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The need for compliance with government requirements only gets more important after forming a corporation or LLC. Very often the corporation or LLC was set up in the first place to help protect personal assets and provide tax-deductible benefits for owners and employees. Failure to satisfy these ongoing requirements, however, could result in the organization losing those very benefits.

Small business owners are especially at risk of stumbling into this particular pitfall. Since they are often overwhelmed with the multiple facets of their business’ day-to-day operating needs, they may not know how to avoid noncompliance and the resulting crippling or fatal business consequences. IncFile.com can help.

Corporations and LLCs have both internal and external ongoing requirements. The internal requirements must be met by the directors of the corporation or the members of the LLC, and then documented in company records. External requirements are those imposed by the state in which the LLC or corporation was formed; these often include, at a minimum, an annual (every year) or biennial (every two years) filing with the state, as well as some kind of fee.

Internal Requirements

Internal requirements are frequently overlooked, but are vitally necessary to effective decision-making and communication within the organization. A corporation has more internal requirements than an LLC; these include holding and properly documenting director and shareholder meetings, adopting and updating bylaws, issuing stock to shareholders, and recording stock transfers. While these actions are not specifically required for an LLC, it’s still a good idea to adopt an operating agreement (and keep it up to date with amendments as needed), issue membership shares, record interest transfers, and hold annual meetings.

Owners use a consolidated corporate records book to organize and maintain important corporate documents such as articles, bylaws, meeting minutes, resolutions, stock certificates, deeds, and so on. Many business owners use a Corporate Kit or LLC Kit for organizing and maintaining these vital records. Many businesses also use a metal or rubber corporate seal—the kind that leaves the company name in raised letters on a document—to signify that the document is an authorized, official transaction of the corporation. These can be obtained as part of a corporate kit or from a stationery store.

Bylaws lay out the corporation’s basic operating principles; they should be planned for and drawn up as part of the incorporation process. It is not required to file the bylaws with any government agency, but a corporation is required to have at least an initial and annual meetings, adopt bylaws, and keep minutes of the meetings, and keep these on file with the corporate records. Bylaws are important because they set down formal rules for such things as: when and how meetings can be held; notice, quorum, and voting rules for meetings; how decisions can be reached and recorded outside of meetings; basic titles and responsibilities of corporate officers; and the requirements for providing periodic (usually at least annual) information to shareholders.

In short, bylaws are the corporation’s major decision-making and operating procedures set down on paper. This can help owners refine and improve their common practices, and can also serve as a “referee” when uncertainty or disagreements arise on what the official solution is to a given situation or need. Bylaws also give your firm credibility in the eyes of shareholders, creditors, potential investors, other businesses, and even the IRS. Owners should take care, though, to make sure their bylaws do not conflict with their state’s Business Corporation Act or its equivalent.

If the board of directors is not already appointed in the articles of incorporation—a requirement in some states—the initial board’s names and addresses will need to be listed in a separate document. These directors will serve on the board until the first annual shareholders’ meeting, when a new board will be elected.

One of the new corporation’s most important tasks is to prepare minutes for the first board of directors meeting. This first meeting is where several key company actions should be approved, such as electing officers, adopting bylaws, selecting the main office or headquarters location, choosing a bank for corporate accounts, the accounting period or fiscal year, initial tax elections, and issuance of initial shares of corporate stock. Normally the groundwork and supporting research is done before the actual meeting, although the board can change or amend the minutes as prepared if they vote to do so. Any of the initial directors can prepare the minutes, but the entire board must sign them at the meeting, incorporating any amendments or changes as needed.

Thereafter, at a minimum, the corporation must hold a shareholders’ meeting and a board of directors meeting at least annually; accurate, complete minutes for both are essential, because these documents will be used as reference materials for future decisions. Remember: “If it’s not written down, it didn’t happen.”

A limited liability company, on the other hand, comes officially into being when its articles of organization are filed with the state’s LLC office. The articles contain basic organizational information about the LLC, such as its name; whether it’s managed by its members or by selected members called managers; the name and address of its members; and where its office is.

