Once your business is launched and in full swing, things move at a break-neck pace. Amidst the flurry of finding new clients, helping existing customers, and bringing staff on board, it’s all too easy for some legal paperwork to slip through the cracks.
However, when a company doesn’t meet its legal obligations with the state, it can fall into “bad standing” and even be administratively dissolved. Ignoring the problem won’t make it go away, as any unpaid fees will continue to accrue (in addition to some hefty fines). And more importantly, when a business is in bad standing, the business owner loses the personal liability protection of the LLC or corporation.
In short, you should do what you can to avoid falling out of compliance in the first place. The good news is it’s not that hard, once you know the common traps:
Mistake 1: Forgetting to file paperwork with the state
Once you’ve formed an LLC or corporation, you’ll most likely need to file some form of annual report with the state (at present, Ohio and Alabama are the two states without an annual report requirement). Check with your state’s secretary of state office to learn your specific deadline and get this form in on time to avoid any penalties or late fees. Likewise, if you’ve made any changes to the LLC or corporation (for example, you authorize more shares or a board member leaves), you’ll need to submit an Articles of Amendment form with your state.
Mistake 2: Commingling your personal and business finances
If you started as a sole proprietor, you might be used to sharing the same checking account and credit card for business and personal finances. After all, for small businesses, home and business budgets are closely intertwined. However, once you form an LLC or corporation for your business, you’re required by law to separate your business and personal finances. This means opening a business checking account (and credit card if needed), and staying disciplined to keep a sharp line between what’s business and personal.
Mistake 3: Not keeping up with your registered agent/address
Many businesses often use a registered agent as their official business address, particularly those businesses that are home-based or don’t have a permanent office location. Then after a few years, busy owners might forget to pay the Registered Agent fees and the agent stops representing the company. What happens then? Any official mail sent by the state is automatically returned and the company can be placed in bad standing until it updates its address of record.
Mistake 4: Not signing contracts with your proper business name
Is your official company name COMPANY INC., but you’re writing every contract or form as COMPANY? Believe it or not, that can be a problem. You need to be extra careful about how your business is referenced in any business contract or official forms. Use the exact name that’s included on your business formation document with the state.
Mistake 5: Not getting a DBA for any name variations
If like most businesses you’re going to be operating under any variation of your official company name, you will need to file DBAs (Doing Business As) for each of the variations, no matter how minor the differences may seem to you. If you don’t have your proper DBA paperwork in with your local government, your business is improperly operating whenever you use one of the name variations in an official capacity.
Mistake 6: Improperly operating in another state
If you are going to be conducting business in another state besides where you formed your corporation or LLC, you’ll need to get permission to do so. This usually means qualifying as a Foreign Corporation or LLC with the new state (often called a “foreign qualification”). Without this paperwork, each new state where you’re operating will perceive you as a sole proprietor, meaning you lose any of the personal liability protection of the LLC or corporation.
Not sure what constitutes “doing business in another state”? Here’s an example. Joe runs a small mobile app company in Nevada and has clients outside of Nevada. At this point, he probably is not considered operating out of state. However, let’s say Joe decides to open a small development or sales office in California, he will then need to foreign qualify to legally operate in California.
Each of these common mistakes is easily avoidable as long as you stay on top of your legal compliance paperwork. The bottom line? It takes only minutes to fill out your business’ annual report, but it can take hours, and hundreds of dollars in added fees, to try to figure out why your company has been placed in bad standing by the state.