After forming your LLC or corporation, you'll need to meet a number of requirements at the state, local, and federal levels. Staying compliant supports healthy growth by protecting your business's legal standing and reducing the risk of fines and penalties.
What is business compliance?
Business compliance means following the rules that apply to your company, whether they come from your city, state, the federal government, or your industry. It's an ongoing part of running a business, not a one-time task you finish after you incorporate.
Every business has some level of compliance to keep up with. Even a sole proprietorship, which requires no formal formation process, still has to meet basic registration and reporting requirements based on factors like its business activities, location, and whether it has employees. LLCs and corporations, however, face a specific set of ongoing requirements.
Compliance requirements for LLCs and corporations generally fall into two buckets: internal and external. Internal requirements are the governance tasks and records your LLC or corporation manages internally, such as decisions made and documented by members and managers, or shareholders and directors. External requirements primarily come from the state where you formed your business and any other state where you're registered to do business (a process known as foreign qualification). They can also come from other state agencies, as well as federal and local ones, depending on your business activities.
Internal governance requirements for LLCs and corporations
LLCs and corporations both have rules about how the entity is governed. Some of these rules come from state law, and others come from your own internal documents, like an operating agreement or bylaws.
LLC internal requirements. After forming your LLC, it's important to create an operating agreement. This document spells out how your business runs and can help prevent misunderstandings between members (the owners), even if you're a single-member LLC. You'll also want to issue membership shares to formally establish each member's stake in the company.
From there, make it a habit to review your operating agreement every year. This helps ensure it still reflects what members want and covers any operational issues that state law wouldn't otherwise address.
Beyond the operating agreement itself, keep a record of any membership interest transfers, and hold annual meetings of members (and of managers too, if the LLC is manager-managed). For more information, see our article on Why you need an LLC operating agreement.
Internal requirements for corporations. Corporations (both C corps and S corps) have stricter internal requirements than LLCs.
After forming a corporation, you'll need to hold an initial meeting to adopt bylaws, elect directors, and take care of a few other startup tasks. Depending on your state, this may include:
- Appointing directors (if they weren't already named in the Articles of Incorporation)
- Adopting corporate bylaws
- Electing officers
- Issuing stock
- Choosing a corporate bank
- Setting the company's fiscal year
- Setting up a corporate records book
Once your corporation is up and running, you'll also need to keep up with ongoing formalities, such as:
- Holding a shareholders’ meeting every year
- Keeping corporate minutes (in a corporate record book) and allowing shareholders to vote on major corporate decisions
- Maintaining your bylaws
- Keeping a record of all stock transfers
- Keeping detailed financial records
Compliance kits. Many small business owners use a compliance kit to keep their records organized. A typical kit includes items like an LLC or corporate seal, sample operating agreement or bylaws, membership interest or stock certificates, and an ownership transfer ledger.
External requirements for LLCs and corporations
There are various state and federal requirements for businesses to complete after formation. Some need to be handled soon after you form your LLC or corporation. Others are recurring tasks you'll need to stay on top of for as long as your business exists.
Post-formation steps. Shortly after forming your business, you'll likely need to:
- Register for state taxes
- Get an EIN from the IRS
- Complete any employer registrations
- Obtain the necessary licenses and permits
- File a "doing business as" (DBA) name if you plan to operate under a different name
A few states, such as California and Nevada, also require initial reports or statements to be filed, along with a fee, within the first few months after formation. Some states, like New York and Arizona, also require newly formed LLCs to publish a notice of formation in local newspapers. Your online incorporator or registered agent can tell you whether your state has any of these formation-related requirements.
Recurring requirements. Once your business is up and running, you'll also have ongoing requirements to keep it in good standing:
- Annual reports. Most states require LLCs and corporations to file an annual report (sometimes called an annual statement). Some states require this report every two years instead. Either way, you'll typically pay a fee when you file, ranging from $10 to $300 or more.
- Franchise tax. Some states also charge a franchise tax, a fee for the privilege of operating as an LLC or corporation in that state. California, for example, charges an $800 minimum annual franchise tax, with the amount increasing once your gross revenue crosses certain thresholds.
