Information Central - BizFilings

Although tax considerations are often drivers for incorporating or forming an LLC, these entities are creatures of state law. They come into being only when formation documents are filed with the state. And, to continue to exist they must comply with state business law requirements. Now is a perfect time to educate clients on the importance of state business requirements and to verify that they are in compliance.

Educate Your Clients about the Importance of Good Standing
Good standing means that an entity was properly formed and is currently in compliance with the state’s requirements. An entity in good standing can a certificate of good standing. (In some states, this document is referred to as a certificate of authorization or a certificate of legal existence.)

This is critical to your client’s success, particularly for a growing business. Nearly all states require a certificate of good standing as part of the foreign qualification process. Many financial institutions and investors will also expect to see a certificate of good standing before making any financial commitments.

In general, the compliance requirements to stay in good standing are basic and straightforward. However, because of due date complexity and the pressures of running a business, it’s easy to overlook these obligations. Unfortunately, failing to comply can lead to severe consequences if not remedied.

In virtually all states, two common ways to lose good standing are

• Failing to file state-mandated information reports and pay franchise taxes in states that impose them.
• Failing to appoint and maintain a registered agent

Unlike a financial annual report, the state-mandated annual report is a very basic information report that is designed to ensure that the secretary of state has current contact information for the entity. In states with a franchise tax, this tax is often calculated on the annual report form and is collected when the annual report fees is paid. There are often steep financial penalties for failing to timely file the annual report and, in many cases, penalties are automatic and unlikely to be waived.

Loss of good standing can be disastrous. In addition to delaying expansion into a new state and hindering financing, it may lead to administrative dissolution. Administrative dissolution can

• Result in loss of asset protection for the owners
• Prevent the company from bringing a lawsuit (although in most states it can still defend itself if sued)
• Result in the company’s losing rights to its name
• Increase exposure to business identity theft

Administrative dissolution will result in fines, penalties, and aggravation to get reinstated. While most states provide for reinstatement, the action must be taken within a specified period of time. Also, state laws vary on whether reinstatement relates back to the time of dissolution and what protections are provided in the gap period.

It’s also important to realize that in some states adverse consequences can come into play prior to formal dissolution by the state. For example, in California, failing to file a required information reports results in suspension. During this time, the entity’s name can be taken by another company and any contracts entered into are voidable.

Provide Guidance on Managing Due Dates
Most states require a statement of basic information about the entity to be filed once a year, which is why the term “annual report” is commonly used. However, not all states require reports on an annual basis or from every type of entity. Managing due dates is further complicated by the fact that many states do not have a standard due date. For example, every Delaware business corporation must file its annual report and pay its franchise tax on or before March 1, but Nevada ties the due date to the date of formation or registration in the state.

Because it’s easy to overlook state deadlines, work with your clients to establish an effective tickler system. This is particularly important if the client operates in multiple states.

Verify That Each Entity Has a Valid Registered Agent
Every corporation and LLC is must maintain an in-state registered agent, not only in its formation state but in every state where it has registered to do business. The registered agent must be a citizen of the state or a company registered to act as a registered agent in that state. This agent must be available during normal business hours throughout the year at a physical address, not a P.O. box. Using a professional registered agent helps ensure that the presence requirements are met and provides for continuity as the business grows.

Conclusion
Helping your clients remain in good standing is another way you can demonstrate your value to them throughout the year. To learn more about services that enable you to meet your client’s needs, visit www.aicpa.org/bizfilings for more information on the AICPA BizFilings program for AICPA members.