How to keep a corporation or LLC in good standing
Forming a company takes an afternoon. Keeping it in good standing takes a few hours a year, and skipping them can cost you penalties, your company’s legal status and, in the worst case, the personal liability protection you formed it to get.
What good standing means
A company is in good standing when the state’s records show it is current on required reports and fees and still has a registered agent on file. States prove it with a certificate, called a certificate of good standing, existence or status depending on the state, and banks, lenders, buyers and other states’ filing offices often ask for one.
Falling out of good standing usually starts with late fees. If the problem continues, the state can administratively dissolve the company or revoke its registration, and in some states a company that is not in good standing cannot bring a lawsuit until it fixes its status. Reinstatement is usually possible, but it means filing every missed report and paying the fees and penalties.
File state reports and pay franchise taxes
Most states require corporations and LLCs to file a report every year, and a few, including New York, ask for one every two years. The report usually confirms the company’s addresses, registered agent and leadership, and it comes with a fee. Due dates vary, with some states using the anniversary of formation and others a fixed date for everyone.
Some states also charge a franchise tax, a charge for the privilege of existing or doing business in the state that has nothing to do with franchising. Delaware is the best-known example: its corporations owe an annual report and franchise tax by March 1, and its LLCs owe a flat annual tax by June 1.
If a Delaware corporation’s bill looks alarming, check whether it was calculated with the authorized shares method, because the assumed par value capital method often yields far less for companies with many authorized shares. And treat official-looking letters from private firms offering to file reports or prepare required minutes for a fee with suspicion until you have checked your state’s own website.
Keep a registered agent everywhere you are registered
A registered agent is the person or company designated to receive lawsuits and official notices for your business. Almost every state requires one, with a physical street address in the state and someone available during business hours. New York works differently: its Secretary of State accepts legal papers for corporations and LLCs and forwards them to the address on file, so that address must stay current.
The requirement applies in your formation state and in every state where you register to do business. When a company transacts business in another state, for example by opening an office or employing people there, it generally must register, or foreign qualify, before it starts. Operating unregistered can bring penalties and back fees, and it can keep the company out of that state’s courts until it registers.
Follow your governing documents and formalities
A corporation’s bylaws set its internal rules, such as how many directors it has, what officers do and how meetings work. An LLC’s operating agreement covers who manages the company, how profits are divided, how members vote and what happens when one leaves. Some states require LLCs to have one, and without one, state default rules decide those questions for you.
Corporations carry the most formalities: an annual shareholder meeting to elect directors, board meetings for major decisions and minutes of both. Most states let directors act by unanimous written consent instead of meeting. LLCs usually have fewer required formalities, but recording big decisions in writing is still wise, especially these.
- Electing directors and appointing officers or managers.
- Issuing stock or admitting new members.
- Borrowing money, guaranteeing debts or buying property.
- Opening bank accounts and naming who can sign.
- Approving distributions, dividends or a sale of the business.
Keep the company’s money separate
Courts can pierce the corporate veil, holding owners personally liable for company debts, when a company looks like an extension of its owners. The usual warning signs are shared bank accounts, personal bills paid with company money, too little capital for the company’s risks and ignored formalities.
Run every transaction through the company’s own account, sign contracts with the company’s name and your title, and pay yourself through salary or documented distributions. If you lend the company money or it lends to you, put the loan in writing with terms you actually follow.
Keep the records that prove it
Maintain a permanent record book, on paper or digitally, and update it whenever something changes. Shareholders and members generally have a legal right to inspect certain records, so an organized book also heads off disputes.
- Formation documents, amendments and state filing receipts.
- Bylaws or operating agreement, with every amendment.
- Minutes, written consents and resolutions.
- A stock or membership ledger showing who owns what.
- Annual reports, tax returns, the EIN confirmation letter and licenses.
Put every deadline on one calendar
Lapses often happen because a deadline lived in one person’s head. Build a single calendar for the company, give each date an owner and set reminders 60 and 30 days ahead.
- Annual or biennial reports in the formation state and every foreign registration.
- Franchise or privilege tax due dates in states that charge them.
- Federal income tax returns: March 15 for calendar-year S corporations and partnerships, April 15 for C corporations.
- Business license and permit renewals.
- Annual meetings, or the written consents that replace them.
- A yearly check that the registered agent and addresses on file are correct.