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ENTITY COMPLIANCESURVIVAL GUIDE

CT Navigator Series for Entity Compliance Professionals

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Chapter 1:

Welcome to Entity Compliance . . . . . . . . . . . . . . . 3

Chapter 2:

Effectively Maintaining Records and Tracking Service of Process for Your Entity . . . . . . . . . . . 9

Chapter 3:

Business Expansion and Ongoing Entity Compliance Requirements . . . . . . . . . . . . . . . . . . 18

Chapter 4:

Business Contraction and Ongoing Entity Compliance Requirements . . . . . . . . . . . . . . . . . . 34

Chapter 5:

Complying with Information Reports and Other Annual Filings . . . . . . . . . . . . . . . . . . . . . . 46

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Chapter 1Welcome

CHAPTER 1:

Welcome to Entity Compliance

running a business requires a knack for juggling multiple priorities and commitments. Staying on top of compliance obligations and deadlines may not be at the top of your “to do” list—but maintaining your company’s “good standing” status should be. It’s critical to protecting your business from administrative dissolution and even default lawsuit judgments. We at Ct Corporation couldn’t be happier to help with any of your entity compliance needs.

In a corporation, the board of directors and the shareholders provide direction for the business. In a limited liability company (LLC), the members or the managers set the future course for decision-making. But none of those important activities can take place unless the business entity is formally recognized by state authorities under law.

and that’s where you come in.

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Ct Navigator Series for entity Compliance professionals

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as the person in charge of entity compliance, you must ensure that the business entity remains in “good standing” with state officials, so that day-to-day operations can continue uninterrupted. and this can be a thankless role—much like an umpire or an official at a sporting event, you’ll get little credit when things go smoothly, but you can count on being criticized when things go wrong.

So to help you with this very important (and often unappreciated) task, Ct Corporation has developed this Entity Compliance Survival Guide that you can save and print for future reference.

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Just for You— Entity Compliance Survival GuideIn your role as entity compliance specialist, you act as your business’s in-house expert on such matters. however, nobody is born with all the knowledge needed to manage every entity compliance situation. By selecting Ct Corporation for your entity compliance services, you do not have to face these responsibilities alone. the Entity Compliance Survival Guide can help you to stay on top of your ever-growing job responsibilities.

Of course, no one resource can contain all the information needed for every nuance. these can be complicated subjects. In many situations, consultations with your legal professionals are recommended—we at Ct Corporation are not offering legal advice. What we are providing with the Entity Compliance Survival Guide is a high-level overview of the many common compliance obligations your entity may face, as well as the steps and best practices many entities follow.

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Entity Recordkeeping and Service of Process

entities are public creations of the state. and virtually every state requires that entities keep certain records publicly available. Moreover, there are

often specific statutory requirements (and penalties) related to viewing these records. are your processes up to par?

One of the most important recordkeeping functions for handling entity compliance involves internally managing service of process. When your company receives notice of a lawsuit, are you ready to expedite this information to the right people in order to get proper resolution? all the best-laid plans of your company’s management team may be laid to waste if a default judgment blindsides the company. Nobody likes to be sued, but are you ready to handle service of process if you are? and the recordkeeping doesn’t end once you’ve notified the legal team.

Check out Chapter 2 of the Entity Compliance Survival Guide for more information on these subjects.

Entity Expansion

If business is good (and we hope it is), your business may begin conducting some activities outside of its formation state and across state lines.

Certain activities may trigger the need for new entity compliance obligations in those new states. Other activities may not trigger this need. Do you know the difference? and once you do, are you aware of the numerous requirements from state authorities that must be satisfied?

In some cases, your company may be considering the formation of a brand-new entity, either inside or outside of its home state. as the person in charge of entity compliance, you may have started working for your company after it was already a fully formed creature of the state. But entity compliance for a newly forming entity requires returning all the way to Step 1 in the process. are you aware of every step that follows? any delay could prove very costly to your new startup.

Setting aside the major entity changes associated with expansion, any number of minor changes to entity structure could usher in a new set of compliance requirements and filings. are you familiar with the changes that could prompt new obligations to remain in good standing with state officials?

See Chapter 3 of the Entity Compliance Survival Guide for coverage of these topics.

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Entity Contraction

Most businesses rarely remain the same for long—they are either expanding or (unfortunately) contracting. and in most cases, the

contraction is voluntary, although some entities find themselves suffering from involuntary contraction at the hands of state authorities. You don’t want to find yourself in the latter situation, because this is usually the penalty for non-compliance with entity obligations. If you don’t follow the entity rules established in your state, officials may administratively dissolve the entity or revoke its authority to do business. and if this does happen, you’ll want to apply for reinstatement as soon as possible. are you familiar with the issues surrounding involuntary contraction of your business entity?

as for voluntary contraction, any number of seemingly routine operational changes to your company may cause the need for new state filings to preserve your entity’s good standing. are you aware of the implications? Other changes, such as company mergers or acquisitions, are much more complicated, and have much more complicated filings. Do you know what is required to keep these transactions on target and on time? Finally, dissolving an entity and wrapping up its affairs may take some time to complete. Do you know the duties that bring this process to a successful conclusion?

to learn more about these tasks, consult Chapter 4 of the Entity Compliance Survival Guide .

Annual Filing Obligations

every state requires entities to periodically update authorities on the current status of the business. these annual report filings take many forms, are due

at different times of the year and, in some states, may not even be required annually. and these compliance duties—including the payment of required fees—must be completed for every state in which the entity is registered. Do you know what the obligations are for your entity? and are you aware of the serious downside of not completing these requirements in a timely manner? Dissolution and revocation may occur. and while we can inform you of the processes that may be used to cure these situations, nothing is guaranteed.

Other filing obligations are imposed on entities as well. Business licenses and permits must be acquired and kept up-to-date. and of course, taxes must be paid to the proper federal, state and local authorities. While these duties are likely outside the scope of your day-to-day entity compliance, you should have a working knowledge of how these filings can affect other entity compliance filings, so you can better understand the big picture for your business entity.

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an overview of these issues can be found in Chapter 5 of the Entity Compliance Survival Guide .

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Chapter 2recordkeeping

CHAPTER 2:

In this chapter of the Entity Compliance Survival Guide, we discuss two types of documents that you need to handle on behalf of the entity. the first type are those documents that every entity is required by law to maintain and make available when there is a valid request made to view them. this is an ongoing, routine assignment. the other type of document that you may need to handle is service of process paperwork. Service of process, while it may be frequent depending upon the nature of the business, is never routine. Failure to efficiently handle a service of process can result in a default judgment against your company, which is likely to have adverse effects on you personally.

Effectively Maintaining Records and Tracking

Service of Process for Your Entity

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this chapter of the Entity Compliance Survival Guide addresses:

Statutory recordkeeping and Inspection requirements

Inspection of records requirements

Limited Liability Companies

Corporations

Inspection request Documentation

handling Service of process

the Lawsuit Commences

the hot potato Lands in Your hands

receive Documents from registered agent

Distribute Documents—Communicate and Collaborate with the Legal team

track and Monitor progress

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Statutory Recordkeeping and Inspection RequirementsVirtually every state requires that a statutory entity, such as a corporation or limited liability company (LLC), maintain certain records related to that entity. records must be stored either at the entity’s principal place of business in that state or at its transfer agent’s place of business. (Delaware is one of the few states that does not have a statutory provision that requires the keeping of books and records.)

as is usually the case in state law, there is wide variation of documents that must be kept. (It is critical to know the rules for each state in which your entity does business.) In general, the statutorily mandated types of records fall into these major categories:

Organizational documents . these documents include a copy of the articles of incorporation (or formation), as well as any amendments or restatements of those articles.

Ownership documents . these include shareholder lists for corporations and member lists for LLCs.

Operating documents . For corporations, the operating documents consist of the by-laws. For LLCs, the operating agreement. Many states also require keeping a copy of all amendments made to the operating documents.

Capital contribution documents . Quite a few states require LLCs to keep records of the amount of cash contributed by each member, the agreed value of other property or services contributed by each member and any additional contributions that will be required of each member. Most states require corporations to retain documents regarding the types of stock and shareholder lists.

