Cost of Corporate Compliance Grows in Recession: File Statements of Information to Avoid Penalties

Since the recession began, the cost of corporate compliance has increased, while state governments have limited services in this area.  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.

But we’ve recently seen increases in the fees for annual reports like never before.  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).

You might think that increased fees would bring along a renaissance of excellent service, but we’ve also seen an enormous decline in state services. 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.

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.  Failing to keep after these small filings can result in the “suspension” of the company’s right to transact business.  To learn how it works, see Why is Completing Secretary of State Filings Important? 

“Fixing” a corporation that gets “suspended” is an enormous pain.  A suspended corporation is not permitted to transact business or defend a lawsuit.  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.