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Statements of Information: Consequences of Not Filing Them Correctly

March 30, 2012 | Comments: 0 | Views: 180

All states require corporations and LLCs to regularly update key information (e.g., principal place of business, names and addresses of officers and directors, etc.) with the Secretary of State. In California, for example, each year every corporation must file a Statement of Information, along with a $25 fee.

These filings might seem like nothing more than a small nuisance given the nominal fee, but the consequences of not keeping up with these requirements can be substantial. States impose a variety of penalties on tardy filers and ultimately take steps that prevent the corporation from conducting its business.

Since the recession began, the cost of corporate compliance has increased, while state governments have sliced and diced budgets related to services in this area. For example, many states have increased the penalty for tardy filings (e.g, $250 in California; and $400 in Florida). In other states, new reports (and fees) have crept up where not previously required (e.g., $500 for limited partnerships in Massachusetts; a new LLC report in Mississippi; a new $60 annual fee for limited partnerships in Washington).

The increased fees and penalties have not resulted in more customer-service focused secretaries of states. In fact, hiring freezes in California have led to only 8 people processing more than 1 million annual Statements of Information in Sacramento, resulting in an incredible 3-4 months in California to receive conformed copies of the filings. Navigating complex phone trees and enormous waiting times are the norm. In addition, many states are no longer sending alerts and notices for upcoming annual reports. Other states and have replaced formal notices with email alerts and postcard reminders. Colorado, Delaware, Florida and New Jersey now accept only electronic filing of annual reports. The burden is now on the small business to proactively track filings and deadlines.

Failing to keep after these small filings can result in the "suspension" of the company's right to transact business. Here's how it works in California: the Secretary of State will mail a Notice of Delinquency to the corporation. If the Statement of Information is then not filed within 60 days, the Secretary of State certifies the name of the corporation to the Franchise Tax Board. The Franchise Tax Board then assesses a $250 penalty against the corporation. The corporation can then be suspended if it either fails to file the Statement of Information or pay the penalty.

"Fixing" a corporation that gets "suspended" is an enormous pain. A suspended corporation is not permitted to transact business or defend a lawsuit. Even worse, a contract made by a suspended corporation is voidable by the other party to the contract. It is even a criminal offense punishable by fines and albeit very unlikely, a prison term. While all of this is "fixable", a paperwork headache, penalties, and fees are guaranteed.

Recently, a large real estate client explained that corporate compliance has become such a pain that he takes a "pay the fine" approach (i.e., he just pays fines and penalties whenever he is trying to get a deal done). But taking the "pay the fine" approach is unwise and shortsighted. Even if a corporation is not suspended, failing to file a Statement of Information will result in the corporation no longer being considered "in good standing". As a practical matter, deals won't close. In the middle of a deal, it's a last minute fire drill to restore "active" and "good standing" status and the timing may cause the deal to fall apart. In the long-term, the least amount of work is to monitor all required filings, proactively file all annual reports, and consistently ensure that all entities are in "good standing" in all jurisdictions where they are qualified to do business.

Visit our website to read more about the consequences of not keeping after the Statements of Information for your LLC or Corporation. is a team of talented lawyers who dedicate their services to helping small businesses and entrepreneurs form and maintain LLCs and Corporations and consistently strive to do their very best for their clients.

Source: EzineArticles
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