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Failure to Honor Inspection Request Can Trigger Penalties

State LLC statutes impose penalties for failure to honor a request to inspect the entity’s record. these penalties can be quite steep. For example, the penalty in alaska is 10 percent of the value of the member’s interest or $5,000, whichever is greater .

Documents of actions taken . Corporations are generally required to keep a record of each shareholder and director meeting, as well as the resolutions adopted or actions taken. (even when not required by statute, this evidence is often necessary to support the tax treatment of items.)

Tax and financial records . a significant number of states require that some type of tax or financial records be maintained. For LLCs, the requirement is frequently the three most recent tax returns. For corporations, the most recent annual report or financial statement will usually suffice.

In addition to these mandated records, keep any records that would be necessary to support an item included on the entity’s tax return. (these records may, in fact, be kept in the tax or finance department, but it is essential that you know their whereabouts and how to access them if you are required to do so.)

Inspection of Records Requirements

Under certain circumstances, some types of statutorily required records must be available for inspection by the entity’s owners.

Limited Liability Companies . Many states provide that an LLC must allow a member to inspect the statutorily required records. In general, there must be:

a written demand made

a purpose related to the member’s ownership of the entity

the time of inspection must be “reasonable.” Some statutes specify that the inspection must occur during normal working hours.

Corporations . Shortly before the corporation’s annual meeting, a corporate shareholder has the right to obtain a list that includes the names and addresses of all the shareholders. In addition, most states permit a corporate shareholder to make a written request to inspect the shareholder listing and other statutorily required documents. (Some states allow a corporate director to make such a request.) the requestor must have a proper purpose for making a request, such as determining the value of his or her shares or investigating specific acts of mismanagement of corporate assets.

Inspection request documentation . Nearly all statutes that authorize inspection of books and records provide that the request be in writing and the time of inspection be reasonable. You should maintain the following information for each request:

a copy of the written request for inspection

authorization from the legal department to allow the inspection, unless the request is for a shareholder list prior to the annual meeting (the legal department should ensure that the request is for a proper motive)

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an acknowledgement by the requestor that the books were made available

For each document inspected, there should be a record of who inspected the material, the time and date of inspection, and whether a copy was made. Your legal department may want the requestor to sign a document stating that use would be for a proper purpose.

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Handling Service of Process No one likes to think about being sued. however, if you are responsible for entity compliance, it is better to consider and plan for a lawsuit than wait until the service of process documents arrive on your desk. this section of the Entity Compliance Survival Guide will help you develop an effective action plan for responding, even as you’ve kept your fingers crossed that you won’t have to put the plan into action.

The Lawsuit Commences

Before we walk through the steps of an action plan, it helps to understand how a lawsuit commences and the importance of due diligence at each stage of the

process. a lawsuit begins when the one bringing the lawsuit (the plaintiff) files a complaint and arranges for notice to be served on the one being sued (the defendant). Once the defendant receives notice, there is only a short window to respond by filing documents with the court.

the service of process rules of the court in which the lawsuit was filed govern how notice is given to the defendant. the rules specify:

What documents must be served

By whom and how the documents are served

On whom the documents are served

For a business entity, the “on whom” usually is the entity’s registered agent. the Ct Corporation White paper, “What Constitutes Valid Service of Process?” provides much more information on how process can be served.

Once the registered agent receives notice of the lawsuit, the agent must immediately notify the business entity so a response can be filed with the court within the statutory timeframe.

http://ct.wolterskluwer.com/sites/default/files/pdfs/CT_Corporation_Service_of_Process_White_Paper.pdf

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The Hot Potato Lands in Your Hands

If you are the point-person within your company for receiving the service of process, you have a weighty responsibility. You must proactively take the steps necessary to

ensure that the process makes its way—in a timely and error-free manner—from your desk to the legal team responsible for responding to the matter.

the following three-step plan will help you organize the information and keep the process flowing smoothly. Your goal is to develop and implement internal safeguards at each stage of the process, from the moment of notification until the matter is concluded, that guarantee the right people have the right information in time to act.

1 . Receive documents from registered agent Quick action is essential because the clock is ticking. Not only must you know what to do when you receive notice of the service of process, you must have back-up plans in place.

First and foremost, designate a back-up for receiving documents from your registered agent.

If you receive paper copies from your registered agent, make sure to designate someone to check your mail in your absence. Make certain your boss knows who you designated.

WARNING

Failure to Act Can Result in a Default Judgment

any time you miss a legal deadline, you put the entity at risk of a default judgment. In a default judgment, everything the plaintiff has claimed is taken to be true, which means the plaintiff automatically wins and, generally, gets the remedies requested.

although a default judgment sometimes can be set aside, there is no guarantee it will be. You do not want to be in the position of having to rely on a “maybe.” Implementing good process management is your best protection from unpleasant surprises.

For more information on the default judgment processes and its consequences, see the Ct Corporation White paper, “Litigation Process: When Good SOP Goes Bad .”

http://ct.wolterskluwer.com/sites/default/files/pdfs/CT_Corporation_SOP_Litigation_Process.pdf

http://ct.wolterskluwer.com/sites/default/files/pdfs/CT_Corporation_SOP_Litigation_Process.pdf

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Make Sure You Know Your Role

Depending upon how your company is structured, your role may go beyond simply handing off the “hot potato” to the next set of hands. You may be called upon to serve as a liaison between the legal team and others in the corporation.

If you receive electronic versions, have your boss and your back-up included on the notification. When you are in the office, the back-up can ignore the notification.

Second, you need to make sure you have clear instructions regarding what actions the back-up must take.

2 . Distribute documents—communicate and collaborate with the legal team as in the game of “hot potato,” you want to get the service of process documents out of your hands and on to the next person as quickly as possible. however, you can’t just pitch the documents off into the abyss; you need to know whom to notify and how to notify them.

Whom must you notify? the service of process documents need to reach the proper member of a legal team. In a smaller corporation, there might be one point-person for all lawsuits, but in a larger corporation, different lawyers may handle different types of actions or different regions. You may also have responsibilities to notify members of the corporate finance team or other members of management.

How do you make the notification? In many cases, you will forward the electronic notification that you received to those who need to be notified. Make sure to monitor your email and follow up immediately if any messages are returned as “out of office” or are otherwise undeliverable. (Include yourself and your back-up on the cc: line to provide confirmation that the email went through.) In the case of paper documentation, it is wise to request confirmation that the documents were received and follow up if you do not receive the confirmation in a timely manner.

When notifying others, highlight the date and time of service, the manner of service and the type of lawsuit. this will help the legal team triage the documents appropriately.

3 . Track and monitor the process It is essential that you log the receipt of service of process documents. You should have a master file for each lawsuit that is filed against your company. at a minimum, you need to capture:

Facts regarding the Lawsuit

Name of plaintiff (who is suing the company)

Date and method of service (person, mail, service waived)

Name of court (state, federal)

type of lawsuit (contract, tort)

Date response due (create a 5-10 day “tickler” in advance of the due date to follow up with legal team)

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Internal Communications

Notified parties (legal team, finance team, management representatives)

When notification was given

Method of notification (mail, hand-delivery)

Notification of resolution

request notification when the answer has been filed in court

record that information on the master record you keep for each lawsuit

Following these three steps will help make sure your company does not have a default judgment entered against it.

ConclusionFollowing best practices when handling your entity’s documents will make your

day-to-day routine easier. It will also enable you to be effective and efficient when responding to service of process or requests for information.

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Chapter 3Business expansion

CHAPTER 3:

Business Expansion and Ongoing

Entity Compliance Requirements

Business expansion, whether by moving into another state or by spinning off a new entity, brings with it a host of entity compliance issues. as your company’s entity compliance manager, you will be responsible for these important filing duties. even if there is no major expansion, other modifications (such as a change of address) can trigger compliance responsibilities. this chapter of the Entity Compliance Survival Guide will help you handle the challenges that you may face when business is thriving—a problem we hope you have.

