Compliance
A. What is corporate and LLC compliance?
Compliance can be defined in a number of ways. For the purposes of this paper, when we talk about corporate and LLC compliance we mean the state, federal, and local statutes, rules and regulations, court decisions, and internal business entity documents that require a business entity to take some affirmative action and that impose penalties on the business entity if it fails to take that action.
There are a wide number and variety of compliance requirements. However, this paper will focus on the following:
- Corporations and LLCs: Although limited partnerships, general partnerships, and other forms of business entities have compliance requirements, corporations and LLCs are the most popular forms and our discussion will be limited to them.
- State business corporation and LLC statutes: These impose compliance obligations on the widest range of companies. It generally does not matter what type of business the corporation or LLC is in or what activities it is undertaking. As long as the corporation or LLC is a domestic or qualified foreign entity it will have to comply. Most other compliance statutes regulate only certain kinds of industries or activities.
- Filing and reporting requirements: Having to file documents or reports with a state agency is a common compliance requirement. A failure to comply can lead to consequences ranging from small fines to the company being involuntarily dissolved.
- Filing a beneficial ownership information report: All corporations and LLCs have to file a beneficial ownership information report with the Department of Treasury’s Financial Crimes Enforcement Network unless they qualify for an exemption.
B. State corporation and LLC statutes
Corporation and LLC statutes are considered “enabling” acts – that is, statutes which give management a choice of actions to take, as opposed to “regulatory” acts – which require entities to take certain actions. Nevertheless, corporation and LLC statutes do contain compliance requirements, including those detailed below.
1. The annual report filing requirement
a. Requirement in general: Corporations and LLCs are generally required to file an information report with the business entity filing office of their formation state and of every foreign state in which they are qualified to do business.
This is typically referred to as an Annual Report requirement because in most cases the information report must be filed every year and the document filed is called an Annual Report.
However, there are a few states where the filing is not due annually and where the form is called something other than an Annual Report.
b. Report’s contents: The information required to be set forth in an Annual Report differs from state to state and entity to entity but generally includes the following:
- The business entity’s legal name
- In the case of a foreign business entity, the fictitious name it qualified under, if any
- The principal office address in the state, if any
- The principal office address wherever located
- The registered agent’s name
- The registered office address
- The names and business addresses of directors and officers (for a corporation) or managers and members (for an LLC)
c. Filing requirements: Some Annual Reports are due on a fixed date. Other states have a due date based on the business entity’s anniversary of formation or qualification. A growing number of states will only accept Annual Reports that are filed electronically.
d. Penalties for non-compliance: Penalties are imposed for a failure to comply with the Annual Report requirement. If the report is not filed by the due date a late fee will be charged. A delinquent business entity also falls out of good standing. This means the state will not issue a certificate of good standing or file documents for the business entity.
Continued non-compliance can result in administrative dissolution or revocation. An administratively dissolved corporation or LLC is prohibited from conducting any business other than that necessary to wind up and liquidate. The effect of administrative revocation is that the corporation or LLC loses the authority to transact business in a foreign state. Furthermore, doing business while administratively dissolved or revoked can bring about additional penalties and personal liability for those acting on the entity’s behalf.
2. The registered agent requirement
a. Requirement in general: In order to facilitate service of process on domestic and qualified foreign corporations and LLCs the states require the appointment and maintenance of a registered agent and registered office.
This requirement has two parts: (1) the corporation or LLC must have an agent, located in the state, who is authorized to receive process on its behalf, and (2) the corporation or LLC must notify the filing office if its registered agent or registered office changes.
Penalties for non-compliance: A penalty for failing to comply that is found in many statutes is administrative dissolution or revocation. The statutes of several states provide that the Secretary of State may proceed to administratively dissolve a domestic corporation or revoke a foreign corporation that is without a registered agent or office for 60 days or more or that does not notify the Secretary of State within 60 days that its registered agent or office has been changed.
3. Qualification requirement for foreign corporations and foreign LLCs
a. Requirement in general: Every state’s corporation law and LLC act requires foreign corporations and LLCs to qualify before doing business in the state.
Few laws define the phrase “doing business in the state”. Most statutes do, however, contain of list of activities that do not constitute doing business, which generally includes maintaining or defending a proceeding; carrying on activities concerning internal affairs; maintaining bank accounts; conducting an isolated transaction, and transacting business in interstate commerce.
While these statutory provisions provide some guidance, the determination of whether a corporation or LLC is doing business in a state sufficient to require qualification will generally require an analysis not only of the governing statute, but of case law. Whether a foreign corporation or LLC must qualify is decided on a case-by-case basis.
b. Qualification procedure: Corporations and LLCs become qualified to do business in a foreign state by filing a document, generally called an application for certificate of authority, with the state filing office. A certificate of existence from the home state generally has to accompany the application.
c. Penalties for non-compliance: Corporations and LLCs transacting business in a foreign state may not maintain a proceeding in any court of that state until they have qualified. Many states also impose monetary penalties on foreign corporations and LLCs that do business before qualifying. These penalties vary significantly from state to state and can range from a few hundred dollars per year to several thousand dollars per year. Some states penalize individuals who act on behalf of the unauthorized entities.
4. Post-qualification filings
Qualified foreign corporations and LLCs are required to notify the state filing offices of certain changes affecting the entity. For example, if the corporation or LLC changes its name in its home jurisdiction, it will be required to notify the foreign state. This is generally done by filing an application for an amended certificate of authority or a statement of change of name, along with proof that the change was made in the home state.
Corporation and LLC statutes will also frequently require the filing of documents to notify the state if the foreign entity was merged out of existence, converted to another entity type, or dissolved in its home state.
A failure to file a required document may subject the foreign corporation or LLC to a statutory fine.
5. Transactional filing requirements
The successful completion of formations, qualifications, name changes, mergers, dissolutions, and other transactions requires compliance with statutes, regulations, and administrative policies dealing with the preparation and filing of documents with the state filing office.
Non-compliance can have serious, negative consequences. These can include delaying a transaction, unanticipated tax or reporting requirements, and even monetary penalties being imposed.
One of the keys to ensuring compliance with transactional filing requirements is to be prepared. A useful exercise is to ask the following questions and obtain the answers before attempting to make a filing.
- What is the proper filing office?
- What is the name of the document to be filed?
- What is the required content of the document?
- Who can sign the document?
- Are supporting documents required?
- What are the filing fees?
- What methods of delivery may be used?
- Is the filing entity in good standing?
- What are the filing office’s administrative policies?
- Does the filing have to be made by a certain date?
6. Franchise tax requirement
In many states, corporations and LLCs must pay a special privilege tax levied upon their right to do business as a corporation or LLC. This kind of tax is generally referred to as a franchise tax. However, the exact name of the tax may be something different - such as a license tax, excise tax, or registration fee. A franchise tax differs from an income tax in that the entity does not have to earn an income or even do business in the state. It only has to be formed or qualified to do business as a corporation or LLC under the state’s law.
A failure to pay the franchise tax generally has the same consequences as a failure to file an Annual Report. There are late fees, a loss of good standing, and eventually administrative dissolution or revocation.