Core compliance responsibilities in the run stage
To effectively advise your clients, you must understand the specific compliance related tasks that dominate this phase of the entity lifecycle. Here is a breakdown of the primary obligations your clients face while running their businesses.
Filing annual reports and paying franchise taxes
Almost every state requires business entities such as corporations, limited liability companies, limited partnerships, and limited liability partnerships to file an annual or biennial report.
Many states also require business entities to pay a franchise tax or license fee. This is basically the state’s fee for allowing the business to operate as a statutory entity, with all the advantages that brings, and should not be confused with a state income tax.
Missing an annual report deadline is one of the most common compliance failures. States do not hesitate to penalize late filers. The states will also revoke the company’s good standing until it complies. And if the noncompliance continues, the state can administratively dissolve the entity.
Renewing business licenses and DBAs
Most businesses require a license. Some multiple licenses. Initial business licenses are generally not permanent. They expire and require periodic renewal. Depending on the client's industry and location, they might juggle a mix of federal, state, county, and municipal licenses.
A restaurant, for example, must renew health permits, liquor licenses, and local operating permits. Operating with an expired license can result in immediate shutdown orders or severe financial penalties.
Individuals and business entities often conduct their business under a name that is not their legal name. (In the case of a corporation, LLC, or other statutory entity, the legal name is the name on its current formation document. This is often referred to as a DBA or doing business as name, although the states tend to use the term assumed name, trade name, or fictitious name. If your client operates under a DBA name, most states will require it to register the name. Registration may be made at the state or county level. Renewal is required in some, although not in all states. It’s important to know if your clients have to renew their DBA registrations and, if so, to make sure renewals are filed on time.
Keep in mind as well that if the information in the business license or DBA registration changes – for example, the client’s name or address changes, an updated license or DBA registration may have to be filed with the appropriate regulatory agency.
Managing registered agent and office updates
Statutory entities like corporations, LLCs, limited partnerships, and limited liability partnerships must appoint at the time of formation, and continually maintain throughout their existence, a registered agent to receive service of process and official state communications. The registered agent must have a physical location in the formation state, which is generally referred to as the entity’s registered office.
During the Run stage, a client’s registered agent and/or registered office may change. For example, an individual employee or owner may be named the registered agent, and that individual leaves the company. Or the business’ headquarters is listed as the registered office location and the headquarters moves.
Business entities are required to keep their registered agent and registered office information up to date. Depending on the state and entity type, updating the information may be done by filing a notice of change, an amendment to the formation document, or by updating the annual report. Under some state laws, failing to maintain a registered agent or office or update the state of a change in a timely manner is grounds for administrative dissolution. It also can result in the client missing critical legal notices, potentially resulting in default judgments or other penalties. For many businesses, hiring a professional registered agent can help ensure someone is consistently available to receive and route time-sensitive documents.
Proving corporate existence
Throughout the Run stage, clients will seek financing, enter into new contracts, submit bids, or attempt to open new bank accounts. For these transactions, third parties typically require proof of the entity's existence and good standing. A client may also be looking to expand into new states and will be required to qualify to do business there. States may require proof of existence and good standing before filing the qualification document.
Law firms frequently need to obtain a Certificate of Existence or Certificate of Good Standing, request document authentications, or secure certified copies of formation documents for their clients. And while not a compliance requirement itself, proactively monitoring a client's status as being in good standing ensures that when a major deal arises, the necessary certificates are readily available. And if the status check shows a client is not in good standing, steps can be taken to restore the client to good standing status. This prevents administrative delays from derailing lucrative business opportunities.
Navigating Securities Exchange Act requirements
If your client is an SEC-reporting company, the Run stage includes strict federal compliance obligations. For example, the company may be required to file with Securities and Exchange Commission the Form 10-K (annual report), Form 10-Q (quarterly reports), and Form 8-K (current report).
In addition, directors, officers, and shareholders owning more than 10% of the company must comply with Section 16 of the Securities Exchange Act.
This involves filing Form 3 for an initial statement of beneficial ownership, Form 4 to report changes in ownership, and Form 5 for an annual statement of transactions not reported on Form 4. These filings carry strict deadlines and heavy regulatory scrutiny.
How law firms can proactively assist clients
Knowing the requirements is only half the battle. Attorneys can help their clients build structured, proactive processes to manage these obligations. Here are practical ways to integrate compliance management into your legal services.
Implement automated tracking systems
Manual spreadsheets leave too much room for human error. To manage compliance effectively, law firms can recommend reliable compliance tracking systems. For example, CT’s Annual Report Management System (ARMS) and Business License Management System (BLMS) can monitor upcoming deadlines for annual reports and license renewals, and CT’s hCue can monitor Sec. 16(a) filings. These systems can even do the filings for your clients. Automated tracking transforms a business from reactive troubleshooting to being proactive about compliance.
Educate clients on the cost of non-compliance
Some business owners view compliance as a minor administrative nuisance rather than a critical legal requirement. Educate your clients on the tangible risks of failing to comply.
Explain how a loss of good standing can delay business transactions, how a public listing of their company as being delinquent can hurt its reputation, and how administrative dissolution strips them of their limited liability protection, leaving their personal assets vulnerable to business creditors. Detail how a lapsed license can breach covenants in their commercial lease or loan agreements and how a failure to update registered agent and registered office information can result in a default judgment that cripples the business. When clients understand the high stakes of non-compliance, they are much more willing to invest in ongoing legal oversight.
The value of proactive counsel
The Run stage of a business lifecycle is demanding. By helping clients manage these critical legal responsibilities, you’re freeing them to focus more on what they do best: growing their business. You help reduce their concern that they can miss a deadline or never see an important state communication.
When a client knows their legal foundation is secure, they operate with confidence. They make bolder decisions and pursue aggressive growth strategies. By mastering the compliance demands of the Run stage, you directly contribute to your clients' long-term commercial success.
Next steps for your practice
Review your current roster of corporate clients today. Identify any entities that have not undergone a recent compliance check. Reach out to them and offer a comprehensive status review to ensure they are meeting all state and federal requirements. By taking this initiative, you can uncover hidden compliance issues, protect your clients from looming penalties, and strengthen your trusted advisor relationship.
Learn more
Looking for help keeping clients compliant through the Run stage? Contact a CT Corporation specialist to learn how we can support your firm with reliable guidance and scalable services so you can stay focused on advising clients while we help manage the compliance details.
Related resources:
Entity Compliance by Business Stage: An Infographic for Law Firms
The start phase: Laying the foundation for long-term compliance
