Now’s the time when most everyone is thinking about their holiday to-do list and what they will wear when they ring in the New Year. As an entrepreneur, you have something far more critical to ponder — your year-end legal checklist.
Has your business done all that it must to remain in good legal standing with the state?
With 2019 coming to a close, now is the time to make sure your business has all of its compliance matters in order.
Year-end legal checklist to stay in good standing
Before you ring in the New Year, check these to-do items off your legal checklist:
- Verify that your business is currently in good standing.
- Take inventory of your annual compliance filings.
- Ensure that you’re selling in other states legally.
- Verify that your business structure is still the best choice for your company.
- Dissolve a business entity if it’s no longer active.
- Get your business back in good standing if it’s fallen out of favor with the state.
- Seek help to understand what you must do.
1. Verify that your business is currently in good standing
A quick way to check the status of your registration is to search for the company on the Secretary of State website where the company is registered. If the status shows “Current-Active,” the company is in good standing.
If your business plans to apply for a loan, seek funds from investors, or procure a federal contract in 2020, you may want to consider requesting a Certificate of Good Standing from the state.
Many state websites have an online form for requesting a Letter of Good Standing. The cost is generally minimal, as little as $10 up to approximately $50, depending on the state and type of business entity.
Note that some states require that a business uses its Certificate of Good Standing within a certain number of days after it’s issued. That’s good to keep that in mind if you need it for a specific purpose.
Related: Small business funding options
2. Take inventory of your annual compliance filings
Before this year ends, make sure you’ve taken care of all the necessary reports, renewals, fees, etc. that your state, county and local municipality requires.
Some of the items that LLCs and Corporations need to do each year include:
Hold an annual meeting with LLC members or the corporation’s shareholders
During the meeting, written minutes must be recorded to capture what took place. LLC members and shareholders must sign off on those minutes.
Prepare and file an annual report
Most states, with just a few exceptions, require LLCs and corporations to create an annual report every year.
Some states require one every other year or on some other time interval (for example, LLCs in Pennsylvania must submit them every 10 years). Check your state’s requirements so that you don’t miss filing yours by the due date.
Businesses that don’t file them on time (or file them at all) are at risk of penalties and late fees.
Maintain a registered agent
LLCs and corporations must have a registered agent designated at all times to receive important government and tax documents on behalf of the company.
Registered agent subscriptions could be annual, biannual or on some other contract term.
Make sure you know when yours must be renewed so that you pay the applicable fee when it’s due.
Renew business licenses and permits
Licenses and permits required for a business to operate legally within a state or local jurisdiction may need to be renewed annually or on some other time schedule.
It’s critical to renew on time, so verify due dates with the issuing agencies.
Renew DBAs and trademarks
Many states (or counties) require DBAs (fictitious names) to be renewed on some interval — usually every five or 10 years.
Notify the state of any key changes
When an LLC or corporation makes any major changes, it must submit Articles of Amendment to the state.
Examples of changes that the state needs to know about include a change in the company name; if anyone has left or joined the board of directors, and if the business moved to a new address.
Related: What is DBA?
3. Ensure that you’re selling in other states legally
A company that has expanded — or is thinking about expanding — beyond its home state’s boundaries may need to be “foreign qualified.”
Answering “yes” to any of the following questions may indicate that a business must file for foreign qualification to sell is products and services in a state:
- Does the LLC or corporation have a physical presence (e.g., an office or retail location) in the state?
- Does anyone working for the company regularly conduct in-person meetings with customers in the state?
- Do any of the company’s employees work in the state?
- Does a large portion of the company’s revenue come from the state?
- Did the company apply for a business license in the state?
- Does the company have a bank account in the state?
To apply for foreign qualification, business owners must file an application (usually called either a “Certificate of Authority” or “Statement & Designation by a Foreign Corporation”) with the state.
Companies that foreign qualify in a state must file reports, pay state taxes, obtain the necessary business licenses, and fulfill other obligations that the state requires of foreign-qualified companies.
Another responsibility is maintaining a registered agent authorized to provide its services in the state of foreign qualification.
While there are paperwork and some formalities involved in foreign qualification, it’s generally simpler and less costly than the alternative of forming a new domestic corporation or LLC in every state where a company wants to conduct business.
