Today’s regulatory landscape has become increasingly complex, as state and local governments expand compliance requirements, increase fees and increase enforcement efforts. Even the most dedicated and conscientious business can find it overwhelming to keep up with the constant onslaught of new and changing requirements.
If you’re in the position of ensuring that issues related to entity compliance don’t bring your business to a screeching halt, read on. We’ll present you with an overview of key compliance areas and risks, plus pointers on setting up systems and applying best practices that could help your company to lower or eliminate those risks.
What are basic regulatory compliance requirements?
Requirements for corporate compliance are in a constant state of flux as a result of changing laws and the various actions a business takes. Here are some critical areas of compliance you need to engage in –
- Recordkeeping. Maintain records as required by state law.
- Service of process. Have your plan in place for responding to lawsuits.
- Entity expansion or contraction. Be aware of state-related business activities—either business expansions or contractions (even those that are involuntary)—that can trigger compliance violations.
- Other entity changes. File required documents for changes in corporate names, shares issued and more.
- Annual report filings. Meet deadlines for filing your state-required reports and paying state fees.
- Business licenses. Obtain and maintain your required state and local business licenses.
- Registered agent representation. Appoint and maintain your registered agent in your corporation’s home state and in every “foreign” state in which you are qualified to do business.
- Tax reporting and payments. Make timely and accurate tax-related filings and payments of any franchise, corporate and state income, sales and use, or other taxes.
Understand compliance risks
Your corporation has certain responsibilities to the state in which it was incorporated, as well as the states where it qualified to do business.
When your corporation fails to properly comply with one or more of these requirements, then it is deemed to have “fallen out of good standing.” The implications of this change in status, if not remedied quickly and properly, can be quite serious and damaging—both to your business and to you personally as the owner of that corporation and the person doing business on its behalf.
Just as state requirements change, so can aspects of your business that impact your compliance status. Some of these changes may not be obvious to you. In fact, most small businesses like yours are often at greatest risk from compliance violation “trigger” events that you may not even be aware of.
Your entity status matters
There are two categories of entity status changes that can result in your corporation falling out of good standing: voluntary and adverse. In both cases, you are required to take the appropriate remedial action with the affected state(s).
A voluntary status change reflects an action consciously taken. For example, you decide to change your corporation’s name or change its legal structure (such as from a corporation to an LLC). Voluntary status changes, since you choose to make them, are generally easier to prepare for and respond to in terms of taking steps to meet compliance requirements.
It’s the second scenario—an adverse status change—that presents the biggest risk to your business, and perhaps to you personally as well. These status changes or other lapses in compliance happen quietly in the background, only to emerge at the worst possible time.
Something as simple as a neglected license renewal, late fee payment or a failure to post the proper public notice can send your business into crisis mode. In essence, what you don’t know could hurt you.
How a change in status can impact your business
Should your corporation fall out of good standing, 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.
- Forced shutdowns. A state may force a company to close physical locations or plants if proper licenses are not in place.
- Inability to pursue new business. Many businesses require proof of good standing for bids, RFPs and other opportunities, in an effort to lower their own 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, and other entities may be able to claim that name in the meantime.
- 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.
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 business entity’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 each of your entity’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.