It happens. At times, hardworking and well-intentioned small business owners fail to meet their legal obligations with the state, and their businesses fall into “bad standing.” No matter how you got yourself into a non-compliant status, it is possible to get back into good standing and reinstate a non-compliant business. Fortunately, in many cases, it’s not as difficult a road as you might think.
If your company is in bad standing with the state, it’s a good idea to bring it back into compliance before the end of the year. That’s because ignoring the problem won’t make it go away. The penalties and fees will catch up to you eventually. So it’s typically better to deal with the issue as soon as possible and start the new year with a clean slate.
If your business is not in bad standing, the following can still help you understand how to meet your legal obligations and avoid these problems in the first place.
How Do Companies Fall Out of Compliance?
A corporation or LLC falls into bad standing when it fails to meet the requirements of the state where it formed or where it has a foreign qualification. Here are some of the common culprits:
- You forget to file your business’ annual report and pay the associated fees (probably for several years in a row).
- You forget to pay your registered agent fees, so your Registered Agent stops representing your company and you don’t set up a new agent of record with the state.
- You fail to file your business’ state franchise taxes (possibly for several years in a row).
Why Does it Matter?
When a company doesn’t meet its legal obligations, it can be placed in non-compliant status, administratively dissolved or even revoked by the state where it formed. Any unpaid fees and taxes will continue to accrue, and you’ll most likely have some hefty penalty fines added on top.
In addition, when a business is in bad standing, the business owner no longer enjoys the limited liability protection of the LLC or corporation. That means that his or her personal assets are now vulnerable. If your business is sued, the plaintiff may seek damages from your personal savings.
Likewise, if you continue to fail to pay your business’ taxes or fees, the state may be able to place a levy on your personal bank account.
How Do You Know if Your Business is in Bad Standing?
In many cases, your business (or your registered agent) will receive a notice from the state telling you that you’re in non-compliant status.
If you are not sure how your business stands with the state (for example, you haven’t updated your mailing address/address of record to receive a notice), simply check with your state’s secretary of state office.
How to Get Back Into Good Standing?
The specific steps will vary based on your state and the reason why you fell out of compliance. At a high level, you’ll typically want to:
1. Check why you fell out of compliance in the first place (if you don’t already know this, you can check with the state’s secretary of state office).
2. Submit a reinstatement form on behalf of the corporation or LLC to the secretary of state. You can either do this yourself, or have a legal document filing company handle it for you to make sure you’ve got all your T’s crossed and I’s dotted. In some cases, you may need to file additional documentation with the reinstatement form. It all depends on why you fell out of compliance in the first place.
3. Pay your outstanding fees, fines, and/or overdue state franchise taxes. This is usually the most painful part for any business. There’s typically no easy way around it. If you owe more than you can pay, you may want to consult a lawyer to determine your options.
Once you’ve reinstated your business, your corporation/LLC keeps its original filing date of formation.
I’m sure that in many cases, it may be tempting to ignore the non-compliant business and start over with a brand new one. However, don’t ever think that the state will stop keeping tabs on the old business.
Until a business is officially closed with the state, you’ll be on the hook for all fees, penalties and taxes. As state budgets are being increasingly stretched thin, state franchise and equalization offices are keeping a closer eye on late and non-payments.
Reinstating your business lets you instantly regain all the benefits of corporate/LLC status, including that important limited liability protection to safeguard your personal assets.
Most importantly, you can start fresh without worrying about an uncertain legal status.
Non-Compliance Photo via Shutterstock