What do we mean when we talk about small business compliance? Business compliance means meeting a series of internal and external business compliance requirements. These requirements are determined by the state of incorporation and may be defined under the terms listed below:
- Internal Business Compliance: These are forms of recordkeeping for incorporated businesses. Recordkeeping depends on the entity formation. For example, an LLC will keep records with an LLC operating agreement while a corporation will update corporate bylaws.
- External Business Compliance: These are state and federal filing requirements for small businesses. External compliance may range from filing annual reports to paying franchise taxes.
Most businesses know that it’s important to stay in good standing with their state of incorporation. Falling out of good standing means the business may receive hefty penalty fees. The business can even be involuntarily dissolved by the state.
Fortunately, it is possible for incorporated businesses to maintain compliance and their status of good standing by focusing on the following key areas.
Maintain operating agreements and corporate bylaws.
Let’s look at some internal compliance requirements for small businesses. Companies that have incorporated as an LLC or a corporation will draft an LLC operating agreement or corporate bylaws for their business, respectively. These documents outline the rules for running and operating an LLC or corporation and the responsibilities of the owners.
Maintain these documents accordingly each year. Corporations will also need to take and record thorough minutes during corporate meetings. Remember that all members may review and reference the LLC’s operating agreement and/or corporate bylaws.
File an annual report.
Many aspects of a business change throughout the course of a year. For example, an LLC may appoint new members, or the business may make changes to some of its yearly activities. As such, it is a requirement that small businesses file an annual report. This report records these changes and keeps the state up-to-date on the business.
When is an annual report due? As per the name, small business owners file an annual report with the Secretary of State on an annual basis. However, some states require annual reports to be filed biennially. Remember to check in with your state of incorporation for the proper filing deadlines. As you file your annual report, pay the proper statement fee associated with the report.
Pay franchise taxes.
Some states will charge a franchise tax to LLCs and corporations that incorporate within that state. LLCs and corporations must pay these fees by their deadline to stay in compliance.
Not sure if franchise taxes apply to your business? Reach out to your Secretary of State to determine if you need to pay franchise taxes.
Obtain and renew business licenses.
Almost every small business is required to have business licenses. The licenses the business files will vary depending on its industry and location, but businesses still need to obtain licenses and permits to conduct operations.
The next steps are fairly simple. Once you know which licenses your business requires, file for pay the filing fees to obtain these business licenses. If the license is close to expiration or requires renewal, renew the license per state requirements.
Obtain an employer identification number (EIN).
After incorporating or forming an LLC, the IRS will issue a nine-digit number called an employer identification number (EIN) to the small business. This number identifies the business entity and allows the business to file income tax returns. Having an EIN also allows business owners to hire employees and open business bank accounts.
Legally, small businesses must use either a Social Security Number (SSN) or EIN to identify their business. Some entrepreneurs do not feel comfortable using their SSN on various filing paperwork. Instead, they will use an EIN as a safeguard in its place.
If you have not incorporated your business, it’s a good idea to apply for an EIN from the IRS. (And if you have incorporated the business, but still don’t have an EIN reach out to the IRS to determine if they provide you with this federal tax ID.)
File for a doing business as name (DBA).
Some small businesses operate under names that are different from their registered business name. These names are known as doing business as names, or DBAs.
Having a DBA allows your business to conduct business under that fictitious name. You may accept payments, open a business bank account and cash checks using the DBA. If you do not plan to conduct business under an assumed name, you will not need to obtain a DBA. However, a DBA is necessary for businesses that operate under multiple names of divisions.
What else does my business need to stay in compliance?
There are additional areas of external business compliance for small business owners, including designating a registered agent and obtaining a certificate of good standing.
Every business must have a thorough understanding of what they need to stay in compliance and how they may obtain these assets. If you are uncertain as to what is necessary for your small business to stay in good standing with its state of incorporation, reach out to your local Secretary of State. Determine what applications and forms you’ll need to file, payment fees you’ll need to include, and the appropriate point of contact for submitting this information. You’ll be able to maintain a bit of peace of mind in knowing your business is in compliance.