It’s important for a business to maintain corporate good standing. Being in good standing means that the business has satisfied all of the statutory requirements that have been imposed on it by the state.
If an entity fails to comply with one of the state’s requirements, it will lose its good standing status and, along with it, all of the rights and protections that come along with being a registered entity in that state. The consequences can be severe for businesses who fail to satisfy a compliance requirement. They include:
- Fees, fines and penalties
- Loss of exclusive right to business name
- Loss of access to the state courts
- Potential personal liability
- Inability to qualify in another state
- Inability to enter into/enforce a contract
- Inability to participate in a merger
- Inability to obtain a business license
- Difficulty in securing financing
- Administrative dissolution or revocation
Specific requirements vary by state and entity type and there are many deficiencies or delinquencies that can cause an entity to fall into bad standing. This article will focus on the top four things an entity can do to maintain its good standing.
1. Appoint and Maintain a Registered Agent
A Registered Agent is the person or organization a business names as responsible for accepting legal documents (aka Service of Process/SOP), tax notices and other important communications on its behalf.
Every registered business (Corporation, LLC, LP, etc.) is required to appoint a Registered Agent in every state where they are qualified to transact business. The Registered Agent is designated either at the time the entity is formed, or by the filing of a state-specific form shortly thereafter.
If that Registered Agent moves out of state or resigns the post, the business will need to name a new one as soon as possible and file paperwork to alert the state to the change, usually within 60 days, or risk falling into bad standing.2. File Timely Annual Reports
Nearly every state requires a periodic report from business entities to confirm or update certain pieces of information on record at the state filing office such as legal name, primary address, names of officers and directors, etc. In general terms, this report is referred to as an Annual Report, though some entity types in some states file only every other year or even less frequently.
Figuring out when to file Annual Reports can be a challenge, especially for those managing multiple entities across a variety of jurisdictions. That’s because states differ in how they assign due dates for Annual Reports. Some states assign a fixed due date according to entity type while others base the due date on the entity’s anniversary. These dates must be monitored closely – a missed Annual Report filing deadline is one of the quickest and most common ways for a business to fall out of compliance.
3. Pay Franchise Taxes
A Franchise Tax is a privilege tax that some states levy against entities for doing business in their jurisdiction. It is important to distinguish that a Franchise Tax is not an income tax. A business does not have to be actually earning income in the state to be subject to the tax, simply having filed formation or qualification documents in the state will make the entity subject to the tax.
Just as with Annual Reports, Franchise Taxes can be difficult to keep track of since due dates, formulas for calculating the tax and the specific taxing agency vary from state to state. Failure to file or late filing of Franchise Taxes will lead to steep penalties and an eventual loss of good standing.
4. Document and Keep Annual Corporate Minutes
Corporations are required to hold annual shareholder meetings to elect the board of directors and make other important decisions about the business. Annual Corporate Minutes are the documented record of what transpired at that meeting.
An entity’s minutes do not get filed with any public agency, rather they are an internal recordkeeping requirement. The requirement holds that entities must draft the annual minutes and maintain them year over year so they are available for inspection upon request, such as in the event of a lawsuit or an IRS audit.
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For informational purposes only; content does not constitute legal advice.