Congratulations on forming a corporation or Limited Liability Company and taking steps toward your future success. Now comes the housekeeping you need to perform to stay in business, specifically knowing and understanding the rules and regulations you must follow.
Compliance with all applicable laws and requirements, whether they are federal, state, or local, is essential and will ensure that your business remains in good standing. Good standing means that all paperwork, annual reports, and fees have been kept up to date and on file with your state. This includes maintaining a registered agent of record.
If at any point in time your business is out of compliance, you face damaging your business, your brand, your future success, and even your personal assets. You could lose your home, personal bank account, and anything of value you own. Those are the stakes if your business is non-compliant. You can avoid this by creating a detailed checklist tailored to your type of business that can help you track required compliance activities and deadlines. What follows is a brief description of what basic tasks you should include in your checklist. Keep in mind that your state may require additional compliance measures.
Corporations have the most formal requirements and draw the most scrutiny by regulators. You can put your business in jeopardy by not complying with them. All corporations are required to hold an initial meeting with their shareholders and directors, at which the directors will appoint the corporate officers who should have a clear understanding of their roles and responsibilities as corporate officers.
Corporations must also hold annual meetings with the proceedings documented as minutes. Minutes should be taken for any board of directors’ and shareholders’ meetings. Lastly, any decision regarding the sale and/or transfer of stock, or shareholder action, must be included in minutes. Most corporations maintain a corporate kit, or binder, that contains all the official organizational documents.
A corporate compliance checklist includes but is not limited to the following
· Initial meeting of directors and appointment of corporate officers
· Annual meeting
· Minutes of all board of directors meetings
· Decisions regarding sale and/or transfer of stock or shareholder action
Limited Liability Companies
Although compliance for an LLC is not as formal as compliance for a corporation, there are still requirements. Each LLC must maintain an operating agreement between the company manager and the company member. This agreement outlines the management guidelines, the name(s) of the member(s), and the roles and responsibilities of the member and the manager. It should specify what business functions are member managed or manager managed.
Also, a process for orderly transition in the event of any change of management or ownership must be addressed in the agreement. This is important in the event you decide to sell the business or add additional partners.
An operating agreement includes but is not limited to the following
· Management guidelines
· Member names
· Roles and responsibilities of manager and member
· Plans in the event of management and/or ownership changes
Corporations and LLCs
Whether you incorporated your business as a corporation or LLC, you must maintain a registered agent. A registered agent provides a company with a physical address for service of process. For example, if someone sues your business, the registered agent receives the summons and complaint as part of service of process. Your business could be put at risk if you do not maintain a registered agent. In addition to being responsible for accepting legal documents, an agent is also responsible for accepting any state documents, including annual reports and franchise tax reports.
Most states require both corporations and LLCs to file an annual report with their Secretary of State. Some states require biennial reports, and a few states request that companies file an initial report, which are due to the state within a few months of the initial incorporation or formation date. Typically, there are associated fees for annual report filings. These fees are also known as franchise taxes or filing fees. To aid businesses in this requirement, many states have online portals for filing annual reports.
Additional Filing Requirements
Some states, specifically Arizona, Georgia, Pennsylvania, Nebraska, and New York, have additional publishing requirements for companies after the incorporation or formation is complete. For instance, you must advertise in a local newspaper that your business is now a corporation or LLC.
Non-Compliance with local, state, or federal regulations and requirements can put not only your business in jeopardy but also your personal assets. At the state level, there are consequences for failure to file reports and/or failure to pay fees. A state can decide to administratively dissolve or void your business, so your company will not be in good standing until you make additional state filings or pay appropriate fees. Certain states may require you to file a Certificate of Reinstatement. Once this is done, your company will be back in good standing.
In the event your corporation is sued and the proper compliant steps were not taken, the corporation could lose its corporate veil of protection, referred to as “piercing the corporate veil.” A plaintiff could argue in not taking the appropriate compliance steps, the company was being operated as an unincorporated entity such as a partnership or a sole proprietorship. Your personal assets as the owner of a business and those of any corporate director are no longer protected from liability. If this happens, your personal assets such your home or bank accounts are at risk and on the hot seat. This is why compliance is crucial!
You as the business owner have the responsibility to ensure your company is in compliance. This task is vital to continue operations for your business. Ensuring that there is even a basic compliance program ultimately rests with you. At the very least, you should create a checklist that includes the points previously provided. However, you can delegate this activity to a third party such as a registered agent. Many registered agents offer compliance services to assist their clients. For additional information about compliance and other requirements, visit the National Association of Secretaries of State to find your state. Compliance protects not only you but also your company, your future success, your mission, and brand, so make your checklist today.
By: Chantal Towles, President of Creative Business Assistants, LLC, provides dynamic, customer-focused, small business incorporation services, as well as compliance and virtual business support services. To learn more about Creative Business Assistants visit www.cbadirect.com or view Chantal’s profile on LinkedIn.