After formation, corporations and LLCs require ongoing compliance. Business owners, especially small business owners, often neglect these requirements. Whether not knowing about the requirements or just being too busy to address them, not satisfying compliance can have dire consequences. A company can lose its corporate or LLC status resulting in a loss of liability protection and tax benefits that may have been the main reason for forming those entities.

STATE REQUIREMENTS

These requirements are those imposed on corporations and LLCs by the state in which they are formed or foreign qualified. The requirements often include an annual state filing of officers for a corporation and members or managers for an LLC. Of course, the requisite state fees must accompany these filings.

INTERNAL REQUIREMENTS

Most corporations and LLCs keep organized records in the Corporate or LLC Record Book. These record books contain bylaws or operating agreements, stock or membership interest certificates, a corporate or LLC seal, meeting minutes, resolutions and other important corporate documents. Actions that are taken within the corporation or LLC by the directors and shareholders or the members and managers must be documented and those documents are kept in the company record book. A corporation has more strict recording requirements than an LLC. A corporation is required by statute to hold initial and annual meetings of the directors and stockholders, adopt and maintain bylaws, issue stock and record all stock transfers. Although it may not be required, it is highly recommended that an LLC adopt and maintain an updated operating agreement, issue membership certificates and hold annual meetings of its managers and members.

CONSEQUENCES

Corporations and LLCs are formed for two basic reasons:  tax benefits and asset protection. If the corporation or LLC is unable to show that it has met all the corporate or LLC compliance requirements, the judge or the IRS may rule that the company is nothing more than the "alter ego" of its owners.  The owners would then lose any liability protection and tax benefits afforded them. This is known as "piercing the corporate veil." This means that the assets of the individual owners are now accessible should a judgement be made against the company.

Southwest Business Advisors, Inc. assists our clients in meeting their compliancy requirements through timely reminders and assistance. Our goal is to make the compliance process as easy and convenient as possible for our business owners. Since you took the time and incurred the expense of forming a corporation or LLC, you should also take the time to ensure it stays compliant and keeps its valued entity status.