It is unclear if the two funeral homes have or will face any financial penalties for operating their businesses with proper articles of incorporation.

Contact this reporter at (937) 225-2414 or kwynn @DaytonDailyNews.com.