Compliance and governance for corporations and LLCs under state business entity laws

This article will discuss the most common compliance requirements imposed by the corporation and LLC laws and will also discuss how the statutory governance structures of corporations and LLCs help determine which positions of authority are responsible for compliance.

Five statutory compliance obligations

Although compliance requirements vary by state and entity, most state corporation and LLC statutes impose the following five compliance obligations:

1. Annual report

Almost all states require domestic and qualified foreign corporations and LLCs to file an annual report with the Secretary of State (or similar office) a report containing certain basic information. In most states it must be filed annually.

However, some states require filing every two years or some other period instead of annually. A failure to file will result in the corporation and LLC not being in good standing and can eventually result in administrative dissolution or revocation.

2. Registered agent and office

Corporations and LLCs are required to continually maintain a registered agent and registered office in their formation state and in each state in which they are qualified to do business. A registered agent is an agent authorized to receive service of process on the corporation or LLC’s behalf. The registered office is where the registered agent is located. A failure to maintain a registered agent and office, or to timely notify the state of a change in registered agent and/or office can result in penalties, including, in some states, administrative dissolution or revocation.

3. Foreign qualification

Corporations and LLCs that transact business in a state other than the formation state are required to qualify in the foreign state. Corporations and LLCs that transact business without qualifying may be subject to monetary penalties and will be unable to bring an action in the state’s courts until they have qualified.

4. Franchise taxes

Most states impose a franchise tax or fee on corporations and LLCs in return for granting them the privilege of being formed as a domestic corporation or LLC or allowing them to do business as a foreign corporation or LLC. Payment is often due at the same time the annual report is filed and the failure to pay will result in a loss of good standing and can result in administrative dissolution or revocation.

5. Assumed name registration

In most states, if a corporation or LLC does business under a name other than the name that is on its formation document, it must register that “assumed” name. (Note that in some states the assumed name statute may be found in the state’s consumer protection law rather than the business entity law). Doing business under an unregistered assumed name can bring monetary penalties and a loss of access to the state’s courts, depending upon the state.

Statutory governance structures

By “governance” we are referring to the allocation of power and decision making authority within corporations and LLCs. Governance is determined, in part, by the state corporation and LLC statutes - which set forth the basic governance structure. Governance is also determined by internal documents, such as corporate bylaws and LLC operating agreements, which are permitted by the statutes to also set forth provisions regarding governance.

The basic statutory governance structures are as follows:

1. Corporations

The state corporation laws provide that corporations are managed by or under the direction of a board of directors, who are elected by shareholders. The directors appoint officers who handle the day-to-day operations while the directors are responsible for major decisions. Under this structure it is more likely that a person holding the position of officer will be responsible for compliance. The directors’ role in compliance is mainly in monitoring the actions of others while the shareholders do not have a role in compliance. Of course, that is a general statement and who is actually responsible will vary in each corporation.

2. LLCs

The state LLC laws in general vest management of the LLC in all members unless the operating agreement or articles of organization provide for management by managers. Therefore, responsibility for compliance may depend upon whether the LLC is member-managed or manager-managed. If the members so choose, they can set forth the identity of the manager or member who is responsible for compliance with state LLC laws in their operating agreement.

Conclusion

It is important that corporations and LLCs comply with the requirements of the state corporation and LLC laws to avoid the penalties imposed for non-compliance. CT Corporation can assist corporations and LLCs with meeting these obligations. The persons responsible for their corporation’s or LLC’s compliance with the business entity laws can contact CT for more information regarding how CT can help.

Related resource

A guide to corporation and LLC compliance and governance