Starting a corporation or limited liability company (LLC) takes a lot of work. Before you serve your first customer or fulfill your first order, it is important to complete the initial business formation process.
Although starting a business is a significant achievement, small business owners cannot coast on past accomplishments. You must look to the future and the next steps. This includes keeping your business in good standing with the state. Not maintaining the legal status of your corporation or LLC can have serious consequences. You could owe fines, be unable to expand your business, and even face involuntary dissolution.
Fortunately, this can all be avoided by maintaining strong internal processes. If you are unsure what is required to maintain your LLC’s status, schedule a meeting with a business attorney right away.
The Consequences of Losing Corporation or LLC Status
Corporations and LLCs are legal entities that exist independently of their owners. These structures protect corporation owners (called shareholders) or LLC owners (called members) from the entity’s debts and lawsuits, and it also provides taxation flexibility; these benefits are not available with sole proprietorships and partnerships.
However, these benefits come with a tradeoff: forming corporation or LLC is more complex and more expensive than starting a sole proprietorship or a partnership. Not only must you file detailed formation documents with the appropriate agency in the state where the corporation or LLC is formed, you also have to provide that state agency with information on an ongoing basis to maintain good standing.
Corporation and LLC statutes vary by state, but failure to comply with them can cause you to lose good standing. Losing good standing can result in the following consequences:
- The state will not issue the corporation or LLC a certificate of good standing, which may be required to open a business bank account, set up customer payment processing, apply for a business line of credit, expand into other states, or file and maintain lawsuits on behalf of the business.
- The entity could lose the right to use its business name in the state.
- The state may impose fines and penalties on the Corporation or LLC and its shareholders or members, respectively.
Companies not in good standing may be more vulnerable to business identity theft.[1]
- The business’s home state can dissolve the LLC or corporation.
- Other states can revoke the corporation’s or LLC’s qualifications to conduct business there.
Technically, once you are issued a certificate of good standing, it is valid until the expiration date. But if you lose good standing, the state typically will not issue a new certificate when the current one expires.
You may have a short time to remedy any issue that results in a loss of good standing. While recovering good standing may simply be a matter of sending a check or filing a document, it is best to avoid problems in the first place to prevent interruptions in your business’s good standing.
Remaining in Good Standing
Being denied good standing, even for a few days or weeks, can devastate your business. If you are not careful to maintain your business entity’s standing, you might only learn at the last minute—when you go to apply for a loan or register to conduct business in another state—that your status has lapsed.
You may be able to recover good standing with a quick fix, but any compliance red flag sends a bad message to potential business partners. And not all fixes are quick. Losing good standing for an extended period could jeopardize your corporation or LLC—and your livelihood.
Maintaining your entity’s status is not difficult, but it requires attention to detail and can be time-consuming. In most states, taking the following steps will keep you in good standing:
- Amend the articles of incorporation or certification of formation if there is a qualifying event, such as a business name change, a change in the name or address of the registered agent, or a change in the corporation’s or LLC’s financial, taxation, or management structure. Different states may have different events that trigger an amendment to the articles of organization and require a filing with the secretary of state or other state agency.
- File an annual report with the state in accordance with state laws. Not all states require an annual report, and some only require them every other year. Each state also has its own reporting requirements. Generally, you must provide information about the entity’s registered agent, its current business address, the names and addresses of members and managers, and an updated description of business activities. Reports are usually due on the formation anniversary, but not always. Most states require you to file with the secretary of state, but this is not universal. Check the due date and where to file. Expect to pay a filing fee with the report.
- File state and federal taxes when they are due. Corporation shareholders, if also acting as an officer of the corporation, or LLC members are often treated as self-employed individuals, and thus must pay quarterly estimated taxes. Tax deadlines vary depending on whether a corporation or LLC is filing as a sole proprietorship, partnership, S corporation, or C corporation. Some states, including California and Delaware, also require an annual corporation or LLC tax.
Renew business licenses and permits, such as health permits, occupational licenses, liquor licenses, building permits, and zoning and land use permits. Many of these need to be renewed annually. In addition to state licensing laws, cities and counties may have separate registration rules.
- Resolve any criminal activity charges against the business or one of its owners. Criminal activity could lead to loss of good standing.
Wolters Kluwer notes that the responsibility for maintaining good standing is often spread across different departments in a business (e.g., finance, legal, and tax). Businesses that have compliance teams may fail to communicate internally, stay up to date on state requirements, and monitor company information.[2]
Losing your good standing could come down to a simple error like a mistake in a filed form, missing information, or paying a noncurrent filing fee.
You Earned Your Good Standing. Do Not Let It Slip Away.
There is an entrepreneurial saying that you should work on your business, not in your business. It captures the idea of taking a big-picture view and not getting bogged down in minutiae. Spending too much time on tasks that can be delegated robs you of the energy needed to plan, build, and strategize.
Compliance failure is not a mistake your corporation or LLC can afford to make. Maintaining good standing demands constant attention, cross-department coordination, and a proactive strategy. To stay on top of your LLC or corporation status obligations, consider meeting regularly with an experienced business attorney, especially if your business entity has a more complex structure and operates in multiple states.
[1] 4 Reasons to Stay in Good Standing for Business Compliance, Wolters Kluwer (Jul. 24, 2018), https://www.wolterskluwer.com/en/expert-insights/4-reasons-to-stay-in-good-standing-for-business-compliance.
[2] Mark Rosanes, Business Identity Theft—What Can US Companies Do to Protect Themselves?, Ins. Bus. Am. (Jul. 14, 2022), https://www.insurancebusinessmag.com/us/news/cyber/business-identity-theft–what-can-us-companies-do-to-protect-themselves-413160.aspx.
