Understand compliance risks that can cause a loss of good standing
Your corporation has compliance obligations under the laws of its state of incorporation and any state where it has qualified to do business. Failing to meet those obligations can result in a range of penalties.
If your corporation fails to properly comply with its annual or biennial reporting requirements, or paying its state franchise taxes, then it is deemed to have “fallen out of good standing”. In some states, noncompliance with other statutory requirements, such as a failure to maintain the registered agent and office, can also result in a loss of good standing. The implications of the change in status from being in good standing to being delinquent, or not in good standing, if not remedied quickly and properly, can be damaging, both to your business and to you personally as the owner of that corporation and the person doing business on its behalf.
A state will not issue a certificate of good standing to the corporation, which is proof of good standing that is needed for various transactions. And continued non-compliance can result in the state administratively dissolving a domestic corporation or revoking its authority to do business in a foreign state.
How a change in status can impact your business
Should your corporation fall out of good standing, and not remedy the situation promptly, your business operations can be impacted in a number of direct and indirect ways:
- Possible loss of access to courts. If you need to take legal action, for example, to enforce a contract, you may be out of luck.
- Inability to pursue new business. Many businesses require proof of good standing for bids, RFPs and other opportunities, in an effort to lower their risks.
- Difficulties in securing capital or financing. Lenders equate a loss of good standing with risk and may deny financing as a result.
- Imposition of tax liens. Non-payment of taxes can also affect your relationship with lenders, as tax liens generally take priority over other types of liens.
- Loss of the right to your corporation’s name. You could lose the right to operate under your company’s current name, because other entities may be able to claim that name while you are not in good standing.
- Fines and penalties. State and local governments impose and collect fines and penalties on non-compliant entities.
- Personal liability. A state may hold officers, directors, or employees personally liable for acting on behalf of a company with “revoked” status.
- Reputational impact. A corporation’s status as “revoked” or “delinquent” is listed on the Secretary of State’s website and can be seen by anyone looking for information about your company.
- Risk of business identity theft. Business entity thieves prey on companies listed as “revoked” or “delinquent” and may reinstate the company and use it without your knowledge.
Understand other corporate compliance risks
Federal, state, and local laws also impose compliance obligations that must be met and impose penalties if they are not met. Most businesses are required by federal, state, and local laws to obtain business licenses and permits. Noncompliance can bring monetary penalties for the corporation that owns the business, personal liability for those doing business on its behalf, and an inability to enforce a contract made while not having the proper licenses.
Many states also require corporations doing business under an assumed name (DBA) to register the name and impose monetary penalties for noncompliance, as well as loss of access to the courts. Another compliance requirement is to register the corporation to do business in foreign states. A corporation transacting business without authority to do so cannot bring an action in the state’s courts, is subject to monetary penalties, and in some states, the individuals doing business on its behalf can also be penalized.
Implement a compliance program and apply best practices
Obviously, prevention is the best medicine. The following best practices could help you lower your risk of exposure to corporate-compliance-related problems. How you implement them depends on your business and its unique features. Note that working with a full-service registered agent gives you the option of taking on all, some, or none of these tasks yourself.
- Monitor. Check your corporate records – preferably every month – to confirm that your corporation’s information is listed properly on the public record in each state in which it is on the public records. Also, monitor new laws that could impact your business.
- Schedule. Know the deadlines for filing forms or reports and paying taxes or fees in your corporation’s home state and in each of your corporation’s states of qualification. Make sure the person responsible for meeting those deadlines is aware of them well ahead of time.
- Communicate. Create a system for communicating required deadlines, status-change triggers or other issues among the people tasked with compliance responsibilities, such as management, accounting, or legal staff.
- Centralize. Keep a master compliance calendar that can be seen by all the affected stakeholders in your company. Maintain a single, secure repository of entity records and related documentation, preferably one that is linked to your compliance calendar and communications system.
Learn more
Learn more about how to efficiently keep all your entities in good standing. Contact CT Corporation to request a good standing audit. We’ll show you where you’re registered and your status with the Secretary of State. If our research uncovers any issues, we can help you resolve them.
Related resources:
What is good standing and why your business needs it
Registered agents and annual reports: Essential elements of good standing
What good standing means for your business: 4 reasons to stay in compliance
