When you decide to incorporate or form an LLC, you are committing to follow certain compliance requirements that are set out by California law. Failing to adhere to these legal demands can completely undermine your business structure. Therefore, it is important to know and understand these obligations so you can fulfill these duties.
Types of Compliance Requirements
Generally speaking, there are two types of compliance requirements in California. These include both internal and external obligations. Internal requirements are obligations that you must perform in-house; you do not report this information to any external party, but you must still fulfill these requirements to maintain your business entity status. External obligations are reported to an outside entity, usually the Secretary of State or taxing authority.
Compliance requirements will vary depending on your business entity type. For example, sole proprietorships have no formal requirements while corporations have the most compliance obligations. Corporations and LLCs have specific compliance requirements that are outlined below.
Internal Compliance Requirements
The purpose of internal requirements is to ensure that the corporation or LLC is acting ethically and in a fiscally responsible manner. These obligations encourage good record-keeping and accountability as well.
Corporations, including both C corporations and S corporations, have the strictest internal requirements. For example, you must hold annual shareholders’ and directors’ meetings, and take minutes at each of these meetings. You must also create and adopt bylaws for the corporation, keep records of stock that is issued to all shareholders, and record all stock transfers. Otherwise, you may become personally liable for the business’s debts.
In an LLC, you should create and maintain an operating agreement and keep records of any adjustments that may be made to this agreement. While minutes and meetings are strongly encouraged, there is technically no legal obligation under California law to engage in these practices.
One of the many reasons that business owners choose to become an LLC instead of a corporation is because of the lack of internal compliance requirements.
External Compliance Requirements
California law requires that you file a report either once a year or once every other year, depending on your specific type of entity. You should also update these filings any time information included within them changes. You are also expected to pay a fee associated with this filing.
You will likely be required to file certain tax information as well. These obligations will vary depending on your type of business and the industry in which your business operates. Failing to pay the proper taxes, licenses, or permits can result in monetary penalties in many situations.
Keeping up with your annual obligations can be complicated, so it is always a good idea to enlist an attorney to help with this process. That way, you can ensure that your requirements are being met and the forms are completed correctly to avoid any potential issues. Integrated General Counsel P.C. can help you with this process. Call 925-399-1529 for more information.
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