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Due to COVID-19, many businesses have had to reduce or entirely suspend operations. But there are other disruptive events — natural disasters, such as hurricanes, tornadoes and wildfires, and other unforeseen events, such as the departure of partners or key personnel — that can force a business to temporarily close its doors. What can owners do to prepare in the event of the next crisis?
Sandra Feldman, Publications Attorney at CT Corporation, explains why forming an LLC or corporation can protect and assist existing and future businesses in times of emergency. She also goes into key compliance obligations that would need to be fulfilled throughout the lifecycle of an LLC or corporation.
Greg Corombos: Hi, I'm Greg Corombos. So our guest this week on Expert Insights is Sandra Feldman, Publications Attorney at CT Corporation. Today's topic is a very timely one, we're going to be looking at what a small business can do from a business entity compliance perspective, to prepare for and hopefully survive an emergency event like COVID-19 or some other emergency that forces the business to close for a period of time. And Sandra, thanks very much for being with us again.
Sandra Feldman: Well, thank you, Greg. Today, I wanted to talk about some of the things small business owners can do before a crisis event hits that forces them to close up the business for a while and some of the things they need to remember to do while they're temporarily closed. Obviously, we're talking about that today because of COVID-19. But I'm not focusing solely on COVID-19. For one thing, it's too late to prepare for it. It's here. So I'm also including other challenging events, we're likely to see whether it be a hurricane, a tornado, a wildfire, that like a pandemic affects a lot of businesses, or something bad that happens to just one particular business. Right now, there's a lot of good advice out there for small business owners, from experts in many different fields like legal advice, financial advice, healthcare advice. So I'm going to stick to my area of expertise, which is statutory business entities, and in particular LLCs and corporations. And to be even more specific, it's in the compliance obligations they have throughout their lifecycle from formation to dissolution, including the obligations that continue even if the business itself is temporarily closed.
GC: Well, Sandra, you mentioned there's a lot of expert advice out there. You are one of our valued experts. So what advice would you give a small business owner that would help them in case their business is closed because of COVID-19 or, as you mentioned, it could be a myriad of other things?
SF: Well, if I was talking to someone who was planning on starting a new business, and hopefully when COVID-19 is over, we'll be seeing a lot of new businesses starting, I’d probably suggest that they seriously consider forming an LLC or a corporation to own the business, rather than owning it themselves. Or at least talk it over with their lawyers. Now, it will be more expensive, but there are advantages, and particularly in times of trouble. Let's say the business has to close for a while because of one of these crisis events, and it can't complete a contract. If you own the business yourself, it's your contract, and you can be held liable. But if say an LLC owns the business, the LLC is responsible for its own contracts. The owners of the LLC are not.
GC: What about small business owners who have already decided to form either an LLC or a corporation? What advice do you have for them?
SF: Well, one thing I would suggest is that they appoint a professional Registered Agent for their LLC or corporation, rather than an individual like the sole owner or one of the owners if there's more than one. Again, it will be an added expense. But having a professional Registered Agent comes in handy if one of those bad things happens, and the business has to temporarily close up. As a reminder, every LLC and corporation has a statutory obligation to maintain a Registered Agent as long as that LLC or corporation exists. And the main function of a Registered Agent is to receive service of process, which is a legal document notifying the company it's being sued and telling it what to do to respond and avoid having a default judgment issued against it. And the Registered Agent’s name and address are on file with the state and are listed in the state's public records. But if process can't be served on the statutory agent at the statutory address, then what can happen is that process may end up being served in a manner less likely to provide actual notice of the lawsuit, which can put the company at risk of a default judgment. And if the crisis event itself doesn't wipe out the business, a large default judgment can. But a good professional Registered Agent will most likely be around even if the LLC’s business has had to close.
For example, my employer, CT Corporation, has continued to fulfill its role as a Registered Agent throughout the COVID-19 crisis.
GC: When we talk about compliance, Sandra, often the question that seems to keep coming up is, what else do I need to know? Since you just mentioned maintaining a Registered Agent is one compliance obligation that continues for LLC or corporations. Even if the business is not operating, are there others to be aware of? And if so, what are they?
SF: Yes, there are. The owners of the LLC or corporation have to remember that even if the business is closed temporarily, that LLC or corporation is still obligated to file its annual report. Even in the midst of the COVID-19 crisis, most states are requiring the annual report to be filed. And if the company doesn't file its annual report, it can lose its good standing status, and that can jeopardize his chances of getting a business loan. Also, if it doesn't file the annual report when it's due, there are monetary penalties, which is something the company will want to avoid.
GC: What other filings need to be made besides annual reports?
SF: There can be others depending upon the circumstances. For example, sometimes a natural or unnatural disaster can force a business to relocate. So I would remind small business owners that if their place of business moves, they need to update the state and local records where the old address is listed. And that could include, for example, updating business licenses, DBA, registrations, and tax registrations. And very important, if you didn't appoint a professional Registered Agent, and the business address is the Registered Agent’s address, you must file an address change form with the state. And if not, there are serious penalties that can include administrative dissolution, and having the wrong address for the Registered Agent on file increases the risk of a default judgment. And if the business relocates to another state, there's a whole lot more involved. Among other things, the LLC or corporation will have to qualify to do business in the state, and it will be subject to fines if it does business without first qualifying.
GC: Sandra, you've already given us a wealth of good advice on this subject. What else do you have? What additional advice do you think would be helpful to small business owners?
SF: Well, one final point I would make, and that's if the business can't be saved, and the owners decide to close up for good, if the business is owned by an LLC or a corporation, the people who own that LLC or corporation have to remember that the business ceasing to exist does not mean that LLC or corporation ceases to exist. It exists until those owners formally terminate their existence by following statutory procedure. And as long as an LLC or corporation exists, it still has to comply with state law and file its annual reports, pay taxes and so on. And if it doesn't comply, it will rack up fines that the state can seek to collect. And perhaps more importantly, that LLC or corporation will remain on the public records and be listed as delinquent, inactive, or administratively dissolved. And you know, who has access to those public records? Business identity thieves. And what they do is pay the fines, reinstate the company, and start using it to take out loans and buy expensive items and leave your LLC or corporation holding the bag. And we've been told by more than one filing office that this is a growing problem. So what business owners need to do is formally dissolve that LLC or corporation. Or if they can find a buyer, merge it out of existence. But never abandon an LLC or a corporation.
GC: Sandra, again, excellent advice and a good roadmap, I think, for different businesses and business owners through an uncertain time. I know that word is overused a lot these days. But any final thoughts you want to share?
SF: Well, because I hate to finish on such a negative note talking about businesses that can't survive. Because I do believe that once the COVID-19 crisis is over, we'll see small businesses reopening, new businesses starting and being successful. Because let's face it, we all want to see people back at work and small businesses doing well, and as consumers, we’ll support them like never before. And I know I can't wait to eat in every restaurant in my neighborhood as soon as they reopen. In fact, I may never cook again. So I think we just need to hang in there. And we'll all get through this eventually.
GC: Sandra, very good insights, both in terms of compliance and the road ahead. Thanks very much for being with us today.
SF: Thank you, Greg
GC: Sandra Feldman is Publications Attorney at CT Corporation. I'm Greg Corombos.
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