For example, usually, a corporation’s bylaws and board of directors in its home state will cover those requirements in the states where the business has foreign qualified.
In other words, the company probably won’t need to write a separate set of bylaws and appoint a board of directors for the state(s) of foreign qualification.
4. Verify that your business structure is still the best choice for your company
As a business grows and evolves, the business entity type it started as may no longer be the most advantageous.
Some of the things to consider when deciding on the most favorable business structure include:
- Income tax rates
- Allowed business deductions
- Self-employment taxes
- Personal liability protection for business owners
- Plans to add or remove owners (or shareholders)
- Management flexibility
- Plans to raise capital for expanding or growing the business
- Business compliance formalities
There’s a lot to consider! That’s why it’s smart to review with your accountant and attorney whether your current business structure still makes sense from a legal, financial and tax perspective.
Entrepreneurs that decide to change their business structure may be able to do a “statutory conversion.” This means they can switch from one business structure to another without closing the original entity and forming a new one.
Examples of statutory conversions include:
- LLC to C Corporation
- C Corporation to LLC
- Limited Partnership to C Corporation
Note that not all states allow for conversions, however. In the states that do give the option of statutory conversions, the process varies by state.
Generally, the steps involved include:
- Write a Plan of Conversion.
- Get approval from the governing stakeholders (e.g., partners, LLC members, shareholders, board of directors).
- Prepare the formation documents (e.g., Articles of Organization, Articles of Incorporation) for the entity type the business will be changing to.
- Prepare a Certificate of Conversion for the entity that the business will be after the conversion.
- File the new entity formation document, Certificate of Conversion, and any required filing fees with the state.
Depending on the state and the entity type, there might be other requirements, too.
Some states that don’t offer statutory conversions have what is called “statutory mergers.”
When neither a statutory conversion or a statutory merger is available, the original business entity must be dissolved and a new one must be formed.
5. Dissolve a business entity if it’s no longer active
There’s more involved with closing a business than locking the doors and ceasing to serve customers.
Business owners must inform the state (and licensing agencies) that the company is closing. Otherwise, they may still be held responsible for filing reports, paying license renewal fees, submitting tax returns, and other compliance requirements.
Businesses operating as a corporation, LLC, or partnership must hold a meeting with their directors, shareholders, members or partners to vote on closing the business.
Corporations that have issued shares of stock must obtain agreement on the dissolution from two-thirds of the company’s voting shares. When no shares are involved, the corporation’s Board of Directors must approve of dissolving the company.
After getting agreement from key stakeholders, other important next steps include:
- File Articles of Dissolution form with the Secretary of State’s office.
- Notify the IRS to close the business’s EIN (Employer Identification Number) and federal tax account.
- Notify the state and county to close those business tax accounts.
- Pay off any outstanding business debts.
- Contact the county where the business is located to cancel the business license, seller’s permit, and any other permits.
6. Get your business back into good standing if it’s fallen out of favor with the state
Everything that I’m sharing with you in this article is to help you stay in good standing. Still, you may be wondering if there’s any way to regain good favor with the state if you’ve slipped up somehow.
Here’s the good news: there are ways to regain a favorable status if a company has been deemed noncompliant or if the state has administratively dissolved it for not following the rules.
Typically, upon reinstatement, a company will get to retain its original filing date of formation.
The process of reinstatement varies from state to state. Generally, what a business must do includes:
- Find out why the company fell out of compliance. The state can provide details about what factors affected your fall from good standing.
- Submit a reinstatement form to the Secretary of State office (or other appropriate agency) on behalf of the company.
- Pay any outstanding fees, taxes, and fines; and submit any other required compliance documentation.
7. Seek help to understand what you must do — and to get it done
As I mentioned before, professional guidance from an attorney, accountant and tax advisor can help you better understand the legal and financial matters that will affect your business’s status of good standing.
And after you have the information and direction you need, there are online business document filing services that can help you keep track of your compliance due dates, prepare forms, and submit filings.
Put your business’s best foot forward in 2020
I hope this list of considerations will serve as a helpful starting point as you research what you must do to ensure your company is in good legal standing at year-end and stays that way in 2020.
For more insight about what you should consider, consult with trusted legal, financial and tax professionals.
For more inspiration on starting the new year out right, see quotes from some of our favorite entrepreneurs. You’ve got this!
The above content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.