The Annual Report: What is it, and Why does it Exist?
If you’re a business owner in Florida, you’re probably familiar with the annual report filing that must be submitted to the Department of State each year. The report must be filed each year on or before May 1st, and typically consists of updating any information that may have changed over the past year (such as principal address, registered agent, and officers of the business). For the two most popular legal entity vehicles – corporations (for profit) and LLCs – the annual report filing fee is $150.00 and $138.75, respectively. The report can be filed online and is not complicated (see www.Sunbiz.org).
Some are critical of the state-imposed annual filing requirement, arguing that it is an unnecessary nuisance that serves only to provide the state with an additional revenue stream. However, the Annual Report requirements serve a very important function: clearing out inactive businesses, encouraging businesses to regularly update their information, and opening up the availability of their names to be used by others. Due to the “distinguishable name” requirement under the Florida Statutes, corporations and LLC must create a distinct name for their business that is unique from other active businesses. If there were no financial commitment to maintaining ownership of a business, any individual could incorporate or organize a business and sit on it – preventing the use of its name by others who would put it to higher commercial use.
The penalty for not filing an Annual Report by May 1st is that an additional $400 fee will be added on and must be paid before a business can file its annual report. Failure to file an annual report by the third Friday of September each year will cause your business entity to be administratively dissolved or revoked in the Department of States records at the close of business on the fourth Friday of September. Administratively dissolved or revoked entities may be reinstated, but it requires submitting a reinstatement application and paying all associated fees (the reinstatement fee + annual report fees due) at the time of submission.
What is Good Standing?
As a technical matter, “good standing” is the state of being current with the Department of State with all required filings and fees. Filing the Annual Report is one aspect of remaining in good standing, and the penalty for failing to file the Annual Report is discussed above. However, there are several other compelling reasons why it is important to remain in good standing (i.e., active status) as a business in the state of Florida:
Loss of Name Registration
In Florida, the incorporation or organization of a business entity does not create trademark rights to the business’s name; but, as a practical matter, once your business’s name is reserved, no other business can file under that name – due to the “distinguishable name” requirement discussed above – and it will be rejected by the Department of State if attempted. However, if a business falls out of good standing and is marked “inactive” by the Department of State, anyone can now register a new entity using that business’s name. This can result in significant expense in having to change your business’s name (including all the branding and marketing that goes with it).
Loss of “Corporate Shield”
When an individual signs a document on behalf of a nonexistent or dissolved business, there is case law in Florida that holds that they can be treated as having signed the document personally. This means that a business owner who thinks they are signing an agreement on behalf of their business could unknowingly be making themselves personally liable to the other party. This can be cured, however, by reinstatement – which, once effective, will relate back to the date of administrative dissolution.
Loss of Legal Rights
When an LLC or Corporation falls out of good standing in the state of Florida, it loses the right to prosecute or maintain any action in any court of this state until the report is filed and all fees and penalties due are paid. (see section 607.1622(f)(6), Florida Statutes for Corporations, and section 605.0212(f)(6), Florida Statutes for LLCs).
Loss of Ability to Transact Business
A business that is not in good standing likewise may not transact business in the state until the annual report is filed and all fees are paid. This applies to both foreign and domestic Corporations and LLCs.
What is ‘Dissolution’ and How Does it Happen?
Dissolution of a Corporation or LLC can occur in one of several ways: by administrative dissolution for failure to file your Annual Report (as discussed above), by voluntary act of the business (i.e., the business decides to wind up and close on its own), or by judicial procedure. For LLCs in particular, the passage of 90 consecutive days during which the company has no members will also cause the business to be dissolved, unless: (a) consent to admit at least one specified person as a member is given by transferees owning the rights to receive a majority of distributions as transferees at the time the consent is to be effective, and (b) at least one person becomes a member in accordance with the consent.
Once a business is dissolved, it can no longer transact business or engage in commerce except to the extent necessary to “wind up” its affairs. In other words, once dissolved, a business can only take action necessary to close up shop.
In winding up, a business must discharge or make provision for the company’s debts, obligations, and other liabilities, settle and close the company’s activities and affairs, and marshal and distribute the assets of the company. It may also take other necessary and appropriate action to wind up the business, such as preserving the company’s activities, affairs, and property as a going concern for a reasonable time, prosecuting and defending actions and proceedings, and transferring title to the company’s real estate and other property.
How to Stay Within Compliance
The bottom line is that a business and its owners/officers may pay close attention to detail in observing all state requirements for remaining in good standing. This includes:
- Filing your Annual Report on time;
- Having an ironclad Shareholders’ Agreement/Operating Agreement specifying the procedures for things such as adding or removing officers, members, directors, and shareholders; dissolving the business; responsibilities of the company constituents in the event of dissolution; buy/sell provisions; and transferring units of ownership in the business;
- Remaining abreast of all legislative updates affecting the business; and
- Taking prompt action in the event that the business does fall out of good standing
It is important to note that “foreign” Corporations and LLCs (those businesses which were organized in a different state but operate in Florida), as well as businesses that were organized in Florida but operate in multiple states, have a higher regulatory burden. They must observe additional requirements in both Florida and the other states in which they operate.
If you are looking for competent legal counsel for your business who can help you navigate the world of compliance, give us a call today. We’re here to help you succeed.