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Many times, a business formed in one state (the home state) has contacts within another state (the foreign state). this happens naturally as businesses grow and expand to reach customers outside of the home state. Or, management could decide to open a branch office in another state. regardless of the reason, if your entity is conducting business in another state, you need to obtain a certificate of authority. this is often referred to as foreign qualification (for a corporation) or registration (for an LLC). the first section of this chapter walks you through the key points to consider in determining if the entity is doing business in another state and spells out the compliance steps you need to take for most states.

another common expansion scenario occurs when an existing company “spins off” a business or starts a new endeavor. For example, in the early 1990s, Circuit City created CarMax, a spin-off company. (and in the case of CarMax, sometimes the spin-off outlives its parent company). regardless of whether the spin-off or the parent company is most successful, any spin-off must remain compliant with state incorporation or formation requirements. the second part of this chapter explores the major issues that must be addressed when a new business is formed.

the last section of this chapter takes a look at compliance requirements that you need to watch out for, even when it seems to be “business as usual.” Seemingly minor changes in the business organization can result in mandated compliance duties.

Within this chapter of the Entity Compliance Survival Guide, you’ll find helpful information on:

expanding Into another State

What Constitutes Doing Business?

actions that Do Not Constitute Doing Business

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Foreign Qualification/registration

Name reservation

Filing requirements

Business License Considerations

registered agent Considerations

Formation of a New entity

preliminary Considerations

Document and Filing requirements

Corporate Filing requirements

LLC Filing requirements

amendments to existing entities

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Expanding Into Another Statetoday’s technology makes it easy to conduct business in multiple jurisdictions. a business that operates outside of its home state can find itself subject to the laws of a foreign state in three areas:

taxation, such as income and sales taxes, because the actions create tax nexus (a connection to the state)

Litigation as the defendant because your company’s actions made it subject to service of process and suit in that state’s courts

Foreign qualification

WARNING

Failure to Qualify Can Be Costly

Complying with various foreign qualification laws in different states is aggravating and time-consuming. however, failure to qualify (or obtain a certificate of registration) can carry severe repercussions. Nearly every state denies court access to foreign entities that do intrastate business in their states without being qualified (or authorized). What’s more, the corporation—and, in some cases, its officers or agents—may be penalized. For more information about the perils of operating without foreign qualification or authorization, see the Ct Corporation White paper, “What Constitutes ‘Doing Business’ for a Foreign Corporation .”

http://ct.wolterskluwer.com/sites/default/files/pdfs/CT_Corporation_What_Constitutes_Doing_Business_WhitePaper.pdf


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Foreign qualification is designed to ensure both foreign and domestic corporations are treated alike under state law. For example, in most states, foreign qualification is necessary to initiate a lawsuit in a state court (as opposed to defending against a lawsuit).

If your entity’s activities in a state are considered “doing business,” then you must take action to obtain foreign qualification (for a corporation) or a certificate of registration (for an LLC).

What Constitutes Doing Business?

the first question that must be answered is: “Is the entity doing business in state X?” Unfortunately, the question is far easier to ask than it is to answer. No standard

definition of what constitutes doing business exists. the exact parameters are decided on a state-by-state and case-by-case basis.

to make matters more confusing, an entity can be doing business in a state for one purpose (taxation), but not for another (requiring qualification). Generally, “doing business” for purposes of qualification is the most rigorous one to satisfy. So, if the entity needs to register as a foreign entity, the standards to be taxed and to be sued will likely be met.

One standard often applied asks whether the entity is transacting a substantial portion of its ordinary business within the state . If this test is met—after looking at all the facts and circumstances—then the entity needs to be qualified (or authorized) to do business within that state.

Actions that Do Not Constitute Doing Business

another way of approaching the question—and one that is a bit more concrete—is to examine what the state allows an entity to do before it must qualify to do business.

all states provide a listing of actions that an entity can perform within a state without having to qualify. although these actions vary from state to state, the following are common:

Transacting business solely in interstate commerce . the Constitution places the right to regulate interstate commerce solely in the hands of Congress.

Isolated transactions and activities . Most states provide that doing business does not include an isolated act that occurs only once during a given 30-day period.

Secondary corporation activities . If a corporation does not conduct primary business activities in a state, most states provide that secondary activities, such as maintaining a bank account, holding directors’ meetings or maintaining a stock transfer agent, will not require authorization.

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Make Sure to Check the State Statutes!

review each state’s statutes as soon as you become aware of any activity in a state other than the home state. the full-text of each state’s doing business statutes as well as examples of activities that do or don’t cross the line into doing business can be found in the Ct Corporation treatise, “What Constitutes Doing Business .”

Sales via independent contractors . employees and retail facilities located within a state nearly always will constitute doing business in that state. however, sales orders taken by independent contractors or sales that must be accepted outside of the state to be valid will not constitute doing business in most states.

Property mortgage/debt activity . Most states provide that taking and holding mortgages, depositing payments and collecting upon secure debts do not constitute doing business.

Defending or settling proceedings . although an unauthorized entity is usually barred from bringing a lawsuit in a state, any foreign entity is entitled to defend itself—whether that means proceeding with or settling a lawsuit or administrative proceeding.

this is only a high-level summary of the types of actions that an entity can take without being required to qualify or be authorized to do business in a state. More detail can be found in the Ct Corporation White paper, “Specific ‘Doing Business’ Activities that Affect the Foreign Qualification Requirement,” as well as the Ct Corporation Smart Charts, “LLC Activities That Do Not Trigger State Foreign Qualification Requirements,” and “Corporation Activities That Do Not Trigger State Foreign Qualification Requirements .”

Foreign Qualification/Registration

there are many similarities between qualifying as a foreign corporation (or registering as a foreign LLC) and the initial incorporation (or formation) process. In both cases:

You need to determine the business name that you will use

You must file documents and pay fees to the secretary of state

You must appoint a registered agent within the state

In general, the requirements for foreign qualification and authorization are similar—so many of the actions you must take will be the same regardless of the entity type. the following discussion will highlight any points of difference.

Name Reservation Your entity is already operational within the home state, so it already has a name that is familiar—internally (other employees, shareholders/members, and officers of the organization) and externally (customers and vendors).

http://ct.wolterskluwer.com/sites/default/files/pdfs/CT_Corporation_2012_What_Constitutes_Doing_Business_Treatise.pdf



http://ct.wolterskluwer.com/sites/default/files/pdfs/CT_Corporation_What_Constitutes_Doing_Business_Activities_WhitePaper.pdf

http://ct.wolterskluwer.com/sites/default/files/pdfs/CT_Corporation_What_Constitutes_Doing_Business_Activities_WhitePaper.pdf

http://ct.wolterskluwer.com/sites/default/files/pdfs/Foreign_Qualification_LLC_Smart_Chart.pdf

http://ct.wolterskluwer.com/sites/default/files/pdfs/Foreign_Qualification_LLC_Smart_Chart.pdf

http://ct.wolterskluwer.com/sites/default/files/pdfs/Foreign_Qualification_Corporation_Compliance_Smart_Chart.pdf

http://ct.wolterskluwer.com/sites/default/files/pdfs/Foreign_Qualification_Corporation_Compliance_Smart_Chart.pdf

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What Is a “Legal Name”?

the legal name of a statutory business entity, such as a corporation, LLC or Lp, appears on its formation document. although a name must be chosen before the formation paperwork is filed, it can be changed as often as desired during the entity’s existence. however, the entity can have only one legal name at any given time. In contrast, a business entity can have several assumed, fictitious or trade names at one time.

?

You must use the legal formation name when you obtain a certificate of authority in a new state. and, ideally, you will want to use that name to do business in the foreign state.

Unfortunately, an entity is not always able to use its formation name when it moves into another state. the name may already be in use, or the new state may have different naming requirements. For example, the new state may require a corporate indicator (such as “Inc.”) in the name, whereas the home state does not. In order to qualify in the new state, the entity must add the required qualifier. If a foreign corporation’s name is unavailable for use, most states will allow it to adopt and qualify under a fictitious name. (the fictitious name chosen must be available for use in the foreign state.)

therefore, one of the first tasks in preparing to file for foreign qualification or a certificate of registration is to determine what name will be used in the new state. You must ensure the proposed name complies with that state’s laws and is available for use by the entity.

Restrictions on legal name selection . States impose restrictions on names primarily to prevent the public from being misled by entities that misrepresent themselves. thus, the restrictions fall into three broad categories:

Required words—designed to make sure that the public knows the type of entity. For example, most states require that a limited liability company’s name include the words “Limited Liability Company” or the letters “LLC.”