- Business license and DBA renewals. If you obtained licenses, permits, or a DBA during formation, you'll need to renew them periodically to stay compliant.
- Registered agent. LLCs and corporations must maintain a registered agent in their home state, as well as in any other state where they're registered to do business.
Due dates for annual statements and franchise taxes vary by state. Some states tie the due date to the anniversary of your formation or registration, while others set one fixed due date for all LLCs and another for all corporations.
Since annual statements and franchise taxes are ongoing costs, it's worth researching your state's specific requirements before you incorporate, so you can budget for them accordingly.
What are the penalties for business noncompliance?
Failing to keep up with LLC or corporation compliance can lead to serious consequences, including the loss of your personal liability protection.
Piercing the corporate veil. If a corporation or LLC is sued and can't show that it met its internal governance formalities and state requirements, a judge may decide the company was really operating more like a sole proprietorship or general partnership. This can result in “piercing the corporate veil”, meaning your limited liability protection disappears, leaving your personal assets vulnerable if a judgment is made against the company.
One of the factors courts look at when deciding whether to pierce the corporate veil is whether you followed the compliance requirements of your governing business entity statute. For corporations, this often means checking whether you held shareholder and director meetings, issued stock, kept minutes, and documented major decisions.
LLCs can be run more informally, but showing that you held meetings, kept records, and documented business actions still demonstrates that you treated the LLC as its own legal entity, not just an extension of yourself.
Loss of good standing. State-level consequences can also happen well before a lawsuit ever puts your liability protection at risk. Falling behind on your external requirements, such as annual reports and franchise taxes, can cause your business to fall out of "good standing" with the state.
Each state has its own rules for what counts as good standing, but most impose late fees. Staying out of good standing for too long may eventually lead to administrative dissolution, where you lose all the legal benefits of operating as an LLC or corporation.
Other compliance penalties. Other requirements carry their own separate penalties too. Falling out of compliance with a business license, for example, can result in anything from fines to business closure to criminal penalties, depending on the type of license, the nature of the violation, and your jurisdiction.
Maintaining compliance for your small business
Staying compliant isn't a one-time task you check off after formation. It's an ongoing responsibility that lasts as long as your business exists. Between internal governance requirements, external state filings, and the varying due dates and fees involved, it's easy for a busy small business owner to lose track of what's due and when.
A few best practices can go a long way:
- Keep your internal records (meeting minutes, bylaws, or your operating agreement) updated and easy to find.
- Track your state's specific due dates for annual reports, franchise taxes, and any license or DBA renewals.
- Set reminders well before deadlines, since late fees and lapsed good standing can add up quickly.
- Know your compliance obligations in every state where you're formed or registered, not just your home state.
Falling behind on compliance can put your LLC or corporation at risk, but having a system in place helps make compliance more manageable. This becomes especially important as you expand into new states, since each state comes with its own set of requirements to track and complete. Whether you handle compliance yourself or work with a service provider to manage filings and deadlines across every state you operate in, staying proactive is far easier (and less costly) than trying to catch up after the fact.
Get compliance assistance with BizFilings
BizFilings makes it easy to stay compliant and maintain your business's "good standing" status. Here's how we help your LLC or corporation stay compliant:
- Franchise tax and annual report filing alerts. Registered agent customers receive ongoing alerts whenever a state franchise tax or annual report filing is due. Filing takes just a few clicks, so you can keep your business in good standing without the hassle.
- Managed filing services. Registered agent customers can enroll in automatic filing of franchise tax and annual reports. Our dedicated team monitors and updates your state reporting requirements, and files on your behalf. Learn more.
- BizComply management tool. This exclusive account management tool lets you schedule and track all your company's compliance events, with email reminders for upcoming state obligations, invoices, and more.
- Prompt handling of official documents. We provide prompt and efficient handling of important state, tax and legal documents received on behalf of your company.
- Professional and discreet Service of Process delivery. We’ll email and digitally scan Service of Process documents so you can view them instantly.
- Exceptional, responsive service. Our knowledgeable representatives are available by phone or email to answer questions about compliance, your account, or placing an order.
Learn more about BizFilings services.