What is business compliance? The answer is a combination of meeting internal and external business compliance requirements as determined by its state of incorporation.
Internal requirements, as defined by the United States Small Business Administration (SBA), are forms of record-keeping for incorporated businesses. Record-keeping varies depending on your entity formation. An LLC, for example, would need to update an operating agreement. Meanwhile, corporations would need to update corporate bylaws and keep detailed minutes of meetings to remain compliant.
External business compliance focuses on state and federal filing requirements. Small businesses may need to file, pay for, or renew the following essentials:
- File an annual report
- Pay statement fees and franchise tax
- Obtain an employer identification number (EIN)
- Designate a registered agent
- File articles of amendment
- Renew business licenses, permits, and certificates
Why is compliance important in business?
Why does business compliance matter? Keeping records up to date provides the Secretary of State with accurate information about the business. This keeps the business in good standing. A business may fall into bad standing if it does not complete annual filings or pay relevant fees. What if this happens? The small business may be at risk of being involuntarily dissolved, and closed, by the state.
It’s quite easy to manage compliance once you know which areas require your focus. Stay in good standing by fulfilling these internal and external compliance requirements in our small business compliance guide.
Updating operating agreements
Businesses that have incorporated as an LLC may draft a written operating agreement. An operating agreement provides the rules, structure, and regulations for running the LLC. This includes information about ownership, rights and responsibilities of the LLC’s members, rules for joining and leaving the LLC, and dissolution of the entity.
It is not always a requirement for an LLC to have a written agreement. However, it is strongly advised that LLCs do write out an operating agreement for business compliance purposes. This allows members to refer back to the written document with any questions. In the event that the state needs to see the operating agreement, you will be able to readily share it and prove the validity of the LLC. Update this document each year to detail any changes made in the business.
Updating corporate bylaws
Companies that incorporate as corporations are typically required to draft bylaws. Corporate bylaws share similarities with LLC operating agreements. Bylaws detail the corporation’s rules and regulations. Information for conducting meetings, the functions of each corporate office, and shareholder voting formalities may also be found in bylaws.
If key details change about the corporation’s internal management structure, bylaws must be updated accordingly for internal business compliance purposes.
Recording corporate minutes
Minutes are records of notes taken during corporate meetings. Minutes should be extremely detailed, legible, and taken in chronological order.
These documents do not need to be updated after they have been taken during meetings. However, it is typically required to take minutes during each meeting within the corporation for posterity and to serve as a point of reference.
Filing annual reports
An annual report acts as a record of changes and the yearly activities within a business throughout the year. If an LLC appoints new members, for example, its annual report filing will reflect updates on the names and addresses of the LLC’s new members.
Are annual reports and initial reports the same thing? No. An initial report is filed at the offset of incorporating or forming an LLC for a business. It is generally only filed once while annual reports are filed by predetermined dates.
Annual reports are filed on an annual, or biennial, basis. Filing rules may differ depending on your state of incorporation. Check in with the local Secretary of State to determine whether your business needs to file annually or biennially and for the filing deadline.
Paying statement fees and franchise tax
Statement fees are paid with annual or biennial reports. Fees may range depending on the state of incorporation. Franchise tax is another critical aspect of business compliance if the state of incorporation charges corporations and LLCs for these fees.
Paying these fees in a timely manner is an important aspect of small business compliance. If they are not paid on time, your business may be charged with late fees which can be much more expensive. It is also possible that small businesses may be penalized by the state for late payments, so it is advised to pay any outstanding fees ahead of schedule.
Obtaining an EIN
An EIN is an employer identification number. It is also referred to as a tax ID. Businesses that incorporate or form an LLC are issued an EIN by the IRS. This identifies employer tax accounts and ensures the business is collecting payroll taxes.
Where else can an EIN be useful and ensure business compliance? An EIN is required if your business decides to hire employees. You will also need an EIN if you decide to open a business bank account or to build corporate business credit.
Designating a registered agent
The point of contact between a small business and its state of incorporation is a registered agent.
A registered agent may be an individual or third-party organization that accepts service of process on behalf of your business. The registered agent will organize these documents and pass the paperwork along to the business owner in a timely, discrete manner.
Registered agents must be residents in the state in which they do business. They must have a physical street address to accept this paperwork and be available during general business hours Monday through Friday. A business owner may also act as their own registered agent. However, they must be able to fulfill these requirements or else their business runs the risk of falling out of compliance.
Renewing business licenses and permits
Businesses generally require certain business licenses and permits to operate their companies. These vary depending on the company’s industry, its location (city and/or county), and the state of incorporation. Once a small business has obtained a specific business license or permit, they will need to renew it as per state requirements.
Not sure which business licenses you need? Consider doing business license research with the Secretary of State to see which licenses and permits are applicable to your business.
Running a small business requires fulfilling a number of tasks. Filing necessary paperwork, paying taxes and fees on time, and submitting reports and renewals on an annual basis help keep the company running smoothly. Doing each activity signals to the state that your business is active and is prioritizing its business compliance.
If you’re unsure that you’re in good standing or need more information about areas of business compliance as it pertains to your specific business, get in touch with your local Secretary of State. You may need to complete additional paperwork, such as filing articles of amendment, obtaining a DBA, or ordering a certificate of good standing, that further allows your business to fulfill its filing requirements. They’ll be able to answer your questions and guide you to the appropriate point of contact as necessary for any and all compliance issues.
Deborah Sweeney is the CEO of MyCorporation.com which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter at @MyCorporation.
Ready for more?
Apply for funding and find out if you qualify today