Next to its articles of organization, the most important document for an LLC is its operating agreement. This isn’t required by the state (except for New York)—but it’s a key internal document that officially records how the LLC will run. It is very much the same as a partnership agreement; except for an LLC it is called an operating agreement. It lists the members, how much each member has invested, how profits will be divided, and how much weight each member has when matters come to a vote. It may also specify requirements for meetings (notice, quorum, voting rules, etc.) and the like, but it doesn’t have to. Normally, however, the operating agreement does include state-mandated requirements.

 External Requirements

External requirements usually consist of a periodic report to the state and some kind of fee. Most states require corporations and LLCs to file an annual or biennial statement or report, along with an associated filing fee of some kind. LLCs may also be liable for payroll tax, property taxes, sales and use taxes or “seller’s permits,” or business license renewals. Other state or local filings, such as business licensing or state or municipal tax registrations, may also be required. Owners will also still file their individual state and federal income tax returns.

Some states also impose a franchise tax—basically a fee paid by the company for the state’s permission to operate there. Different states use different methods to calculate the franchise tax; it may be based on revenue, or on some measure such as a corporation’s total number of authorized shares and their value.

Each state has its own deadlines for annual statements and franchise taxes. Some states determine these based on the formation anniversary of the corporation or LLC. Other states set one deadline for annual statements for all corporations and another for all LLCs. Business owners need to know how and where to research these requirements so that they can plan for them before incorporating, and then keep up with changing requirements as their business continues to operate and progress.

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Forming a Nonprofit Corporation will not only make you more accessible to potential donors. It will can your organization credibility and help you protect your personal assets, too.

Unlike a for-profit Corporation, a Nonprofit Corporation is not designed to make a profit for shareholders. Instead, it is established for a specific noncommercial purpose, such as educational, literary, charitable, religious, or scientific, for example. None of the income of the organization gets distributed to its officers or directors. Some common examples are schools, colleges, universities, hospitals, houses of worship, museums, fraternal organizations, homeless shelters, food banks, and other volunteer organizations.

Nonprofit Corporations may be eligible to benefit from not having to pay corporate taxes on income they receive that is related to their stated purpose. This tax-exempt status, if obtained, means that donors may be able to deduct their donations to your Nonprofit Corporation on their federal and state income tax returns. This can be a requirement to qualify for a variety of private and public grants. And, just like a for-profit corporation, members and directors of nonprofits are generally protected from personal liability for the operation of their Nonprofit Corporation, which is not true for an unincorporated association or club, no matter how noble the cause.

Unlike regular corporations, however, a nonprofit corporation cannot distribute any profits to its members, contribute money to political campaigns, or engage in lobbying activity, except in very limited circumstances.

The most commonly-used federal tax exemption used for nonprofit corporations is in Section 501(c)(3) of the Internal Revenue Code. This is why Nonprofit Corporations are often referred to as “501(c)(3) organizations” or even just “501(c)(3)s.”

To achieve that critical tax-exempt status, though, nonprofits must apply for federal and state tax-exempt status; it is not just automatically granted by forming the Nonprofit Corporation. To apply for federal tax-exempt status, IRS Form 1023 must be filed with the IRS, and the appropriate tax-exempt application made at the state level as needed.

Like standard for-profit Corporations, Nonprofit Corporations provide limited liability protection for their officers, directors, and members, so that their bank accounts, homes, and other personal assets typically can’t be used to satisfy the debts and liabilities of the Nonprofit Corporation.

Even though Nonprofit Corporations are established and regulated under different state laws than standard for-profit Corporations, the process of forming a nonprofit is fairly similar.

Choose a Business Name
Generally speaking, your Nonprofit Corporation’s name can’t be the same or confusingly close to another, already-registered Corporation, and can’t contain certain potentially misleading words or terms (like Federal, National, Bank, United States, and the like). Some states also require a corporate designator at the end of the name, such as “Corporation” (Corp.), “Incorporated” (Inc.), or “Limited” (Ltd.). There are many states that require a corporate designator with for-profit Corporations that do not require designators for Nonprofit Corporations.

Once you have decided upon a name and entered your information online, IncFile.com automatically performs a name search against the corporate database of the state of incorporation to check the availability.

