Business Compliance Requirements by Entity Type

Business structure affects the filings, reports, and other formalities a company must carry out to legally conduct business. Every state has its own Compliance Requirements, and counties and local municipalities may have regulations, as well. To give you a general idea of what different business structures have to do to stay compliant, I’m going to list compliance formalities by entity type:

Sole Proprietorship and Partnerships

Sole proprietorships and partnerships are considered the same entity as their owners (both legally and from a tax perspective). So, there are no corporate compliance formalities to maintain them. However, that doesn’t mean that entrepreneurs operating as sole proprietorships or partnerships don’t have rules to follow to run their businesses legally! Some of the things that individuals running their businesses as sole props and partnerships must do include:

File for and renew their fictitious name (DBA) if they are marketing their business under a name other than one that includes their first and last name.
File their personal income tax returns (business income is reported on IRS Form 1040 Schedule C) and pay applicable income tax AND self-employment tax.
Apply for and renew any required business licenses and permits.
Collect and remit sales tax (if required for the products and services they are selling).
Obtain an EIN (Employee Identification Number), if hiring employees.
Abide by all employment and labor laws (if the business has employees).

Limited Liability Companies (LLC)

A Limited Liability Company is considered a separate legal entity from its owner(s) (called members). The LLC structure gives members some protection against the legal and financial debts of the business. However, from a tax perspective, an LLC and its owner(s) are treated as the same entity. In other words, taxes flow through to owners’ personal income tax forms.

Some of the compliance requirements LLCs must usually fulfill include:

File Articles of Organization to establish the entity with the state.
Appoint and maintain a registered agent.
Obtain an EIN (Employer Identification Number).
File an initial report and annual reports.
Create an operating agreement to put forth the company’s major decision-making and operating procedures (generally, it’s not required by the state, but it helps ensure other compliance requirements are addressed properly).
Issue member shares and record interest transfers.
Hold LLC member meetings (also, prepare minutes and have all members sign to approve them).
File their income tax returns and pay applicable income tax (business income is reported on IRS Form 1040 Schedule C) AND self-employment tax).
Apply for and renew any required business licenses and permits.
Collect and remit sales tax (if required for the products and services they are selling).
Abide by all employment and labor laws (if the business has employees).
Maintain a bank account solely for business activities. Do not commingle business and personal financial activities and funds.
File Articles of Amendment to report any significant business changes.

Corporations

A Corporation (C corporation or C Corp) is a separate legal and separate tax-paying entity from its owners (called shareholders). With more stakeholders and a higher degree of liability protection for owners and directors, Corporations have stricter compliance requirements than other business entities.

Below are examples of what C Corps may need to do to satisfy their compliance obligations:

File Articles of Incorporation to establish the entity with the state.
Appoint and maintain a registered agent.
Obtain an EIN (Employer Identification Number).
File an initial report and annual reports.
Adopt corporate bylaws to put forth the company’s major decision-making and operating procedures.
Apply for and renew any required business licenses and permits.
Appoint and maintain a board of directors
Hold board of directors meetings (also prepare minutes afterward, and have all directors sign to approve them).
Hold annual shareholder meetings (also prepare minutes and have all directors sign to approve them).
Pay taxes and file corporate tax returns.
Collect and remit sales tax (if required for the products and services sold).
Issue stock to shareholders and record stock transfers.
Abide by all employment and labor laws (if the business has employees).
Maintain a bank account solely for business activities. Do not commingle business and personal financial activities and funds.
File Articles of Amendment to report any significant business changes.

S Corporations

An S Corporation is not a type of business entity but rather a special tax election that eligible LLCs and Corporations may choose. Generally, S Corporation requirements follow what the underlying entity (LLC or Corporation) must fulfill.

Consequences of Noncompliance

Now that we’ve discussed some of the typical compliance requirements, let’s get into what could happen when businesses do not follow the rules. The severity of penalties vary, and they often depend on the seriousness of violations. For any business, noncompliance can cause big problems!

Here are some of the possible consequences of noncompliance:

Piercing of Corporate Veil – I mentioned this at the start of this article, and I’ll expand on it here. “Corporate veil” (also called a “corporate shield”) is the legal distinction between an LLC or corporation and its owner(s). It is the legal separation established by keeping a company’s activities, assets, and liabilities independent from those of the business owner(s). If an LLC or Corporation fails to fulfill its compliance requirements, a court might decide that the corporate veil has been pierced and that the individuals who own or oversee the business are personally accountable for the debts or legal wrongdoing of the company.
Audits – Noncompliance draws closer inspection of a business’s processes and financials. No one likes to hear the word “audit.” That’s no wonder because audits demand a lot of time and money as business owners and employees get pulled away from doing revenue-generating work.
Financial penalties – Noncompliance can hit a business’s checking account hard. There may be fines, back taxes, interest, and other financial penalties levied if a company fails to fulfill its compliance requirements.
Suspension or termination of the business – If the frequency or severity of noncompliance warrants it, a company may fall out of good standing with the state and be forced to either suspend operations or close its doors entirely. Stating the obvious, this can be fatal for a business.
Imprisonment – The LLC and Corporation business entity types provide some liability protection to owners and directors. However, non-compliance may lead to the civil or criminal prosecution of owners, officers, and directors if their personal actions were unlawful or negligent.
Damaged brand reputation – As word gets out publicly about a company’s noncompliance, it could permanently hurt the business’s reputation. That could destroy customer and vendor confidence as well as make lenders wary of providing financing to the business in the future. The hit to a brand’s reputation can destroy trust in the company and limit future opportunities.

How to Stay Compliant

For some businesses, the compliance requirements may be numerous and complex. Entrepreneurs must understand their obligations so that they don’t suffer the consequences we covered above—especially the increased legal risks associated with piercing the corporate veil. To accomplish that, I recommend seeking professional legal and accounting expertise.

Something else that can help you immensely is to designate TaxMedics as your registered agent to receive all critical government and legal notices on your behalf. We provide registered agent services in all 50 states. As your registered agent, we ensure that you know when your business entity’s vital compliance deadlines are approaching.

But that’s not all that we can do!

To make compliance even easier for you, we can also prepare and submit your business filings and reports for you.

Yes, business compliance can be complicated, and the consequences of noncompliance are scary. With TaxMedics’s help, however, you don’t have to sweat the small stuff (or the big stuff!). Contact us today at 509-543-7600 to learn more about how we can help your business stay compliant.

P.S. If your business is non-compliant and not currently in good standing with the state, all is not lost! We also help LLCs and Corporations with reinstatements filings to get them back into active compliant status.

January 2020

This blog does not provide legal, financial, accounting, or tax advice. This blog provides practical information on the subject matter. The content on this blog is “as is” and carries no warranties. TaxMedics does not warrant or guarantee the accuracy, reliability, and completeness of the content on this blog. Please contact us directly to discuss how this information may be used based on your actual facts and circumstances.

Compliance Requirements- By Business Entity Type