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What You Need to Know About Business Compliance
You may hear the term compliance thrown around a lot in the business world. But just what is compliance in business and what are the compliance requirements?
Compliance means following all of the rules, regulations, and laws required by federal, state, and local governments so that your company can remain in good standing.
Compliance requirements are ongoing and you must ensure that you meet them on a regular basis. There are two categories of business compliance – internal and external. Let’s take a look at each of these below.
Internal Business Compliance Requirements
These are requirements that must be undertaken by the company’s management, whether that’s shareholders, officers, managers, directors, or members. A company often overlooks internal requirements, but it shouldn’t. These must be thoroughly followed and documented, especially in cases of a lawsuit or if a company is trying to sell.
Delaware also touts no state corporate income tax for companies formed in Delaware but not conducting business there. However, they do impose a franchise tax, which is an annual fee that’s required to maintain good standing with the state.
C-Corps and S-Corps have the strictest internal requirements, including:
- Issuing stock to shareholders
- Recording all share transfers
- Maintaining up-to-date bylaws
- Holding initial and annual meetings
LLCs also have strict internal requirements, including:
- Issuing membership shares
- Record membership interest transfers
- Hold annual meetings
LLCs should also maintain a current operating agreement. This is not required, but it’s highly recommended.
A compliance kit is an easy way to help your company maintain compliance, and usually includes:
- Sample bylaws
- Sample operating agreement
- Stock certificates
- Transfer ledger
- Company seal
- Sample meeting minutes
It’s also a good idea to have document templates on hand, including templates for documents like bylaws, operating agreements, and meeting minutes.
External Compliance Requirements
The state in which you’re incorporated, as well as any states you’re doing business in as a foreign entity, impose external requirements that must be met. State compliance requirements almost always include an annual report and an annual state fee. The annual report allows the state to track the business.
Many states also impose a franchise tax, a tax for simply being given the right to operate a business in that particular state. States have different formulas for how this franchise tax is calculated, with some imposing a flat rate while others take into account the size of the business and/or the number of shares issued by the company.
The due date for annual reports and fees also differ from state to state. Some states have a set due date that’s the same for every business each year, while others set a due date from when the business officially incorporated. You must make sure you know the due date for your state so you don’t incur any late fees or penalties and retain good standing.
Besides an annual report, some states also require an initial report be filed within a certain time after incorporation.
Consequences of non-compliance
There are potentially serious consequences for non-compliance. If a company fails to meet state compliance requirements, it can be found to not be in good standing, which means possible fees and penalties, and more importantly, not being able to pursue legal matters in court or defend itself if sued. It can also lead to the dissolution of the company.
If a corporation or LLC is sued and it’s discovered that they haven’t lived up to and met all of the compliance requirements, a judge can rule that the corporation is acting more like a sole-proprietorship or partnership, and thus “pierce the corporate veil,” making shareholders and individual members liable for the company’s potential debts and obligations.
With such serious, potential consequences, business compliance training is a good idea. This is the process of educating your employees on the laws and regulations that must be followed in day-to-day operations to maintain compliance standards. Training should be ongoing, as both a reminder to be vigilant and to comply with any new regulations and requirements.
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