From my perspective, it looks like more and more entrepreneurs are forming corporations and LLCs. They’re doing so to take advantage of liability limitations, to get access to tax benefits, and to set their companies up for future investments and an eventual exit.
So what do you need to do on an annual basis to keep your corporation or LLC in compliance?
The answers can vary from state to state and what type of company you have, but we can talk about some general principles and best practices. Let’s look at corporations first and then at LLCs.
For the purpose of this post, I’m talking about small, closely-held corporations. These are often called “S-corporations” because they’ve elected to be taxed according to Subchapter S of the tax code – the details of that decision are beyond the scope of this post. Larger publicly-traded corporations have other compliance requirements. So these guidelines apply to most companies owned by one or a few entrepreneurs or investors. A “small” corporation can still make a lot of money – it just has a small number of owners.
All corporations, no matter how large or small, should hold annual meetings of directors and shareholders. The minutes of these meetings should be typed up and signed. Typically, the minutes of a small corporation aren’t filed with any government agency, they’re just kept by the company. This way, if your business is ever subject to a legal challenge, you will be able to show that you really are operating as a corporation and are having regular meetings as required by the state in which you operate. If your corporation only has one shareholder, you’re not really having a “meeting,” of course, but you still need to create annual minutes.
That’s not to say there’s nothing the government requires of your company. Many states require a document to be filed, either annually, or, in some cases, biannually (every other year.) These are typically called the “Annual Report” or “Statement of Information.” These are usually short forms that simply inform the government that you’re still doing business, what your business address is, and who is your agent for service of process. The latter is the person or company that is authorized to receive legal documents such as a notice of a lawsuit.
Note that if your business was formed in one state (such as a Delaware corporation) and operating in another, or if you have multiple locations across state lines, you may need to file Annual Reports or similar documents in multiple states.
Finally, your business may be subject to annual Service Fees or Franchise Fees. These are taxes that states charge to allow your company to do business in that state. Again, you may owe fees in multiple states depending on where your company was set up and where you’re doing business. Definitely check with a tax advisor about these requirements.
OK, what about LLCs? The answer is a bit simpler. In most states, LLCs aren’t required to hold or document annual meetings of their owners (who are called “Members.”) An LLC may not even have a Board of Directors. However, it’s still a best practice for your LLC to hold and document annual meetings, as it’s a good way to show that you’re operating as a real business and it’s an opportunity for the various owners of the company to get together and discuss what’s happened in the last year and the company’s long-term goals.
Just like corporations, most LLCs are required to file annual or biannual reports and to pay the service or franchise fees to the states in which they were filed and where they do business.
To wrap it up – it’s great to form a company, but if you don’t take the proper steps to maintain it, you may lose the benefits that come from owning a limited liability entity. You may be subject to a personal lawsuit and accrue substantial tax liability. Feel free to be in touch if you have questions about your company’s annual requirements.