What Is Entity Compliance?

Regulations set by federal, state, and local authorities govern how businesses behave and organize themselves in the United States. The laws and rules that affect your small business will vary depending on where you’re located and the entity you select to structure your business as. Entity compliance is a catchall for everything involved in following and staying compliant with all the laws and expectations that apply to your business, ensuring it operates without issue. These laws also provide guidance for the proper legal handling of ownership and liability when businesses expand or close down. Use this blog as your main small entity compliance guide to learn about entity compliance, associated legal obligations, reporting requirements, and how it can apply to your business. 

What is Entity Compliance?

Generally, your business is a legal entity that you must run in compliance with the rules and regulations that impact your operations. However, there are exceptions. For instance, if you are the sole proprietor of your business, then your business's entity is legally inseparable from you as an individual.

What Are the Basic Requirements of Entity Compliance?

There are several aspects of your business that you should track for entity compliance purposes. For example, you'll need to maintain your business licenses, ensure your bookkeeping meets specific standards, and that you keep up with tax reporting and payment requirements. Entity compliance also requires you to establish and follow clear procedures around entity dissolution or expansion and any other changes to the entity itself. Anytime the name of your business entity changes or more shares are issued for sale, there are important regulations to follow. Many corporations have created a dedicated compliance department to run internal audits and monitoring to check for compliance. Ensure your books are accurate and comply with dedicated compliance department to run internal audits and monitoring to check for compliance. 

Records

Proficient recordkeeping helps you maintain records of all of your business's activity. At least for larger entities, financial records must comply with the Generally Accepted Accounting Principles (GAAP) established by the Financial Accounting Standards Board. States most often supervise compliance, which may be a result of the small business regulatory enforcement fairness act of 1996. Failure to keep proper records of your operations can lead to fines and penalties.

Meeting Minutes

Taking minutes during meetings is an important part of your records for entity compliance. Meeting minutes provide a concise summary of what occurred in a meeting. They are important for those who can’t attend the meeting and as a reference to revisit later. Meeting minutes, at a minimum, should include the following:

• Date and time of the meeting
• Names of attendees and notably absent employees or stakeholders
• Items discussed
• Decisions made
• Acceptance or amendments of previous meetings' minutes

Indemnification

Many businesses, such as corporations and LLCs, must provide indemnification for their managing officials. This means that your business assumes responsibility for expenses and liabilities in the event of a lawsuit. These laws can vary by state, but managers and employees generally have the right to compensation from the business when they are sued—at least when they are able to defend themselves successfully in court. 

Dissenters’ Rights

Dissenters’ rights provide for a reasonable procedure and compensation in the event that a shareholder disagrees with decisions or transactions made by a business. Entity compliance, in this case, requires addressing in advance what happens when there is disagreement about important business matters, such as mergers or expansions. LLCs should address these issues in their operating agreement before the organization is officially formed.

Annual Report Filings

Certain states require businesses to submit annual reports detailing their operations as part of their entity compliance, which is an important step on most end-of-year business compliance checklists. These annual reports provide entity filing offices with up-to-date information on the business's status and qualifications. Reports filed should include relevant information about the business entity, the registered agent, and the names and addresses of directors and members of a corporation or LLC.

Business Licenses

You might need a business license to operate legally in certain territories and industries. Compliance requires keeping your license renewed and maintaining all of your professional credentials. Failure to obtain the proper business license and to keep it up to date can lead to fines, lawsuits, and other penalties.

Registered Agent

Every business must have a registered agent. The registered agent is the individual or organization assigned to accept legal documents on behalf of your business.To be compliant, you need to have a registered agent with a physical address in each state where you conduct business. For sole proprietors, you will be the registered agent unless you file paperwork for someone else to handle those responsibilities. You can also hire a professional, such as a lawyer or a certified public accountant (CPA), to act as your registered agent.

Tax Reporting

Paying and reporting all applicable business taxes is another important part of keeping your entity compliant. This includes franchise tax, income tax, property tax, and any tax withholding you do for your employees. Failure to prepare and file your business taxes can result in penalties and increased IRS scrutiny.

Entity Expansion or Changes

Entities should report expansions and other changes in business structure to appropriate state authorities. Businesses expanding into different states also need the owner to report those shifts and file the necessary paperwork with the government authorities of the new state.

Corporation and LLC Requirements

Many compliance requirements apply specifically to businesses formed as corporations and LLCs. Other business entities, such as sole proprietorships and partnerships, usually face extensive restrictions. Many of these restrictions pertain to how the business is organized. Corporations must have a board of directors, and they must have initial and annual director meetings. They must also create and update bylaws, provide stock to shareholders, and note all stock transfers. LLCs don’t have the same level of rigorous regulatory requirements, but they must keep their operating agreement updated, as well as their regular business records. 

