There many different federal, state, and local regulations that govern how businesses behave and organize themselves in the United States. The laws and rules that affect your own business will vary depending on where you’re located and the particular business entity you pick to structure your company.
Entity compliance is a shorthand term for everything involved in following and staying compliant with all of these laws and expectations. It comprises many things that work to keep a business operating without issues. Many of these laws also provide proper legal handling of ownership and liability when companies expand or fail and close down.
What is Entity Compliance?
Your business is a legal entity that you must operate in compliance with the relevant rules and regulations. If you are the sole proprietor of your business, then your company’s entity is legally inseparable from you as an individual.
However, whatever kind of business owner you are, entity compliance is really for your benefit more than anything else.
Compliance measures allow a small business to have procedures for responding to change that affects a company, either from within or without. Entity compliance 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. There are also several penalties for failure to keep your business compliant. There are natural penalties that may occur internal to your business, but penalties can be imposed by regulating entities like your state government.
What Are the Basic Requirements of Entity Compliance?
There are many things you should track for entity compliance purposes. For example, business owners need to maintain their business licenses, ensure their bookkeeping meets certain standards, and keep up with tax reporting and payment requirements.
Entity compliance also requires companies to establish and follow clear procedures around entity dissolution or expansion and any other changes to the entity itself. Anytime the name of a business entity changes or more shares are issued for sale, there are important regulations to follow.
Many corporations create a dedicated compliance department to run internal audits and monitoring to check for compliance.
Entities must maintain records of all business activity. Financial records, at least for larger entities, must comply with the Generally Accepted Accounting Principles (GAAP) established by the Financial Accounting Standards Board.
States most often supervise compliance, and failure to keep proper records of your operations can lead to fines and penalties.
Taking minutes during meetings is one essential 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:
- 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
Many companies like corporations and LLCs must provide indemnification for their managing officials. This means that the company assumes responsibility for expenses and liabilities in the event of a lawsuit.
These laws can vary by state, but business managers and employees generally have the right to compensation from the company when they are sued—at least when they are able to defend themselves successfully in court.
Dissenters’ rights, under the law, provide for a reasonable procedure and compensation in the event that a shareholder disagrees with decisions or transactions made by a company. Entity compliance, in this case, requires addressing in advance what will happen when there is disagreement about important company matters like mergers or expansions.
LLCs should address these issues in their operating agreement before the organization is formed.
Annual Report Filings
Businesses in some states must submit reports to the state on their operations every year as part of their entity compliance. This is an important step on many company’s business compliance checklists for the end of the year.
These annual reports provide business entity filing offices with up-to-date information on the company’s status and qualifications. Reports filed should include relevant information about the business entity, the registered agent, and names and addresses for directors and members of a corporation or LLC.
Depending on where your business is located and what kind of work you do, you might need a business license to operate legally. Compliance requires keeping your license renewed and maintaining all of your credentials. Failure to have the proper business license can lead to fines, lawsuits, and other penalties.
Every business must have a registered agent with their governing authorities. The registered agent is the individual or organization assigned to accept legal documents on behalf of the company.
To be compliant, you need to have a registered agent with a physical address in each state you do business in. For sole proprietors, you will be the registered agent by default unless you file paperwork otherwise. Otherwise, you can hire a professional like a lawyer or an accounting firm to act as your agent.
Paying and reporting all applicable taxes on your business is another important part of keeping your business entity in compliance. This includes franchise tax, income tax, property tax, and any tax withholding you do for your employees.
Failure to report taxes or otherwise fall short of your tax obligations can result in severe federal or state penalties.
Entity Expansion or Changes
Entities should report expansions and other changes to their company structure to the proper state departments. Businesses expanding into other states also need the owner to report those shifts and file any newly necessary paperwork with the government of the new state.
What Happens If You Aren’t Compliant
If you don’t meet these compliance standards, your company may suffer a lack of efficiency and be generally less prepared for new developments. There may also be internal and external consequences imposed by others.
Internally speaking, board members, executives, and other managers of your company may set penalties for any individuals found to be falling short of compliance. Those penalties might include probation, reprimands, or dismissal from the company.
Externally, federal, state, or local authorities might impose punishments on a business failing to meet its obligations. Often this will mean costly fines, but punishments might also strip companies or individual members of their limited liability protection or even order a company to be dissolved.
Corporation and LLC Requirements
Many compliance requirements apply specifically to corporations and LLCs. Other business entities like sole proprietorships and partnerships usually face less extensive restrictions.
Many of these restrictions have to do with how the business is organized. Corporations must have a board of directors, and they must have initial and annual director meetings. They also have to create and update bylaws, provide stock to shareholders, and note any and all stock transfers.
LLCs don’t have quite the same requirements, but they must keep their operating agreement updated, as well as their regular business records. Here are a few more requirements specific to corporations and LLCs.
Annual Report Filing
Corporations and LLCs in many states have to file annual reports and sometimes biennial statements instead. 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 businesses. The agent can either 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 state. Despite the title, this refers to U.S. companies working across state lines, not organizations run by international investors.
Corporations and LLCs aren’t required to complete foreign entity registration in other states, but it is recommended to register 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 closure, or any other structural entity change. All states you operate in should be informed of any of these changes in your corporation or LLC.
Failure to file required documents may result in fines.
Corporations and LLCs will need to adhere to strict transactional filing requirements around all mergers, name changes, and important stock and shareholding transactions.
This includes working with the proper filing office, signing the relevant filing documents, and remaining in good standing. If corporations and LLCs don’t adhere to the requirements, the company can face fines and penalties.
A franchise tax is a regular fee many corporations and LLCs must pay in order to continue operating in a state. It is paid to the state to keep the company in good standing. The exact amount of the franchise tax will depend on the state where the business operates.
Seek Guidance at 1-800Accountant
So many different things go into maintaining correct entity compliance, and the requirements vary widely by state and local municipality. Instead of trying to handle it all yourself, you can save yourself time and energy by working with experts who know exactly what your business needs.
If you’re starting a business, consult a professional accounting firm like 1800Accountant. They can guide you through all the business planning, entity formation, and entity compliance needs you’re likely to encounter.
This post is to be used for informational purposes only and does not constitute legal, business, or tax advice. Each person should consult his or her own attorney, business advisor, or tax advisor with respect to matters referenced in this post. 1-800Accountant assumes no liability for actions taken in reliance upon the information contained herein.