We’ve talked many times about limited liability (for example, here and here), but what many business owners don’t know is that their limited liability can be voided if they’re not compliant with their local Secretary of State’s office as well as any regulatory laws governing LLCs and Corporations.
A Quick Overview of Limited Liability
As we’ve previously discussed, limited liability is a wonderful legal principle that removes a lot of the risk in the business world. As the name suggests, it limits your liability for investment in a business to only that which you have already invested. So if you own an LLC—limited liability company—and you are compliant with all of the relevant regulatory laws, discussed below, then your personal assets such as your savings, checking account, house, car, etc. are protected. Even if your LLC files for bankruptcy, you—the business owner—won’t be on the hook for judgments against your company that exceeds the value and assets of your company.
What’s the SOS?
The more correct question is who is the SOS? SOS refers to your local Secretary of State’s office (note that in some states this office is referred to as the Department of State), and the SOS corporations department handles all of the state’s business entities, –think corporations, LLCs, professional corporations, and other types. Their work involves, among other things, maintaining an online database that the public can access with the entity’s registered agent info and organizational documents such as the articles of incorporation.
Not surprisingly—after all, it is the government!—they can charge quite a bit for these services. In Georgia for example, in your first year it will cost you $100 to be registered with the Secretary of State’s office. Other states, like Delaware, charge a little more because Delaware is generally known, in the business world, as the state with the most favorable laws and courts for businesses—it’s also basically the industry standard for any company seeking to do a public offering and be sold on the New York Stock Exchange.
What Happens if I’m Not Compliant?
Not surprisingly, compliance with the Secretary of State’s office is not often at the top of an entrepreneur’s to do list, but it should be. If you fail to pay the SOS required annual dues, filing fees, or any other fee, your company will likely be “administratively dissolved.”
What is an administrative dissolution? It means that your company is no longer an entity in the eyes of the state it is operating in, and—perhaps more importantly—you are likely to lose your company’s limited liability status. Any person or entity bringing a lawsuit against you could argue that the corporate veil should be pierced, voiding out your limited liability due to this non-compliance with the SOS, and the court might allow the plaintiff to go after any and all of your personal assets.
Administrative dissolution can also wreak havoc on your Operating Agreement (“OA”) if the OA does not account for such an event in your buy/sell provision. Legal questions and vulnerabilities arise such as: upon administrative dissolution, do the owners still own the business? Do they have rights to the profits? What if one partner/business owner has a creditor bring a judgment against him, can that creditor now go after the business’s profits or equity? Can that creditor become a full-fledged owner and participate in the management?
You can see how these issues can grow quickly from a simple failure to comply with relevant regulatory laws, into a mountain of unanticipated consequences.
In sum, business owners without attorneys watching their backs are apt to drop the ball on seemingly trivial issues like compliance with regulations, and when they do, the consequences can be extreme. Is your business compliant and in good standing?
Jonathan Sparks is a partner at Sparks Law. He helps small to medium sized businesses with their legal issues, general counsel and registered agent services.
– Jonathan Sparks, Esq.
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