Annual or Biennial Report Filing

Corporations and LLCs in many states have to file annual reports and sometimes biennial statements instead. States, including California, New Mexico, and New York, require biennial reports with different deadlines for each. Fees to submit these annual reports usually range between $100 and $300, but it varies significantly by state. 

Registered Agent Requirement

Registered agents are more important for corporations and LLCs than other small business entities. The agent can be a business or an individual assigned to receive confirmation, documents, and information from government agencies. They must have a physical street address where they can receive mail and subpoenas in the state.

Foreign Corporations and LLCs

Foreign corporations and LLCs are those that have a location in one state but conduct business in another. Despite the title, this refers to U.S. businesses working across state lines, not organizations run by international investors. Corporations and LLCs aren't required to complete foreign entity registration in other states. Still, it is recommended to register as a foreign corporation or LLC to avoid legal consequences in the other state you’re operating in.

Post Qualification Filings

Foreign corporations and LLCs are qualified to operate in another state once their registration is accepted. After they are qualified, they will still need to file new documents with the state if anything changes about the entity. 

This includes name changes, mergers, business closures, or any other structural entity change. All states you operate in should be informed of any of these changes in your corporation or LLC. 

Transactional Filings

There are strict filing requirements corporations and LLCs must follow in the event of a merger, name change, or important stock trading or shareholding action called transactional filings. Transactional filings involve working with the proper filing office in your state and signing the documents you intend to file to ensure your business remains in good standing. 

Franchise Tax

A franchise tax is a regular fee many corporations and LLCs must pay in order to continue operating in a state, which is paid to keep a business in good standing. The exact amount of the franchise tax will depend on the state where your business operates, and there are penalties for failing to pay this tax. 

Beneficial Ownership

The Financial Crimes Enforcement Network (FinCEN) is an agency of the U.S. Department of Treasury. FinCEN implements rules to improve transparency and prevent financial crimes such as fraud and money laundering. The rules can be viewed on FinCEN.gov, an official website of the United States government.

The Corporate Transparency Act, enacted in 2021, supports government oversight of corporate financial activities. Under this act, FinCEN published the Reporting Rule requiring businesses to comply with beneficial ownership information (BOI) rules.Learn more in A Guide to FinCEN BOI, Beneficial Ownership Information.

State Laws and Entity Compliance

Laws governing entity compliance can differ by state, with most states having at least some processes and procedures in common. For example, most states will require an annual report detailing basic business information. However, submissions can differ in frequency, with certain states requiring this report each year while others require it every two years. Depending on your state and industry, you might also be required to adhere to more obscure rules and regulations, such as laws pertaining to unclaimed property and state securities. Failure to comply will typically result in penalties. 

Entity Compliance and Governance

Directors, officers, and shareholders will influence entity compliance and governance differently. Generally, shareholders influence entity compliance by attending meetings and participating in votes that will determine the business's directors and overall direction. The directors shareholders have voted for will enact a compliance strategy and monitor progress. In contrast, the officers who work under each director will be responsible for carrying out the day-to-day tasks to ensure your business complies.  

Why is Compliance Important?

While external considerations make entity compliance important, compliance also benefits your business internally. Compliance measures allow you to have procedures for responding to change that affects your business. Entity compliance also gives you response measures to help your business react to growth opportunities or change appropriately in times of broader crisis. Of course, a large part of entity compliance is also for the public and various federal and state regulating entities. 

What Happens if You’re Not Compliant?

If you don’t meet these compliance standards, your business may suffer a lack of efficiency and be generally less prepared for new developments. There may also be internal and external consequences. Internally speaking, board members, executives, and other managers may set penalties for individuals falling short of compliance. Those penalties might include probation, reprimands, or dismissal from your business. Externally, federal, state, or local authorities might punish your business if it fails to meet its obligations. Often, this will mean costly fines, but punishments might also strip your business or individual members of their limited liability protection or even order your business to be dissolved.

1-800Accountant Can Keep Your Entity Compliant

Maintaining entity compliance while growing your small business can be a lot of work, especially if you're not fluent in all the rules and laws you must follow. One mistake can potentially set your efforts back, which is why many owners and entrepreneurs trust 1-800Accountant, America’s leading virtual accounting firm for small businesses, with their compliance work.Whether it's entity formation, tax advisory, tax preparation, or any of our professional accounting services, we have the affordable solutions you need to ensure your small business remains compliant. Schedule a quick consultation–usually 30 minutes or less to learn more.