Like any business, small businesses risk fines and penalties if they fail to comply with laws and regulations.
Some businesses have more regulations than others, but if you run an LLC or corporation, you must adhere to specific compliance requirements – or risk legal, financial, and reputational harm.
This article explores business compliance, how non-compliance penalties extend beyond fines, the business changes that can trigger compliance actions and tips for avoiding compliance risk.
What is business compliance?
Business compliance is about adhering to rules and regulations established by federal, state, and local governments.
Some compliance requirements are familiar, such as paying taxes, managing payroll, employment laws, and workplace health and safety. However, your small business also has other obligations, such as obtaining the appropriate business licenses and permits (even if you operate from home) and keeping them current.
Furthermore, if you operate your business under a name other than its legal name, you will generally need to file a “Doing Business As” or DBA registration and renew it as required. This applies to any business, whether you are a sole proprietor, LLC, partnership, or corporation.
Business compliance is never static. New compliance requirements, such as new regulations covering data privacy and security, are always emerging. If your business collects customer data, including website cookies, personally identifiable information (PII), or credit card information, you must comply with data laws. These include GDPR (a European Union law that also applies to businesses outside the EU) and the California Privacy Data Act (CCPA).
LLCs and corporations are also subject to federal and state compliance requirements, including:
- Filing annual reports with the state government
- Paying state franchise tax (privilege tax)
- Maintaining a registered agent in each state where you operate
- Filing a beneficial ownership information (BOI) report with FinCEN
For more information, see Business compliance requirements & consequences.
Business compliance penalties: More than just fines
The consequences of non-compliance can vary from fines and fees to the cessation of business operations, reputational damage, and even criminal penalties.
Consider the following:
- Operating without a business license: If your business doesn’t have the appropriate licenses or operates with an expired license, you could face penalties, including significant fines and/or cease and desist orders. In California, a subcontractor was forced to cease work on a $100 million contract and pay a $200,000 fine for failing to have a state contractor license. Some authorities even permanently revoke a business license for non-compliance. These violations are often covered in the local media, causing reputation harm.
- Failing to pay franchise tax: The penalties can be harsh for LLCs and corporations who fail to pay franchise tax or file an annual report. Your business may incur late fees and loss of good standing (which can result in loss of access to courts, challenges securing financing, tax liens, and loss of name rights). Additionally, if you repeatedly fail to fulfill required filings and do not respond to requests, the state may administratively dissolve your business, meaning it can no longer operate legally. Some states also hold the business officer, director, or employees personally liable for doing business while in a “revoked” status.
- Failing to file a BOI report: The new beneficial ownership information filing requirement has hefty civic and criminal penalties for noncompliance, including large fines of up to $591 per day and possible jail time.
Business changes can trigger compliance actions
Compliance requirements also change as your business grows and evolves. Below are examples of business changes involving LLCs and corporations that can trigger compliance actions:
- Change of business name or address
- Change of ownership
- Hiring employees
- Adding new products and services
- Expanding to a new location within or outside your home state
- Changing your business entity type
- Merger or acquisition
For example, if you change your business name or move to another state, you must:
- Files Articles of Amendment with the state
- Notify the IRS
- Update business licenses and permits
- Submit an updated BOI report to FinCEN (Note: If there are any changes in the information reported about the company or its beneficial owners, an updated report must be filed with FinCEN within 30 days.
- And more
E-commerce can also trigger new requirements. For example, even if your company has no physical presence in a state where you sell online, you may need to collect and remit taxes on goods and services sold – if your business meets the tax nexus requirements of the law and the state has a sales tax. You may also need to qualify or register as a foreign entity to do business in a state other than your operating state. As a registered entity you’ll need to appoint a registered agent, pay franchise or other business taxes, and file annual reports to maintain good standing.
Avoiding compliance risk
Business compliance is an ongoing requirement, and many businesses stumble because they mistakenly view it as a one-time process and fail to consider that laws and regulations change.
To avoid compliance risk, follow these steps:
- Identify and document your business’ compliance requirements and stay current on these requirements.
- Develop a process for tracking any major business changes and apply due diligence to continuously assess and react to any compliance triggers that accompany business changes.
- Consider utilizing a technology solution to store vital company data, monitor crucial deadlines, and manage essential tasks (especially when dealing with multiple companies).
BizFilings can help
Stay on top of critical compliance tasks and avoid penalties with BizFilings. We simplify the process of filing annual reports and beneficial ownership information.
We also eliminate the complexity of staying compliant with ongoing state requirements and corporate formalities. The BizFilings Online Compliance Management Tool notifies you of upcoming compliance events and provides you with the information and tools to stay compliant based on your business type and state.
Learn more about your state's requirements
Our state incorporation guides outline the annual report, franchise tax, and other requirements for LLCs and corporations in all states. Learn more about annual report due dates by state and entity types.