Prohibited words—designed to make sure that the public is not mislead about the type or purpose of the entity. For example, “Bank” is a commonly prohibited word (unless the business actually is a financial institution).

Duplicative names—designed to prevent the public from being confused about the identity of the entity. For example, “a-1 automotive, Inc.” is likely to be considered impermissibly close to “a1 automotive, Inc.”

the Ct Corporation Smart Chart, “Entity Naming Requirements,” provides high-level guidance regarding what words are required or prohibited in each of the 51 United States jurisdictions.

http://ct.wolterskluwer.com/sites/default/files/pdfs/CT_Corporation_Entity_Legal_Name_Smart_Chart_v2.pdf

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Once you are satisfied that the name includes the requisite required words and does not include any prohibited words, you must determine whether the name is available for use. Nearly every secretary of state’s office provides a way to search online to determine if a name is currently in use.

While this is a quick method of getting a general idea of whether a name is available, it does not guarantee availability. If it is crucial that the entity keep its name (and the name is permissible and available), a reservation of Name request should be filed. Most states permit this, although the reservation period varies. (the most common reservation period is 120 days.) taking this approach ensures that another business entity may not form or qualify under, change its name to, reserve, or register the name while the reservation is in effect.

Filing Requirements

all statutory entities must file the required paperwork and pay the prescribed fees to do business in a foreign state. While the required content does vary from state to

state, certain information is required by nearly every state.

For corporations, the required documentation usually includes:

Application for certificate of authority . Most states require the following information:

Corporation’s name

State and date of incorporation

Name Registration Offers Long-Term Name Protection for Corporations

If you expect to file foreign qualification documents within a few months, applying for a name reservation will provide sufficient protection. (and, in most states, any entity can file to reserve a name.) however, if you are looking ahead and realize that the business may be moving into other states in the future, you can obtain long-term protection by filing for “name registration.”

Unlike name reservation, this long-term protection usually is available only to corporations, although some states do make exceptions for limited liability companies. In general, registration is effective for one year and can be renewable indefinitely.

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period of duration

principal office address

registered agent’s name and address

Names and addresses of directors and officers

Some states also require a statement of the:

Corporation’s purposes

Number of authorized and issued shares

estimated value of all of the corporation’s property and its property located in the state

Proof of corporate existence . In addition to providing the information above, most states also require a certificate of good standing issued by the home state. Some states require a copy of the articles of incorporation, rather than a certificate of good standing. a few require both documents be filed.

For limited liability companies, the required documentation usually includes:

Application for certificate of registration . Most states require the following information:

LLC’s name

State and date of organization

principal office address


Names and addresses of the managers (if any)

Some states also require additional information, such as whether it is member- or manager-managed.

Proof of existence . In addition to providing the information above, most states also require proof the LLC was validly formed and is in good standing. this proof is generally satisfied with a certificate of good standing issued by the home state within a specified period (usually one to six months) before the application is filed.

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Determining which licenses are required—and working with the various agencies to obtain those licenses—is time-consuming and frustrating. however, failing to obtain the correct licenses and permits can have serious repercussions, ranging from having the business shut down to stiff fines.

Business License Considerations

thus far, we have focused on the filings required by the secretary of state’s office in the foreign state. however, we would be remiss if we failed to point out that moving

into a new state will require new business licenses and permits to operate in that state. there are three broad categories of business licenses—and it is necessary to examine the various licenses in each type to make sure that the entity is in full compliance. the types comprise:

General licenses . these include sales tax permits, workers’ compensation filings and payroll forms.

Regulatory permits . States impose regulations on particular types of businesses and activities. Most have extensive regulations for construction, transportation and hospitality businesses, although different states will impose different requirements.

Local licenses . In addition to licenses that are required at the state level, local jurisdictions, such as cities and counties, often impose licensing requirements on a wide variety of businesses.

Determining which licenses are required—and working with the various agencies to obtain those licenses—is time-consuming and frustrating. however, failing to obtain the correct licenses and permits can have serious repercussions, ranging from having the business shut down to stiff fines. For more information regarding these risks, see the Ct Corporation White paper “Fines, Risk, and Ruin: The Costs of Business License Mismanagement—and How to Avoid Them .”

Many companies opt to outsource this function to a company with expertise in the process—and resources dedicated to business license issues. If you plan to take the do-it-yourself approach, the Small Business administration (SBa) offers an online tool that can help you determine what licenses are required and what government agencies must be contacted.

Registered Agent Considerations

every corporation, LLC and Lp must appoint and continuously maintain a registered agent in its home state and in every state where it is qualified to do business as a

foreign entity. a registered agent can be an individual, such as a corporate officer or an attorney, or it can be a corporation in the business of providing registered agent services. (this type of corporation is often referred to as a “professional service company” or a “commercial registered agent.”)

One of the main duties of a registered agent is to accept service of summons and other initial litigation documents that can be served. For this reason, the registered agent’s office must be located within the foreign state. (this alone may make use of a commercial agent the best option when moving into a new state: the commercial agent already has a business location within the state.)

http://ct.wolterskluwer.com/sites/default/files/pdfs/Business_Licenses_Fines_Risk_Ruin-CT_Corporation.pdf


http://www.sba.gov/content/business-licenses-and-permits

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With the exception of geographical location, the considerations involved in selecting a registered agent in a foreign state are the same as those involved in making the selection for the home state. It is important that the agent be:

readily accessible and available during business hours for service of process

Familiar with the duties and recordkeeping required of a registered agent

Familiar and sensitive to the legal ramifications of the responsibilities of a registered agent

the Ct Corporation White papers, “The Risks of Using an Individual as Your Registered Agent” and “Your Registered Agent – Compliance Partner and First Line of Defense Against Risk,” will help you navigate the issues involved in selecting a registered agent.

http://ct.wolterskluwer.com/sites/default/files/pdfs/RegisteredAgentSelection_WhitePaper.pdf

http://ct.wolterskluwer.com/sites/default/files/pdfs/RegisteredAgentSelection_WhitePaper.pdf

http://ct.wolterskluwer.com/sites/default/files/pdfs/Your_Registered_Agent-CT_Corporation.pdf

http://ct.wolterskluwer.com/sites/default/files/pdfs/Your_Registered_Agent-CT_Corporation.pdf

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Formation of a New Entitythere are many similarities in compliance and filing responsibilities between forming a new entity and qualifying to do business in a new state. the primary distinctions focus on the type of entity and the state of incorporation.

Preliminary ConsiderationsChoice of Entity . the choice of entity will most likely be made by experts within the legal and tax departments, often with the assistance of outside counsel. For background on the options available and the ramifications, consult the Ct Corporation treatises, “The Corporation Handbook” and “The Limited Liability Company Handbook .”

State of Incorporation/Formation . Once the type of entity is determined, the next decision is to determine where the entity will be incorporated or formed. the selection of the “home” state is important because the entity is governed by the laws of the state of formation. although an entity often is formed in the state in which it is doing business, or in the state where it is headquartered, any state can be selected.

WARNING

Foreign Qualification May Be RequiredIf the entity does business in one or more states other than the home state, you must take action to qualify as a foreign entity in all those states. Generally, foreign qualification is done immediately after the paperwork is completed in the home state.

http://ct.wolterskluwer.com/sites/default/files/pdfs/CT Corporation_The Corporation_Handbook.pdf

http://ct.wolterskluwer.com/sites/default/files/pdfs/CT Corporation_The Limited Liability Company_Handbook.pdf

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a significant number of states allow the articles of incorporation to include any other provision, not inconsistent with law, for managing the business and regulating the affairs of the corporation, and for defining, limiting and regulating the powers of the corporation, its directors and its shareholders.

as with the choice of entity, the state of formation is generally determined by legal and tax experts. Delaware is frequently selected because its business entity laws provide management with a great deal of flexibility and because its highly efficient secretary of state’s office makes compliance easier.

Name Reservation . the considerations for name selection and the process of reserving the name are generally identical to those discussed in the foreign qualification section of this chapter.

Registered Agent . the considerations for selecting a registered agent are generally identical to those discussed above under foreign qualification.

