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As the end of the year approaches, it is important for law firms to remain on top of the compliance obligations affecting their clients’ businesses.
In a two-part interview with Expert Insights, Marcia Suelzer, Senior Manager in Strategy and Innovation for Law Firms at CT, discusses the various state requirements that corporations and LLCs must meet in order to retain their good standing. The topics covered in this podcast include the problems associated with not being in good standing (such as loss of asset protection) and some of the common ways in which a business can lose its good standing status.
Greg Corombos: Hi, I'm Greg Corombos, our guest this week on Expert Insights is Marcia Suelzer. She is Senior Manager in Strategy and Innovation for Law Firms at CT Corporation. And today we'll be looking at the compliance issues that law firm leaders must be on top of here in the final weeks of the year. And Marcia, it's terrific to have you with us again, thanks for your time.
Marcia Suelzer: Thank you. It's great to be here. And I'm looking forward to talking about this subject. You know, at the end of the year, law firms get incredibly busy with wrapping up so many projects that seem to need to close right at the year-end deadline. And along with all those projects work they're doing, there's a whole other side of their business that they really need to be mindful of. And that's really how their clients’ businesses are complying with the various state requirements that they have to meet in order to stay in business and in order to thrive. So for law firms, year-end can be a very, very busy time. And that's why it makes a lot of sense to talk through what they need to do, and a good way to think about how to get it done.
Greg Corombos: Well, there are many different aspects, as you just mentioned, to making sure that you are in compliance and that your clients are in compliance. Let's start with a topic we talked about quite a bit on this podcast, and that's entity. What's the checklist to make sure that your entity or your clients' entity is in good shape?
Marcia Suelzer: Absolutely, you know, the bedrock of any business is really its entity structure. And when you get out of the realm of sole proprietors, the most common entities we see really are the LLC and the corporation. Although there are a lot of differences between the two, how they operate, and what they provide to the owners, that when performing a year-end health check, the same considerations really apply to both types.
So we're just going to talk about entities generally, knowing that there might be nuances if you're a corporation or LLC. The first thing I like to look at is really the organizational structure that they're operating under. What if there haven't been any changes this year? Are you done then?
Actually, you're really not because the next question you need to ask yourself is, has the entity stayed in good standing with the state—not only the state in which they are formed but all the states where they're registered to do business.
Good standing is a fancy way of saying that the entities comply with all of the Secretary of State requirements, or the Department of Corporation requirements, to stay compliant so that they can continue to do business in that state.
The good standing is usually only lost for a couple of reasons. One is that the entities fail to pay its annual report—or fail to file its annual reports—and pay necessary franchise taxes. And the other is that they don't have a Registered Agent that's qualified to serve in the state.
The problem with losing good standing is that first of all, the owners can become personally liable for the business debts for a lot of small businesses. That asset protection aspect is one of the major reasons why they're operating as a corporation or LLC, and falling out a good standing can cost them that. Particularly if they remain out of good standing long enough that their entities are actually administratively dissolved by the state.
There are other really good reasons why you want to stay in good standing. Access to the court system to bring a lawsuit is one. But also businesses who aren't in good standing can't expand into other state jurisdictions. That's almost always a requirement to do business in another state, to prove that you're in good standing in the state where you were formed.
And another reason, especially for businesses who are thriving, is that most financing, whether it's equity financing, or whether it's debt financing through a bank, it's going to require proof that you are what you say you are, and that you're in good standing.
So losing that can really slow up any financing arrangements, which can have a tremendous impact on the business this ability to grow, as well as any attempts at mergers or acquisitions, which can affect both expansion plans and wrapping up business plans.
Sustaining good standing is is very important. If you request a Certificate of Good Standing from the state, and you find out the business isn't in good standing, then it's necessary for the law firm to either file the annual reports or appoint a Registered Agent, whichever is the cause of the failure for good standing, or make sure that their client does this.
Lots of times law firms will just take care of it because then they know that it's done, and they know that they can proceed with whatever else they need to do.
At the same time, the lawyer should take a look at all of the business licenses that the entity might need to run the business. You know, license renewals come up, not necessarily all at the same time. So at the end of the year, it's a good idea to review when they're due and to take appropriate actions.
Lots of times, people get caught off off guard or on the wrong foot, because they don't realize how long it can take to renew a license. One would think in this day of internet automation that you just click a button and poof, you got a new license. And in some states and locales, that's correct. But in others, because these can be done at a very local level, it might be four to six to eight weeks. And during the time your license expires, they actually can shut down your business.
I've seen examples of businesses that I’ve walked by, particularly businesses in liquor establishments—wine, wine bars, and things—where they actually have to close because they didn't start the renewal process and time.
So that's a real hit a business doesn't need to take. And the lawyer, by taking a look at the business license structure, can help prevent that from happening.
Lots of times service providers like CT can help you out with both auditing to make sure all the licenses are as they need to be and doing actually prep and file to get those licenses issues taken care of.
So Greg, that's what happens if everything's operating as normal. If there's been any kind of change, then in addition to those, you need to make sure that those changes got adequately reflected at the Secretary of State.
So you may have wanted to change your corporate name. You need to file some type of amendment. It varies from state-to-state to do that. You might want to restate your Articles of Incorporation to reflect changes. So that's another thing that needs to be considered.
Obviously, if you're doing a merger, then there will have to have been merger filings, and also withdrawal filings for the non-surviving corporation. And again, it's a lot of paperwork. And in some ways, it's very, very simple paperwork. But in other ways, the importance of it makes it very, very complex paperwork, particularly the merger areas.
Timing is everything. If you withdraw too soon, you can expose the owners to personal liability if the new corporation hasn't yet qualified to take over any of those debts. So it's important to work with a trusted provider to make sure that all the papers are filed in the correct sequence.
If the business is growing, which is a great problem for any law firm to have to deal with, growing businesses, then they need to look and see...does the business need to qualify in any other states? And qualifying is just a way of having a foreign corporation have the right to the same footing with the state in terms of access to the states’ courts, and protection under state laws as a domestic corporation.
So if you doing a lot of qualifications, again, this is where it's good to have a trusted service provider to work with. Because a lot of the filings aren't as complex as drafting a complex legal document, they can be very time-consuming. And there are a lot of very, very precise, almost nitpicky rules that vary from state to state.
Greg Corombos: Marcia, this is fantastic information. In fact, we have so much more we wanted to get to, we're going to make it a separate podcast. Thank you so much for your time today, and we'll get to the rest of it very, very soon. Marcia Suelzer, Senior Manager in Strategy and Innovation for Law Firms at CT Corporation. I'm Greg Corombos reporting for Expert Insights.
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