Once a business entity such as a corporation, limited liability company or limited partnership is organized, it must, in most cases, file an annual report with its state of organization and with each other state in which it is qualified to do business. (In some states, a biennial report is filed.) States use the annual report process to collect information about companies – such as the identity of their officers and directors and the name of their registered agent and address of registered office, to determine if the company is still active in their state, to make this information available to the public, and sometimes to calculate and collect franchise taxes.
A company operating in all 51 jurisdictions must comply with each state’s unique annual report requirements, which means meeting 51 different filing deadlines with 51 separate forms. Companies with complex structures – such as a corporation that may have many subsidiary corporations or LLCs - may be managing the filings of hundreds, even thousands of reports annually. Companies have a lot at stake, as failure to file state annual reports is the most common reason for the loss of good standing status.
While many of the annual report forms themselves appear simple, companies with multiple subsidiary entities in multiple states manage a vastly more time-consuming and costly filing program. That’s because efficient annual report compliance is a constantly repeating workflow in which the actual filings are only one step. Getting it right requires expertise in three distinct areas. A failure in any one can result in delinquent entities:
Centralize annual report workflow responsibility. This is the number one best practice. Centralize compliance responsibility in one department, say, tax, finance, or corporate governance, and avoid dispersing it across multiple departments.
Formalize entity status change notifications. Management and the legal department are often the ones who drive corporate actions that impact entity status, such as mergers, acquisitions, and other voluntary changes. These entity status changes must be communicated to the parties handling compliance.
Set up alerts for delinquent entities. Responsible parties must be notified immediately when entities fall out of good standing so that they can quickly remedy the problem before penalties and fines compound.
Take advantage of technology. Superior web-based technology designed specifically for corporate compliance is widely available. At a minimum, set up a centralized master compliance calendar that all stakeholders can access and collaborate on.
Institute an entity records system. A secure online entity management system functions as the authoritative internal record of corporate structure, entity ownership and which jurisdictions to monitor. The system can also be used to communicate and verify voluntary status changes to ensure that they were recorded correctly by the state.
Bring in expert help. This can be a worthwhile investment for companies of any size. You may partner with a full-service commercial registered agent for help with just portions of, or all of, your annual reports filing processes. As a highly specialized compliance expert, the registered agent is uniquely positioned to help you create personalized best practices that keep you fully compliant and in full control.
Annual report compliance is required to maintain good standing status. And maintaining good standing status is an important part of keeping business objectives on track. While this requires a proactive stance, it’s clearly an administrative burden. Consider the true costs of handling annual reports internally. These can include labor, risk management, a distraction from your core business, and the costs of penalties and restoring delinquent entities when mistakes are made. Once you’ve factored in these costs, assess your tipping point at which partnering with a compliance specialist becomes the more efficient option.