Document and Filing Requirements

While considerations related to selection of formation state, name and registered agent are very similar for all entity types, the required documentation and filings

are quite different for corporations and other statutory entities, such as the limited liability company.

Corporate Filing Requirements Forming a corporation requires compliance with far more formalities and disclosure of far more information about the entity’s ownership and structures than other types of formations. While the exact information varies from state to state, and each state dictates its own forms and fees, nearly all states require filing articles of incorporation that contain the following information:

Corporate name

Number of classes of shares and a description of each class

Number of authorized shares within each class


Names and addresses of incorporators

Many states also require:

Statement of the corporation’s purposes

Duration of the corporation’s existence

the number of initial directors

the names and addresses of the initial directors

a significant number of states allow the articles of incorporation to include any other provision, not inconsistent with law, for managing the business and regulating the affairs of the corporation, and for defining, limiting and regulating the powers of the corporation, its directors and its shareholders.

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all of these decisions have important legal ramifications. For additional information, consult the Ct Corporation treatise, “The Corporation Handbook .”

Once the incorporation documents are filed, the first organizational meeting is held. at this meeting, the by-laws are formally adopted and initial directors selected (if these steps are not required for the state’s articles of incorporation). Once selected, the directors will hold the “first meeting of directors” and elect officers, issue stock and take any other actions necessary to complete the formal organization process. all of these actions must be recorded in the corporate minutes book.

LLC Filing RequirementsGenerally, an LLC has far less organizational requirements than does a corporation. however, as with the corporation, the exact information varies from state to state and each state has its own forms and fees. (Some states do not have forms, so the documents must be drafted following the statutory requirements.) the articles of organization are executed by the person or persons organizing the company.

Nearly all states require filing articles of organization that provide the following information:

the limited liability company’s name

the name and address of its registered agent for service of process

the names and addresses of its organizers

the LLC acts also state that optional provisions may be included, such as the duration of the LLC and whether it will be member-managed or manager-managed. however, most provisions regarding the company’s business and affairs will be set forth in the operating agreement, rather than the articles of organization. as with corporations, all of these decisions have important legal ramifications. For additional information, consult the Ct Corporation treatise, “The Limited Liability Company Handbook .”

an LLC does not have to hold a first organizational meeting or meet the documentation requirements mandated for corporations. however, it is advisable for the members to adopt a written operating agreement.

http://ct.wolterskluwer.com/sites/default/files/pdfs/CT Corporation_The Corporation_Handbook.pdf

http://ct.wolterskluwer.com/sites/default/files/pdfs/CT Corporation_The Limited Liability Company_Handbook.pdf

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Don’t Forget the Foreign States

If you are required to file an amendment or restatement in your home state, you are most likely going to have to file a similar document in every state in which you are qualified as an entity. Many states require evidence that the changes were properly documented in the home state.

Amendments to Existing Entitiesthus far, we have discussed foreign qualification outside your home state and formation of new entities. however, changes in an existing entity’s structure or a change of registered agent will require filing with all the states in which the entity does business.

Changes of this type are generally reported to the states by filing a “Certificate of amendment of articles of Incorporation.” In some instances, it may be necessary or advisable to file “restated articles of Incorporation.” restatements are frequently used when there have been a number of previous amendments and the entity wants to “clean up” the documents.

examples of changes in a corporation that often trigger filings include:

Corporate name

period of duration

Corporate purpose

Number of authorized shares

Change from par value to no par value shares (and vice versa)

Change in designations, preferences, limitations or other rights of shares

elimination or creation of classes or series of shares

Increasing or decreasing directors’ authority

Some of these changes will require shareholder, as well as director, approval. all require appropriate documentation within the corporate minutes book.

In keeping with the lower degree of formality required, the types of modifications to an LLC that necessitate filings with the state are fewer than those for corporations. In most states, an LLC is permitted to file articles of amendment to the articles of organization in order to add a new provision or modify or delete an existing provision. Some states

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require an amendment to the articles of organization if the LLC’s name is changed or if the period of its duration is changed. It is absolutely essential to consult the state LLC statutes to determine when a filing is necessary and how it is to be made.

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Chapter 4Business Contraction

CHAPTER 4:

If your duties include responsibility for your organization’s various state filings, you’re no doubt well aware of how complicated and time-consuming this task can be. and the filings required to properly execute changes in business structure due to business contraction are particularly tricky. Multiple entity types and jurisdictions are often part of the transactions involved.

Business Contraction and Ongoing

Entity Compliance Requirements

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Contraction of a business can be involuntary or voluntary. Involuntary contraction often occurs upon the failure to meet state filing requirements. It may be undone in certain circumstances through corrective filing measures, but best practices avoid the negative consequences and hassle of corrective filings. Voluntary contraction requires various filings depending on the type of change desired and the type of entities involved.

In your role as manager of entity compliance issues for your company, you need a complete understanding of various business contractions and the filings necessary to complete the changes. this chapter of the Entity Compliance Survival Guide covers the following topics:

Involuntary Contraction Issues

administrative Dissolution and revocation of authority

Voluntary Contraction Issues

Changes in entity Structure May require amending articles

Conversions allow Businesses to Change entity Form

Changing an entity’s home State through Domestication

Withdrawing or Canceling authority to Do Business in a Foreign State

properly effecting the Decision to Dissolve a Business

Mergers Come in Many Forms

Statutory procedure for Merging entities

Mergers require Numerous Filings at Various Stages

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Understanding and Complying with Statutory Requirements

the Ct Corporation White paper, “The Consequences of Failing to Comply With the Registered Agent Requirement,” and Smart Chart, “Entity Annual Report Due Dates,” provide insight to the importance of complying with these statutory requirements and the guidance on how to do so.

Involuntary Contraction IssuesNon-Compliance Can Lead to Administrative Dissolution and Revocation of Authority To Do Business

properly filing the variety of documents required for voluntary entity transactions such as mergers and dissolutions is enough to overwhelm even the most organized.

however, even more complex is avoiding the consequences of adverse involuntary changes to an entity’s structure due to filing mistakes or omissions. administrative dissolution and revocation of the authority to do business as a foreign entity can easily occur due to the variety of responsibilities that must be met to remain compliant.

States may administratively dissolve entities or revoke their authority to do business for a variety of reasons. the common reasons for forced dissolution and revocation of the authority to do business among most states involve failing to:

pay taxes and fees

File annual reports

Maintain registered agents for service of process

Notify the state of changes in the registered agent or office

If the secretary of state or the state filing office administratively dissolves an entity or revokes a foreign entity’s authority, the entity cannot do business in the state. Obviously, this result can be quite problematic!

Because administrative dissolutions and revocations of authority can easily occur due to inadvertent oversights, most states give entities notice of the problem and the opportunity to comply with the state’s statutes. If administrative dissolution or revocation of authority occurs, most states allow entities to apply for reinstatement.

While reinstatement is usually possible, it’s not always easy to obtain, and the rules vary from state-to-state. For example, some states require that the application for reinstatement be made within a certain time frame after the certificate of authority has been revoked. If you learn of the revocation past the expiration date, the entity would

http://ct.wolterskluwer.com/sites/default/files/pdfs/CT_Corporation_Registered_Agent_Compliance_WhitePaper.pdf





http://ct.wolterskluwer.com/sites/default/files/pdfs/CT_Corporation_Annual_Report_Due_Date_Chart.pdf


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need to re-qualify to do business in the state. and if an entity is continuing to do business because it lacks the knowledge that it has been administratively dissolved, serious problems may result—for example, personal liability on the part of those acting on behalf of the dissolved entity.

For more insight on how forced dissolution can occur, the resulting issues, and the problems reinstatement can and can’t cure, consult the Ct Corporation White paper, “Administrative Dissolution and Reinstatement of Business Entities .”

http://ct.wolterskluwer.com/sites/default/files/pdfs/CT_Corporation_Administrative_Dissolution_and_Reinstatement_White_Paper.pdf

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Voluntary Contraction IssuesChanges in Entity Structure May Require Amending Articles

entities are permitted to amend their articles of incorporation or organization to add, delete, modify, and correct provisions, subject to state law. In addition, some

state statutes require amendments to be made for various reasons, including changes in entity structure.

the entity must approve and adopt an amendment. the approval process is usually governed by a combination of an entity’s rules and procedures (for example, an LLC’s operating agreement) and state statutes.

articles of amendment must then be filed with the proper state officials, effecting the amendment upon filing or upon an alternative date set out in the amendment.

