When a Limited Liability Company (LLC) or Corporation is no longer in good standing with the Secretary of State, it may face severe business disruptions, legal challenges, and penalties. Reinstating the entity is essential to restore its legal status and business privileges. This article will discuss common reasons an entity may fall out of good standing, remedies to fix this, the process of reinstatement, and how failing to address these issues can impact the entity’s ability to do business.
Reasons Why an Entity Falls Out of Good Standing
Entities must comply with various state regulations to maintain good standing. Common reasons for falling out of compliance include:
- Failure to File Annual Reports: Most states require LLCs and corporations to file annual or biennial reports that confirm the business’s continued existence and provide updated information, such as principal office location, registered agent details, and ownership changes.
- Failure to Pay Franchise Taxes or Fees: Many states impose franchise taxes, which are typically annual fees required for the entity to operate. Missing deadlines for these payments can lead to penalties, interest, and loss of good standing.
- Failure to Maintain a Registered Agent: States mandate that LLCs and corporations maintain a registered agent to receive legal documents on behalf of the company. Failure to maintain a registered agent, or failure to notify the state of changes, can cause the entity to lose good standing.
- Non-compliance with Regulatory Filings: In some industries, businesses are required to submit specific regulatory filings to comply with local or federal laws. Non-compliance with these regulations could result in the company losing its active status.
- Failure to Comply with Corporate Governance Requirements: Certain states require entities to follow internal governance rules, such as holding annual shareholder meetings or maintaining certain records. Failing to observe these internal governance rules can lead to administrative dissolution.
- Legal Issues or Penalties: Legal infractions, such as civil or tax violations, can lead to an entity being placed into inactive status by the state.
Remedies to Fix Non-Compliance
Falling out of good standing can be rectified with proper and timely action. Remedies include:
- Filing Past Due Reports and Documents: The simplest way to regain good standing is to file all outstanding annual or biennial reports. Some states allow online filing, while others may require paper submissions.
- Paying Past Due Fees and Penalties: Any unpaid franchise taxes, fees, or penalties must be paid in full. In some cases, states may offer payment plans or reduced fees for reinstatement if the business has been inactive for a long period.
- Reinstating the Registered Agent: If the company has lost its registered agent, a new one must be designated and the appropriate filing must be made with the state to notify them of the change.
- Complying with State Orders: In cases of regulatory or legal infractions, companies may need to resolve these issues before they can be reinstated. This could include clearing up tax liens, resolving legal disputes, or addressing governance failures.
Procedures for Reinstatement
Reinstatement procedures vary from state to state, but generally, they follow similar steps. Here is a common outline of the process:
- Verify the Entity’s Status: Businesses should check with the state’s Secretary of State or Department of Revenue to determine the exact reason for their loss of good standing. Many states provide an online portal where businesses can access their compliance status.
- Submit a Reinstatement Application: The business must file a reinstatement application with the Secretary of State’s office. This application usually requires details about the company, including the business’s name, registration number, and the reason for non-compliance.
- File Delinquent Reports and Pay Fees: All outstanding reports and tax obligations must be addressed before the reinstatement is approved. States often impose late fees or penalties in addition to the original filing fees.
- Approval and Notice of Reinstatement: Once the Secretary of State’s office has processed the necessary paperwork and payments, the business will receive a notice confirming reinstatement. Some states issue a new Certificate of Good Standing, while others restore the previous good standing status.
- Update Corporate Records and Notify Interested Parties: After reinstatement, the entity should update its records to reflect its active status. Business owners should also notify any interested parties, such as banks, lenders, or customers, that the company is back in good standing.
Consequences of Failing to Reinstate
Failing to reinstate a business entity that has fallen out of good standing can have long-term, adverse consequences, including:
- Loss of Legal Rights: An entity that is not in good standing may lose the ability to bring legal actions, enforce contracts, or defend itself in court. In some states, contracts entered into while the entity is out of good standing may be deemed void or unenforceable.
- Liability Exposure for Owners and Directors: When an entity is no longer active, it could lose the protection of limited liability for owners or shareholders. This can result in personal liability for debts, legal actions, or financial obligations.
- Inability to Secure Financing or Investment: Investors and lenders are less likely to work with a business that is not in good standing. Losing access to capital can hinder growth, expansion, or even day-to-day operations.
- Revocation of Licenses and Permits: In many industries, the loss of good standing can result in the revocation of necessary business licenses, professional certifications, or permits. This could prevent the company from legally operating.
- Involuntary Dissolution: Eventually, the Secretary of State or the court may move to dissolve the business if it remains out of good standing for an extended period. Once dissolved, the business no longer exists in the eyes of the law, and any assets or obligations must be liquidated.
- Administrative Penalties: Even if the business is eventually reinstated, it may be subject to hefty fines, penalties, and interest for the period it was non-compliant.
- Harm to Business Reputation: Falling out of good standing can damage relationships with clients, vendors, and partners. It signals to the business community that the company is not complying with basic corporate governance, which could harm its credibility and reputation.
Reinstating an LLC or corporation that has fallen out of good standing with the Secretary of State is crucial for maintaining its legal rights, protecting its owners, and continuing to operate. Non-compliance can lead to severe consequences, including loss of liability protection, the inability to sue or be sued, and even involuntary dissolution. By understanding the common causes of non-compliance and following the necessary procedures for reinstatement, businesses can avoid these disruptions and safeguard their future. Partnering with an experienced service provider to handle corporate compliance and reinstatements can ensure that entities remain in good standing and avoid costly penalties or delays.
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