BY ANDREW TARPEY
There are many benefits to setting up an LLC or corporation. At the top of the list are the protection of personal assets from frivolous and excessively litigious parties and limiting personal liability. The separation of one’s personal assets from the assets held by the LLC or corporation means that if the company is sued, the individual’s assets are not at risk of being lost.
However, once the company has been formed, there is still continuous work to do to ensure it remains in compliance with the laws and regulations that govern it. Attending to these regulations is a necessary and critical part of the process, as failure to remain in good standing means that the LLC or corporation could lose the benefits of protection that it was set up to provide. A shrewd litigant can exploit non-compliance with the law to delegitimize the company and thus expose its owner to personal liability in a legal or civil claim. Here we’ll take a look at some of the ongoing requirements to keeping an LLC or corporation in compliance.
Periodic Report and Franchise Tax:
LLC’s and corporations have to provide a periodic report to their state of formation. This report is filed either every year or every two years depending on the jurisdiction and is generally accompanied by a filing fee. Included in the report are basics about the company, such as its address and list of directors. The deadline to submit the filing varies from state to state; for some states it may be the anniversary of the company’s creation, and for others there may be a certain date when all companies are due to file.
A refusal to file the report in a timely manner can be costly in the way of fees, so it’s important to know when the report is due and ensure that it’s submitted on time. In addition to the filing fee, some states may require the payment of a franchise tax. This is a tax which authorizes the LLC or corporation to conduct business in the state. The franchise tax is generally based on the revenue generated by the company, but it’s calculation varies from state to state.
Articles of Amendment:
It is common for LLC’s and corporations to have changes to their business in one way or another. This may include changing the name or address of the company, or adding or removing a director. When such changes occur, it’s necessary to notify the state. An official notification filed with the state is usually called an Article of Amendment. Some states will allow a company to make such changes when they file their annual or biannual report, so it’s important to check with the regulations of the state where the LLC or corporation was formed to determine when this should be submitted.
It’s also important for an LLC or corporation to look after it’s internal requirements, i.e. those requirements that don’t require a filing with their jurisdiction but are necessary to record and maintain for business purposes. Corporations don’t offer the same flexibility as LLC’s and thus the internal requirements will be greater, but those who set up an LLC should be aware that, even if some procedures are not required by law, they are still good business practice and beneficial to the company. Internal requirements should include documenting corporate meetings through the maintenance of minutes which show who attended the meeting, any action taken, the updating of corporate bylaws, and so forth. The establishment and updating of an operating agreement is another key part of maintaining an LLC or corporation. Although updating the LLC’s operating agreement isn’t always required, it’s advisable to do so on a regular basis. Lastly, it’s vital that accurate financial documents are maintained for the LLC or corporation which shows that it’s an independent entity. The co-mingling of company’s funds with the personal funds of those individuals who established it presents a risk to the limited liability status which it was designed to create.
These are just a few of the on-going compliance requirements that need to be attended to once an LLC or corporation is established; there will be others as well and they will vary depending on the company’s domicile. The operation of a company requires a degree of time and effort, and as a result it can be easy to forget or put off some of the more mundane aspects of compliance. However, this can be dangerous and can imperil the limitation of personal liability that it was designed to create. Being aware of governmental requirements and fulfilling obligations in this regard should be a priority for anyone establishing and maintaining an LLC or corporation.