Conversions Allow Businesses to Change Entity Form

For varied reasons, a business may desire to convert to another entity form. Business entities may change the form of entity in which they operate through a statutory

transaction known as “conversion.” For example, a corporation may convert to a limited liability company (LLC), or an LLC may convert to a limited partnership (Lp). after the conversion, the new, converted entity has the same assets, property, debts, and liabilities that existed before the conversion.

the transaction generally requires the approval of a plan of conversion by a converting LLC’s members or the board of directors and shareholders of a converting corporation. the converting entity then needs to file articles of conversion to effect the transaction.

If the business is converting to a statutory entity such as a corporation, a formation document must be filed for the new entity.

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Ensure Proper Filings for Both the Converting and the New Entity

In order to be certain that the proper filings are completed for a conversion, the entity statutes for both the converting entity and the new entity form must be consulted. Checking both applicable statutes is critical to correctly completing the conversion.

For example, if a business entity is converting into an LLC, state statutes require the converting entity to follow the laws of the formation state, as well its own documents, including filing articles of organization for the new entity after filing articles of conversion.

the Ct Corporation White paper, “Ten Questions You Must Ask When Making State Business Entity Filings,” and the corresponding “Document Checklist for Business Entity Filings,” provide an organized approach to dealing with the complex process involved where filings are required for multiple entity types in one transaction.

Changing an Entity’s Home State Through Domestication

Some states allow an entity to change its state of incorporation or organization through a process known as “domestication.” this is a popular option for an

entity discontinuing business in its home state, while continuing to do business in a different state.

If permitted by state statutes, a foreign entity may become a domestic entity. Corporations must file articles of domestication as well as articles of incorporation to complete the transaction. LLCs wishing to effect this change must file articles of domestication and may also be required to file articles of organization. evidence of good standing may also be required.

Where permitted, state statutes may require adoption and approval of a plan of domestication by the board of directors and shareholders (managers and/or members for LLCs) before the change can be made.

http://ct.wolterskluwer.com/sites/default/files/pdfs/CT_Corporation_Business_Entity_Filings_White_Paper.pdf


http://ct.wolterskluwer.com/sites/default/files/pdfs/CT_Corporation_Business_Entity_Filings_Checklist.pdf

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An Entity’s Name Must Comply with State Naming Requirements

States impose various naming requirements on entities. If your entity changes its home state, the entity’s name must comply with the new home state’s naming requirements. these requirements may include both required and prohibited words. For example, an LLC may be required to include the letters “LLC” as part of its name. Conversely, prohibited words are those misrepresenting the entity type or business of the entity. also, your entity’s name may not be identical or too similar to an already-existing state entity’s name.

See Chapter 3 of the Entity Compliance Survival Guide for additional information and consult the Ct Corporation Smart Chart, “Entity Naming Requirements,” for guidance regarding what words are required or prohibited in each state. to determine if your entity’s name is already in use in your new home state, check with the secretary of state’s office.

Withdrawing or Canceling Authority to Do Business in a Foreign State

When an entity stops doing business in a foreign state, best practice dictates making it official by filing the proper documents. although withdrawing (for corporations)

or canceling authority (for LLCs) to do business in the foreign state may not be required, not doing so means that an entity with foreign qualification status continues to be subject to state franchise tax, annual report, and possibly other requirements.

Corporations must file a document generally known as a “certificate of withdrawal” or an “application to surrender authority” with the foreign state. an LLC must file a certificate of cancelation with the foreign state to cancel its authority to do business there. Some states require dissolved or merged LLCs to file a certificate of fact or a certified copy of the dissolution or merger documents filed to effect the transaction in the LLC’s formation state.

In addition, some states require entities seeking to withdraw or cancel their authority to do business to get clearances from the state’s revenue and/or labor departments proving that all taxes and fees have been paid and any required reports have been filed.



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Be Sure to Cancel Business Licenses and Permits

among the flurry of filings required for dissolution, it’s easy to neglect to file the necessary documents canceling licenses and permits held by the business. Keep in mind that this may require filings on state and local levels.

For detailed information regarding the proper handling of licensing obligations, consult the Ct Corporation White paper, “Fines, Risk, and Ruin: The Costs of Business License Mismanagement—and How to Avoid Them .”

Properly Effecting the Decision to Dissolve a Business

Making the decision to dissolve a business means that various forms must be filed to avoid incurring penalties, fees, and taxes, not to mention potential liability as

an existing business entity. the laws of the state where the business was formed dictate what forms must be filed for the dissolution to take effect. In addition, if an entity is qualified to transact business in other states, the appropriate paperwork to dissolve the business must also be filed in those states. While every state has its own laws governing dissolutions, there are general guidelines encompassed by most state statutes.

Corporations . a corporation must properly dissolve in accordance with state statutes in order to terminate its status as a legal entity. the process by which a corporation may voluntarily dissolve varies depending on whether shares were issued or if business was transacted. a resolution proposing to dissolve the corporation is adopted and approved by the shareholders (if necessary) to begin the dissolution process and put into motion the winding up of affairs.

the filings required for dissolution depend on the state. In some states, once the dissolution is given the green light, articles or certificates of dissolution can be filed. however, some states require the filing of a statement of intent to dissolve, and articles of dissolution are not filed until the corporation’s affairs wind up.

LLCs . Voluntarily dissolving an LLC involves a process similar to voluntarily dissolving a corporation. LLCs may dissolve based upon an event occurring as specified in the entity’s articles or operating agreement, or upon the consent of the percentage or number of members as prescribed in the agreement or by statute.

an LLC terminates its existence by filing articles or certificates of termination or dissolution with the state. also similar to the rules for corporate dissolutions, a state may require the filing of a statement of intent or notice to dissolve before the final dissolution document is filed.

Tax filings . Some states require proof that all taxes are paid up-to-date in conjunction with the filing of the articles or certificates of dissolution. Without proof, the dissolution will not be completed.

In addition, most corporations and certain other entities must file Form 966, Corporate Dissolution or Liquidation, with the Internal revenue Service within 30 days after the plan of dissolution is adopted. tax forms may be required on the state level as well.







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Mergers Come in Many FormsSimply defined, mergers are a statutory method by which two or more business entities are combined. the end-result of a merger is that only one of the business entities survives the process, and the others no longer exist as separate entities. the entities entering into a merger are referred to as “constituents.” the entity intact at the end of merger process is the “survivor” and, appropriately, the merged entity is the “transferor” or “merged” entity.

Why do entities merge? the reasons vary, but can include reorganizing operations in a same-entity merger or changing to a different business entity form in an “inter-species” or cross merger.

Most state statutes permit mergers across multi-entity lines including corporations; limited liability companies; and general, limited and limited liability partnerships.

In another merger-type transaction, the assets and liabilities of two or more entities are combined to form a totally new entity. this transaction is traditionally referred to as a “consolidation” and differentiated from a merger. Some state statutes currently contain specific references to consolidations, but even among the statutes that do so, there is not necessarily any sort of distinction made between consolidations and mergers.

For corporations, a special statutory merger-like transaction is available, known as a share exchange. In a share exchange, the corporations are not combined. true to its name, in this type of transaction, the corporations can exchange their shares with each other or one corporation can acquire the other participant’s shares.

STATUTORY PROCEDURE FOR MERGING ENTITIES While the business reasons behind mergers vary greatly, every merger has one thing in common—mergers are governed by state statutes and require the meticulous following of correct statutory procedure in order to be properly executed.

entities involved in a merger transaction (including consolidations and share exchanges) must have an approved plan of merger in place. the plan’s contents are dictated by statute and must, at a minimum, contain the terms and conditions of the proposed merger.

Corporations . For corporate entities, an approved plan is one approved first by the board of directors. the shareholders of the merged corporation must then also approve the plan, as must the shareholders of the survivor corporation where there is a significant effect on their ownership interests if the merger occurs. Unless an alternative is provided in the corporation’s articles of incorporation, the majority of state statutes require a majority vote to approve a merger.

