Registering to be a corporation or LLC may not be enough
Many people think incorporating their businesses or using a limited liability status for their companies protects their personal assets. You may think you are finished when you apply for an EIN, and file articles of incorporation or an operating agreement with your state. Feeling that will take care of your organizational issues. But if you fail to meet the ongoing compliance requirements of your organization, you can lose your limited liability status. And, even have courts to pierce your corporate or limited liability veil of protection. This could lead to the award of your personal assets to a plaintiff in a law suit. Especially, if your company assets do not cover the judgement amount in a legal action.
There are two types of compliance any company relying on limited liability must observe on an ongoing basis. First, you must operate your business legally within the state where it is physically located. Even if the corporation is registered in another state. For example, many corporations are registered as Delaware Corporations, but are physically located elsewhere.
Virtually every state requires you file a tax return or at a minimum a copy of your annual report. Which may simply be a section of their tax return. Some states also have a franchise tax, which is separate and apart from their requirement for an annual income tax return. Franchise taxes are a fee paid for the privilege of operating as a corporation or LLC in that state. And, all states require you to have the appropriate business licenses to sell the offering your company was established for. Only you can be certain you have met every state requirement. But, Saafenet, through Bizdoks will provide you with a compliance checklist unique to the state in which you are operating.
Here’s what you have to do
There are compliance requirements for corporations you must be certain to meet, Even when you are operating alone during the embryonic stages of your business. including holding initial and annual director and shareholder meetings. Adopting and maintaining updated bylaws, issuing stock to shareholders, and recording all stock transfers must be addressed, too. These requirements must be documented and kept as part of your company records, even when there is only you.
All you can ever be is an employee or a consultant to your corporation even if you are a stockholder (owner). It may be necessary to present these records during the sale of your company. And, they are almost always required for presentation to the courts in the event of a lawsuit.
Compliance requirements for an LLC are usually not as strict as those imposed on subchapter “C” and “S” corporations. However, that varies from state to state. To keep your organization safe it is recommended as a minimum you document the minutes of your meetings.
Documented meeting minutes are important because:
- They offer legal protection aimed at preserving your limited liability status. You must recording your significant actions or the actions of your board, that are outside your normal operations.
- They provide structure, by demonstrating the fact you made a reasonable effort to record all major decisions affecting your company.
- They provide the game plan you or your employees will be required to implement. If they don’t know what the end game is they can’t possibly come up with a means to achieve it.
- They act as a yardstick, measuring whether or not the company has met benchmarks set at periodic meetings.
Corporations and LLCs are sometimes sued and unable to prove they met and ideally exceeded required formalities. In that situation, a judge can rule the company has been acting more like a sole proprietorship or general partnership. This can lead to “piercing of your corporate veil” of limited liability protection. At that point, your limited liability protection disappears and leaves you and any other owners personal assets vulnerable.
In an effort to help you organize what has been described here, look at some basic principals every business person should know.