Good standing: How to avoid penalties and help your company grow

You've put your business on a solid legal footing by forming a corporation, limited liability company, or nonprofit corporation. And now you're focused on running your business. Legal formalities are the farthest thing from your mind.

But they shouldn't be. When you own or manage a business entity, you must keep it in "good standing," or you risk having your entity suspended by the state. You may accumulate fees and penalties or even lose your personal liability protection.

On a more practical level, keeping your company in good standing makes it easy to get a “certificate of good standing" from your state when you need one. You may be asked to produce such a certificate before you can borrow money, sign an important contract, or expand into new states.

Here are some tips for keeping your business in good standing.

File annual reports on time

In most states, corporations must file an annual report and pay a fee or franchise tax. Many states also require annual reports and fees for LLCs. “Annual" isn't really an accurate description, since some states only require reports every few years.

Preparing the report is usually just a matter of filling out an online form. You can find annual report requirements and forms for your state by visiting the website of the state agency where you filed your business formation documents.

If you have registered to do business in other states, you may be responsible for filing reports in those states, too.

If you don't file annual reports and pay associated fees or taxes on time, you may accumulate fines and penalties, and your business may be suspended or even administratively dissolved. Find out when your annual reports are due, and put reminders on your calendar, so you don't miss the deadlines.

Keep registered agent information up to date

When you formed your business, you provided the name and office address of a registered agent to accept lawsuits and other official correspondence on your business's behalf. You may have named an employee, owner, or a third party, like LegalZoom, as the agent and listed the address of your business.

Since then, your business may have moved, or the person you named may have left the company. If your registered agent information is out of date, you must update it, or your business could be suspended. Most states have a simple form for this.

To avoid the risk that your agent information will fall out of date, consider naming a company that provides registered agent services instead of listing an owner or employee.

Keep proper corporate and financial records

Keeping proper business and financial records (also known as “observing corporate formalities") helps you preserve the limited personal liability that comes with owning a formal business entity.

If you don't observe formalities, you risk being held personally liable for business debts or lawsuits, on the theory that the business is just your “alter ego" and not really a separate entity.

All businesses have record-keeping requirements, although the exact regulations will vary depending on your business type and the state where the business was formed.

In general:

• Corporations must hold an annual shareholders' meeting, and they must follow the procedures in their bylaws for calling and conducting the meeting.
• Corporations must keep shareholder and director meeting minutes, and important decisions must be memorialized in a resolution.
• Corporations also must keep records of stock ownership.
• LLC recordkeeping requirements are usually not as strict, but LLCs still should have meeting minutes, resolutions, and ownership records.

A corporation or LLC also should keep good financial records. It is especially crucial to keep company finances completely separate from the owner's personal finances, with payments to and from owners clearly documented.

Keeping a business in good standing isn't difficult if you remember to file reports and pay fees on time, keep your registered agent information up to date, and observe corporate formalities. Being in good standing will help you avoid penalties and help ensure that you can get a certificate of good standing when you need one.