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Most states allow the plan of merger or articles of merger to set a future effective date for the merger. this protocol is helpful for mergers that take place across state lines and must comply with different state statute requirements. It also allows ample time for pre-merger activities and filings.

Following the approval of the plan of merger by the board of directors and the shareholders, articles of merger are then filed with the official designated by the state. the required contents of the articles of merger vary by state, and are spelled out in each state’s corporation law.

the merger is effective when the articles are filed with the state (or once a certificate of merger is issued), provided the articles meet the statutory requirements and are properly filed, and as long as any fees associated with the filing are paid. Most states allow the plan of merger or articles of merger to set a future effective date for the merger. this protocol is helpful for mergers that take place across state lines and must comply with different state statute requirements. It also allows ample time for pre-merger activities and filings.

Special rules apply when a parent corporation owning at least 90 percent of its subsidiary’s shares desires to merge the subsidiary into the parent. Under state statutes, this type of merger—known as a short-form merger—requires only adoption and approval by the parent corporation’s board of directors.

LLCs and other entities . Similar to mergers involving corporations, LLCs and other entities are required to approve a plan of merger according to their governing documents and statutory law. For example, LLCs are required by state statutes to adopt and approve a plan of merger. entity members must approve the plan of merger by a number or percentage specified in the entity’s operating agreement, or as directed in the applicable state statute if the operating agreement does not speak to this issue.

the merger then takes effect under provisions similar to those applicable to corporations.

MERGERS REQUIRE NUMEROUS FILINGS AT VARIOUS STAGES the drafting, approval, and filing of the merger agreement are just one component of the filings necessary to properly complete a statutory merger. even for the disappearing entity, various filings may be required or advisable before, during, and after the merger so that the process goes smoothly and adverse consequences are avoided.

Let’s look at some of the potential concerns you should be aware of at each step of the process if your entity is the non-survivor in a merger:

Pre-merger . Check the status of your tax filings and payments. the merger may be postponed if your entity is delinquent on tax payments. States will want taxes paid up before your entity is merged into another.

Some states require a tax clearance—a formal statement that a business entity is current in its tax payments—before a merger can take effect. If your state requires a tax clearance, you will likely have to request one from the tax department. You should also note that tax clearance requests might take quite some time to receive, so the merger may be delayed if you don’t plan ahead and put in a request far enough in advance.

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Good Standing Is a Necessary Foundation

If a business entity is not in good standing, any merger filings will almost certainly be rejected by the state, bringing the process to a screeching halt. For this reason, you must ensure that all is in order not only in your business’s formation state, but in any state in which it is qualified to do business in as well. the Ct Corporation article, “Good Standing: It’s Essential for Every Business Doing Business,” explains what you need to know about your entity’s status and why.

Merger filings . Mergers are statutory in nature and are effected by filing the articles of merger in the state of formation. however, some states require or allow official forms to be filed in order for the merger to be effective. the proper state-required form must be used so that the merger is not rejected.

Post-merger . the necessary paperwork must be filed to withdraw a merged entity from states where it is qualified to do business but will no longer do so. You do not want a non-surviving entity to be subject to the foreign state’s various requirements or jurisdiction.

For a thorough discussion specific to the filings that need to be completed for mergers, and more importantly, how to organize and plan for the array of paperwork involved, review the Ct Corporation White paper, “Planning and Completing the Public Records Filings for a Merger,” as well as the Ct Corporation tool, “Merger Filings Checklist .”

For more general information regarding business entity filings, including but not limited to mergers, consult the Ct Corporation White paper, “Ten Questions You Must Ask When Making State Business Entity Filings,” and the corresponding “Document Checklist for Business Entity Filings .”

http://ct.wolterskluwer.com/sites/default/files/pdfs/Good_Standing_Article-CT_Corporation.pdf





http://ct.wolterskluwer.com/sites/default/files/pdfs/CT_Corporation_Merger_White_Paper.pdf

http://ct.wolterskluwer.com/sites/default/files/pdfs/CT_Corporation_Merger_White_Paper.pdf

http://ct.wolterskluwer.com/sites/default/files/pdfs/CT_Corporation_Merger_Filings_Checklist.pdf



http://ct.wolterskluwer.com/sites/default/files/pdfs/CT_Corporation_Business_Entity_Filings_Checklist.pdf

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ConclusionBusiness filing compliance is vital to the health of an organization at every stage

of development. to properly complete changes in entity structure, timely filings must be made. and fulfilling filing responsibilities avoids unwanted changes in business structure.

Knowledge of your filing obligations enables you to put a compliance system into place that best serves your needs and those of your business organization. Now that you are aware of the filings involved with voluntary and involuntary business contractions, consult the following Ct Corporation White papers to assist you in setting up a process that works to avoid compliance failure and its adverse consequences:

“Good Entity Management: A Primary Strategy for Reducing Corporate Business Compliance Risk”

“Ten Steps to More Efficient Business Compliance for Small and Medium-sized Businesses”

“Entity Management 101”

http://ct.wolterskluwer.com/sites/default/files/pdfs/Good_Entity_Management-CT_Corporation.pdf

http://ct.wolterskluwer.com/sites/default/files/pdfs/Good_Entity_Management-CT_Corporation.pdf

http://ct.wolterskluwer.com/sites/default/files/pdfs/Ten_Steps_to_Business_Compliance-CT_Corporation.pdf

http://ct.wolterskluwer.com/sites/default/files/pdfs/Ten_Steps_to_Business_Compliance-CT_Corporation.pdf

http://ct.wolterskluwer.com/sites/default/files/pdfs/whitepapers/CS_EntityManagmnt101_CTCorp.pdf

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Chapter 5annual reporting

CHAPTER 5:

entity compliance issues are numerous and arise with the formation, expansion, and contraction of a business. perhaps the most onerous compliance responsibilities are the ongoing tasks necessary to maintain an entity’s good standing. an entity is required to comply with various filing and reporting requirements to maintain good standing in the state of formation, as well as the foreign states in which it is doing business.

almost all entities must file annual information reports in their home state and the foreign states in which they wish to remain qualified to do business. the primary focus of this chapter of the Entity Compliance Survival Guide covers the various aspects of annual information reporting, mainly how to ensure the proper and timely filing of your organization’s reports.

Complying with Information Reports

and Other Annual Filings

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In addition, business licenses and permits to operate in a state are required when a new business is started or expands. and if a business is merged or is dissolved, it may be necessary to terminate or amend existing licenses and permits. Managing licenses and permits for an existing entity may require filings for renewals, administrative updates and the like. the next section of this chapter contains an overview of business license considerations and suggests resources if this area is part of your compliance responsibilities.

Finally, various federal and state tax reports are also required of entities. While your compliance responsibilities may not include tax-related filings, the high-level discussion at the end of this chapter may be helpful for a big-picture view of the variety and complexity of the ongoing filings required of an entity.

this last chapter of the Entity Compliance Survival Guide includes information on:

annual Information reports

annual reports Keep States Informed about entities

reports Must Be Filed with State Officials

Fees accompanying annual report Filings

timing of annual report Filings: Frequency and Due Dates

Consequences of Untimely Filing or Failure to File annual report Can Be Grave

administrative Dissolution and revocation of authority

even If possible, reinstatement May Not Be a Cure-all

Continuing to Do Business Unaware of Good Standing Issue

Business Licenses and permits

tax reporting and payment requirements

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Change in Entity Structure May Require Annual Report Filing

If an entity expands through an acquisition or undergoes a merger, conversion, domestication or some other form of entity structure change, its annual reporting responsibilities are almost certain to undergo a change as well. Be sure to check annual report requirements any time an entity’s structure changes.

Annual Information Reportsthe filing of annual information reports may be required by any entity registered with a state. therefore, the types of entities required to file annual reports with states they are registered to do business in—including foreign states—may constitute corporations, limited liability companies (LLCs), nonprofits, limited partnerships (Lps), and limited liability partnerships (LLps).

every state requires information reports for at least one entity type. Corporate filings are required in almost every state. a few states don’t require annual reports from LLCs, and several do not impose an information report requirement on Lps and/or LLps.

