How to Keep your Business in Compliance and Avoid Penalties

For a small business, the number of filings and fees required in a given year can be overwhelming. Here in California, a newly formed corporation must obtain a Federal Tax ID number (free), file Articles of Incorporation with the Secretary of State ($100), file an Initial Statement of Information ($25), elect S Corporation status if desired (free), file a Fictitious Business Name Statement with the county recorder ($29), and publish this statement in the local newspaper ($101). Each business is also required to file an annual statement of information on the anniversary date of the corporation's filing date ($25). Then, there's other paperwork like meeting minutes or Articles of Amendment, if you make any changes.

This may seem like trivial paperwork, but it's actually pretty important. Failure to file required paperwork can lead to fines and penalties. And as California is facing rising budget deficits, they're looking to ramp up their collection efforts and increase revenues any way possible. The penalty for failing to file your annual Statement of Information is $250 with no exception!

While it's never fun to pay a dime more than you have to, failing to file paperwork can have even more serious consequences than these extra fees. This paperwork is key to keeping your corporation or LLC in good standing. If your business happens to be sued, a plaintiff may try to show that you haven't maintained your business to the letter of the law.

In the worst cases, your "corporate shield" is pierced and your personal assets can be vulnerable.

Maintaining a corporation or LLC is an ongoing process. Below is a general overview of what you need to do to keep your business in compliance. Of course, specific requirements will vary based on your business type and location.

1. File An Annual Report

California requires you to file an annual Statement of Information (SI-200) by the anniversary of your business' incorporation date. About 90 days prior to the statement due date, they will send you a postcard directing you to their website to file it and pay online. I strongly urge you to do so immediately as this is the only notice you will receive about the due date. If you miss this date, you will not receive another postcard. Instead, you will receive a letter from the Franchise Tax Board saying you now owe them $250 instead of $25. Neither the FTB or the Secretary of State's office will not waive the penalty for any reason. In addition, they will suspend your company until the fee is paid.

2. File Amendments For Any Changes

If you made some major changes to your LLC or Corporation, you may need to keep California up to date with an Articles of Amendment form. Examples of changes include: changes to the company name, registered agent, registered office, business address, number of authorized shares, and business activities. Most changes are free to file.

3. Get a Federal Tax ID number

To distinguish your business as a separate legal entity, you'll need to obtain a Federal Tax ID Number, also referred to as an Employer Identification Number (EIN). Issued by the IRS, the tax ID number is similar to your personal social security number and allows the IRS to track your company's transactions.

4. Keep Up To Date With Any Meeting Minutes

If your business is a corporation (S or C), you'll need to record meeting minutes (including every action or decision) whenever you hold a corporate meeting. Typical content includes: time and place of meeting, attendance and chair of the meeting, any actions (purchases, elections, etc.) and signature of recorder and date. You will want to keep a binder, called a Corporate Minute Book, so all this information is in one place.

5. File a FBN For Any Name Variations

A lot of times, a business has an official name and then uses any number of variants of that name. Here in California it is also known as a Fictitious Business Name (FBN). For example, your official name might be ABC COMPANY, Inc., but you may also go by ABC or ABC.com, etc. In these cases, you need to file a FBN (Fictitious Business Name) Statement with the County Recorder for each of the variations. Then, you have to publish this information in the local newspaper. Typically, the cost for filing with the county is $29. Here in Nevada County, The Union charges $101 to publish it in the newspaper.

6. Use Your Proper Name On Any Contract

In addition to filing FBNs as needed, you should be extra careful about how your business is referenced in business contracts and other forms. Whenever you reference your business, make sure to identify it as a corporation, using the correct form of Incorporation or Corporation as Inc. or Corp., as filed with the state. Never use your name followed by "DBA" (Doing Business As) on a contract.