Whether you formed an LLC or corporation, once you’ve completed post formation tasks for your new company you’ll face a host of ongoing compliance responsibilities. Many business owners ignore these, and all to often, to their detriment.
Regardless of the reason—whether it’s ignorance or simple neglect—ignoring ongoing compliance tasks will hinder your company’s ability to remain in good standing with the state and protect you from personal liability. Make no mistake: your company will lose its status as a legally distinct entity and you, as owner, will be left holding the tab.
Since limited liability protection is the primary reason most people form a corporation or LLC in the first place, you should take every necessary precaution to protect it and keep your company in good standing. The alternative: administrative dissolution of your company and unlimited personal liability.
Ongoing compliance requirements vary from state to state. Most states require you to file an annual or biennial report. Some states require you to pay an annual franchise tax for the privilege of doing business in the state while others require you to renew a state business license.
Let’s start with what is required of corporations.
After your corporation is formed you must hold an initial directors’ meeting. At this meeting bylaws are adopted, officers elected, and stock issued.
Bylaws are required by every jurisdiction. They specify how your corporation will be run and the rights and responsibilities of its owners, directors, and officers.
Corporations must hold annual director and shareholder meetings. Meeting minutes should be kept in the company records book. Special meetings should be held when significant matters arise, such as entering into a long-term lease, entering into an employment agreement with key personnel, or considering the sale or dissolution of the company.
Officers and directors should never forget their fiduciary duty to the company. They should always act in the best interest of the corporation, not themselves. This is especially important when it comes to entering into contracts and other agreements on behalf of the corporation.
It is also important for you to maintain a stock ledger that records all shares of stock issued to shareholders and the consideration paid.
Finally, you should document all corporate financial transactions. Keep up-to-date balance sheets and P&Ls.
Now let’s talk about LLCs.
LLCs usually don’t have as many ongoing compliance requirements that corporations have. Nevertheless, LLCs must undertake some of the same steps. Members should hold an organizational meeting after the LLC is formed. At this meeting an operating agreement should be adopted, managers designated, and membership interests issued.
Like corporate bylaws, the operating agreement outlines how your LLC will be governed. While most states don’t require LLCs to have an operating agreement, you’ll still want to draft one. If you don’t create one your LLC will be governed by state law which is not always in the best interests of the company or its owners.
Document all of your LLC’s major activities and financial transactions. Be sure to keep a record of any change in membership interests, and keep records of all major business decisions.
It should be clear by now that both LLCs and corporations should keep impeccable records. And neither should ever comingle company funds with personal funds. Whether big or small, it is absolutely essential for any LLC or corporation to strictly adhere to ongoing compliance requirements and stay up to date on fees and reports. In this way you’ll avoid penalties, fines, and administrative dissolution while protecting your personal assets and reducing your income tax liability.