Annual Reports Keep States Informed About Entities

although the exact form of an annual report varies by state, generally it is a compilation of information about an entity. What kind of information? the content

of the report is not identical from state-to-state; however, the following information typically must be included in the filing:

the entity’s name

the entity’s principal office address

the state of formation or incorporation

the names and business addresses of individuals managing the company or directors and officers

the entity’s business activity in the state

For corporations, the number of authorized and issued shares

the name and address of the registered agent for service of process

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a state may provide a fill-in form for information reporting purposes or a document with the necessary information must be filed.

Why are states so concerned with the information provided in an annual report? Basically, states want up-to-date contact and, in some states, financial information for the entities conducting business within their borders. having this information makes it possible for the state to communicate with and oversee entities.

REPORTS MUST BE FILED WITH STATE OFFICIALSIf an annual report is required, it must be filed with the proper state official or office by the state’s designated due date. Generally, the report is filed with the secretary of state or the business filing office or department. In some states, the annual report is filed with the revenue department.

States are expanding electronic filing options. however, this option is not available in every state. and in some states—for example, New Jersey—electronic filing is mandatory.

FEES ACCOMPANYING ANNUAL REPORT FILINGS the correct filing fee must accompany an annual report filing or the state will almost certainly not accept the report for filing. Filing fees vary widely by state, and can vary among entities within a state as well. For example, some states have lower filing fees in the $25 to $50 range, while others can require filing fees of $300 or more for certain entities.

TIMING OF ANNUAL REPORT FILINGS: FREQUENCY AND DUE DATEStrue to their name, required information reports are almost always filed on an annual basis. Some states dictate biennial filing requirements or options. and in a few states, whether filings are due annually or biennially depends on the type of entity.

although the vast majority of states require annual filings, the due dates of those filings are scattered all over the calendar. For example, here are a handful of differing due dates for corporate reports due annually:

arkansas: May 1

Colorado: Last day of the second calendar month following the company’s anniversary month of organization or qualification

Connecticut: Last business day of anniversary month of incorporation or qualification

Florida: Between January 1 and May 1

Louisiana: anniversary date of incorporation or qualification

Minnesota: December 31

North Dakota: Domestic – august 1; Foreign – May 15

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rhode Island: March 1

Wyoming: On or before the first business day of the anniversary month of incorporation or qualification

also, due dates within the same state for different types of entities can, and often do, vary. For example, in North Dakota, annual reports have the following deadlines:

august 1 for domestic corporations

May 15 for foreign corporations

Before November 16 for LLCs

april 1 for Lps and LLps

Consult the Ct Corporation Smart Chart, “Entity Annual Report Due Dates,” for the following compliance information for five business entity types (corporations, LLCs, LLps, Lps, and nonprofits):

Whether your entity is required to file an annual information report in your home state and/or in any foreign states in which the entity is qualified to transact business

how often the report must be filed

report due dates

Is Your Entity Doing Business in a Foreign State?

Certain activities may constitute “doing business” in a state, which may, in turn, subject an entity to annual information reporting requirements. For information regarding these activities and to make certain you are in compliance with foreign state filing requirements, see Chapter 3 of this Entity Compliance Survival Guide and the Ct Corporation White paper, “What Constitutes ‘Doing Business’ for a Foreign Corporation .”




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Avoid the Problems Caused By Not Being in Filing Compliance

It’s evident that best practice requires the filing of timely annual reports. the Ct Corporation article, “Good Standing: It’s Essential for Every Business Doing Business,” explains why good standing is so important for an entity. “Navigating Compliance Waters: Creating Best Practices,” another useful Ct Corporation article, can help you ensure you don’t run afoul of filing rules that can jeopardize your entity’s status.

Consequences of Untimely Filing or Failure to File Annual Report Can Be Grave

Domestic and foreign entities must comply with state laws for filing annual reports if they want to retain their good standing in a state. and while many states give

entities the opportunity to remedy the error through corrective filing measures, the negative consequences often cannot be undone.

ADMINISTRATIVE DISSOLUTION AND REVOCATION OF AUTHORITY States may administratively dissolve entities or revoke their authority to do business in a foreign state for a variety of reasons, with failure to properly file a timely annual report being one of the most common. and while some states may give entities a fighting chance to stay compliant by allowing a reasonable time period for correction, others revoke an entity’s authority to do business in the state the day after the report’s due date!

EVEN IF POSSIBLE, REINSTATEMENT MAY NOT BE A CURE-ALL While most states allow entities to apply for reinstatement if administrative dissolution or revocation of authority occurs, the rules in some states make it anything but an automatic fix. a state may have a time limit within which an application for reinstatement must be made. Once that time limit expires, the entity would be required to re-qualify to conduct business in the state.

CONTINUING TO DO BUSINESS UNAWARE OF GOOD STANDING ISSUE a worst-case scenario is the situation where an entity is unaware that it has been administratively dissolved or, even more common because foreign states are involved, that its authority to do business has been revoked. Why is this a worst-case scenario? While various serious problems may result, the fact that some states impose personal liability on the part of those acting on behalf of an entity not in good standing can result in disaster.





http://ct.wolterskluwer.com/sites/default/files/pdfs/CT_Corporation_Corporate_Compliance_Creating_Best_Practice.pdf




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Business Licenses and PermitsWhen a business is started or undergoes expansion, business licenses and permits to operate in a state are typically required. Business contraction or termination may require the termination of licenses or permits. however, part of your duties as a compliance manager may also require the updating and renewal of state and local licenses and permits for an entity. Licenses and permits include sales tax permits and regulatory industry-specific licenses, as well as city and county permits.

Fines or even business closings can be the end-result if business license compliance issues are neglected. the Ct Corporation White paper, “Fines, Risk, and Ruin: The Costs of Business License Mismanagement—and How to Avoid Them,” provides insight into the compliance risks involved and how to effectively handle them.



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Tax Reporting and Payment RequirementsUnless you are specifically charged with handling the various tax reporting requirements imposed on your entity, taxes are probably not in your deck of compliance responsibilities. however, because failure to comply with tax reporting responsibilities can result not only in fines and penalties but also the loss of an entity’s good standing, the following is a high-level overview of taxation that necessitates federal and/or state filings:

Federal corporate income tax . C corporations and LLCs electing to be taxed as corporations are subject to an income tax on an entity level. profit distributed to shareholders or members is taxed as personal income (known as corporate “double taxation”).

State income tax . entities are subject to rules similar to those of federal income taxes. allocation and apportionment of income based on business activity within and outside the state determines how a corporation is taxed on the state level.

Franchise tax . this is a state tax on the privilege of having the right to do business as a certain type of entity, such as a corporation or an LLC. the basis of the tax varies by state. the tax can be a flat fee or it can be based on an entity’s income or calculated by some other method.

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Withholding and FICA . Corporations and LLCs with employees may be required to withhold federal income taxes, Social Security and Medicare (FICa) taxes, and state income taxes from employee wages. payroll taxes also require employers to pay a percentage of employees’ wages.

Property tax . property owned by entities is subject to taxation. the term “property” can include not only real property, but tangible and intangible property as well.

Sales and use tax . these state taxes are generally imposed on various retail sales and transactions (varying by state) and paid by consumers. In addition, nearly all states tax personal property leases. Many states also tax certain services. the retailer is responsible for collecting these taxes and paying the amounts due to the state.

CT Corporation—More People Working Together for You!

this Entity Compliance Survival Guide just scratches the surface of all of the services and information available to you as a Ct Corporation customer. please visit CtCorporation.com for a full listing of the offerings and additional information.

In addition, our customer service representatives and on-demand research specialists are waiting for your call. Contact them at:

(855) 316-8944 • 8 a.m.–6 p.m. et

WARNING

Failure to Pay Franchise Tax Can Result in Loss of Good Standinga state’s franchise tax is imposed on the privilege granted by the state to operate as an entity. It reasonably follows that an entity’s failure to pay a state’s franchise tax in a timely manner may cost the entity the right to do business in the state. an entity may also be administratively dissolved for failing to pay franchise tax owed. the Ct Corporation article,

“Good Standing: It’s Essential for Every Business Doing Business,” offers solutions to avoiding the involuntary status changes due to compliance issues that can damage an entity’s ability to do business.
