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What is Business Compliance?
Business compliance, or regulatory compliance, is adhering to state and federal laws and industry regulations that govern your company. It involves various operational processes, from financial reporting and employee relations to data privacy and consumer protection. Compliance requirements vary depending on an organization's industry, structure, and state of formation, but these obligations are generally categorized as internal and external requirements.Internal Requirements
Internal requirements are the policies and procedures that govern a business's internal operations. It includes state mandates specific to your chosen business structure and internal bylaws established by your directors or members. For example, corporations must hold initial and annual director and shareholder meetings and maintain accurate minutes. They must also record all membership interest transfers and adopt and maintain bylaws. The penalties for non-compliance with internal requirements vary depending on the rule violated. If you violated a state mandate for corporate compliance, you could face penalties and administrative sanctions like dissolution. Meanwhile, a breach in internal bylaws could lead to civil lawsuits filed by other shareholders or directors.External Requirements
External requirements are policies and procedures imposed by state, federal, and industry regulatory agencies. These rules cover different areas of law, from taxation and employment to health and safety. Some common examples of external requirements are as follows:- Annual Reports & Registered Agents: Most states require corporations and limited liability companies (LLCs) to file annual reports, which allows their governing bodies to keep track of their business activities. These entities must also designate registered agents who will be their point of contact with the state.
- Franchise Tax Fees: Some states impose franchise tax fees on foreign businesses operating within their jurisdiction.
- Employer Identification Number (EIN): Federal law requires businesses to obtain an EIN, a nine-digit code the IRS uses to identify businesses for tax purposes.
- Business Licenses/Permits: Businesses in regulated industries like healthcare, construction, and food services need specific licenses and permits to operate legally.
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Why is Compliance Important?
In business, there is a concept called "good standing," which means that an organization has fulfilled all legal and regulatory compliance requirements necessary to operate legally within its jurisdiction. It confirms your business's legal and ethical integrity. What happens if a business fails to maintain good standing with the state? It could face legal penalties and experience disruptions in its operations. Failure to maintain good standing at its worst could lead to its administrative dissolution. Some states will dissolve businesses that have stayed out of "good standing" long enough to trigger automatic closure. Ultimately, compliance could mean the difference between a successful business and a failed one.Tips for Keeping Your Business Compliant
Now that you know what the basics of regulatory compliance are, here are a few tips you can follow to ensure that your business stays compliant:Make a list
The easiest way to stay on top of your business's compliance requirements is by listing them. Make a comprehensive list of all the internal and external regulations you must fulfill, including the associated deadlines and fees. Your list should include the following:- Formation documents and state filing fees.
- Annual reports and annual fees.
- Franchise tax fees.
- Articles of amendment.
- Business licenses and permits.