Nonprofit Articles of Incorporation
In order to actually form your Nonprofit Corporation, you will have to file Nonprofit Articles of Incorporation with the appropriate state agency and pay the necessary state filing fees (usually fairly small). In some states, this may be called a Certificate of Incorporation, a charter, or a Certificate of Formation.

Regardless of what they are called, the formation documents need to include specific information and language to make sure you’ll qualify for tax-exempt status. IncFile.com automatically includes the necessary verbiage required by the IRS for 501(c)(3) status.

Apply for Tax Exemptions
After your state’s corporate filing office returns a copy of your filed articles, you can submit your federal 501(c)(3) tax exemption application to the IRS. This has to be done in this order because the IRS requires you to submit a copy of your filed articles with your application. This is a crucial step in forming your nonprofit, since most of the real benefits of being a Nonprofit Corporation are dependent on gaining 501(c)(3) tax-exempt status. The application fee ranges from $300 to $750.

After the IRS reviews your application, it will send you a letter approving your nonprofit tax-exempt status, asking you for more information about your organization, or denying your application outright if it doesn’t meet required standards. If that’s the case, the IRS will tell you where the shortfall was; this is often correctable by including more specific or precise language in your application.

In some states, you will need to apply separately to get a state tax exemption. In other states, as long as you file nonprofit articles of incorporation with the state and get your federal 501(c)(3) tax-exempt status, your state tax exemption will be automatically granted, or will be granted once you furnish a copy of the IRS approval.

Bylaws
After filing your Articles of Incorporation and tax-exempt applications, it’s time to create your corporate bylaws, which lay out your nonprofits’ purpose and internal operating rules. These should include:

• How directors are elected and what authority they have.
• How, when, and where directors’ meetings are held.
• How decisions can be reached with or without a meeting.
• The duties and responsibilities of officers and how long they serve.
• Officers, constituency rights and responsibilities, and standing committees.
• The organizational structure of the nonprofit.

To create your Nonprofit Corporation bylaws, you can hire a corporate attorney—or you use IncFile.com’s nonprofit incorporation kit. Bylaws are typically adopted by the corporation’s directors at their first board meeting.

Appoint Directors
The next step is to appoint an initial group of directors. The directors of the Nonprofit Corporation have the overall authority and responsibility to manage and run the organization. Collectively, they meet periodically and make decisions about major business operations. Many states allow nonprofits to have just one director, but other states require at least three. The board is ultimately responsible for setting the vision and direction of the organization and providing oversight.

In most states you must designate your initial directors when filing your Articles of Incorporation. These directors will serve on the board until the first board of directors meeting, when the first elected board will be seated.

Hold a Meeting of the Board of Directors
The initial makeup of your Nonprofit Corporation board of directors may or may not change at the first board meeting. What’s important to notice is that the first slate of directors is appointed, and then from there on they are elected.

Normally a corporation’s officers include, at a minimum, a president, treasurer, and secretary, or their functional equivalents. It may be “Chief Executive Officer” instead of “president,” for instance, or “Chief Financial Officer” instead of “treasurer.”

The purpose of this first, organizational meeting of the board of directors is where several significant company actions should be approved, such as electing officers, adopting bylaws, selecting the main office or headquarters location, choosing a bank for corporate accounts, designating the accounting period or fiscal year, initial tax elections, and documenting the receipt of federal and state tax exemptions.

Officers (who may also serve on the board) carry out the day-to-day business of the corporation and sometimes do receive salaries.

Depending on its structure, a nonprofit may or may not have formal members with voting rights. If your nonprofit doesn’t create a formal membership structure, the only people who participate in the management of the nonprofit operations are the directors and officers.

After the meeting is completed, minutes of the meeting should be created and filed in your corporate records book.

Acquire Licenses or Permits
Many businesses, whether operating as for-profit or Nonprofit Corporations, are required to obtain state or local licenses and permits before starting to conduct business operations. So, while your organization may not be subject to the kind of red tape that can entangle for-profits, you should check with your state department of consumer affairs (or similar state licensing agency) for information about any licensing or permit requirements for your type of organization. For instance, a local business license (sometimes called a tax registration certificate) may be required for your activities, and if you sell anything to consumers, you may need a state sales tax permit or license.