Compliance Errors and Oversights that Could Close Your Small Business

Every small business is expected to remain in compliance with all applicable laws, regulations, and standards. Not doing so can be highly detrimental to your business, resulting in penalties and costly fines, damaged reputation, disrupted business performance, business closure, and in extreme cases, criminal charges.

Penalties for not remaining in compliance depend on the state in which your business is located, what rules were violated, whether the violation was a one-time or repeated event, and other factors. Neglecting to adhere to rules such as filing reports, holding required meetings, submitting updated information, and paying taxes and fees, however, can put your business at risk for serious consequences.

I’d like to review some common compliance mistakes that can cause big problems for a small business, including the possibility of having your company administratively dissolved, which means the state forces you to close your doors.

Missing State-Required Filings

Almost every state requires Limited Liability Companies (LLCs), C Corporations, and other registered businesses to file some type of annual report, although submission frequency and deadlines for filing vary depending on where you live.

These reports, which might be called a statement of information, business entity report, annual certificate, or another name depending on your state, help officials to stay up to date with the businesses operating within their jurisdictions and inform them of notable changes within organizations doing business there.

Not filing an annual report can result in serious consequences, including the loss of your Certificate of Good Standing, which is a certification the state issues to companies that do everything necessary to meet all compliance requirements. Other actions that could lead to loss of good standing include failing to pay required taxes, not maintaining a registered agent, or not renewing all necessary licenses and permits.

A company that loses good standing with the state can face consequences including:

• Administrative dissolution by the state
• Loss of the right to its business name
• Increased risk to personal liability caused by a court ruling in favor of piercing the corporate veil, a move that removes limited liability
• Increased risk of business identity theft
• Unable to file a lawsuit
• Difficulty in securing capital

While failing to submit an annual report as required is serious and can negatively affect a business, most states will extend a grace period or work with companies to remedy the problem. The best way to avoid penalties, fines, and other consequences, however, is to make sure the report is completed and filed on time.

Failing to Hold Annual Meetings and Record Minutes

There are laws in all 50 states requiring that Corporations hold annual meetings and record and keep records of them. Failure to do so can result in financial and other penalties.

The amount varies from state to state, but a Corporation can face hefty fines for neglecting annual meetings and some states increase penalties for repeated non-compliance. In addition, a business could lose its good standing status, which as you’ve already read, can result in numerous negative consequences, including administrative dissolution of a business.

A serious outcome of failing to hold and record minutes is the potential for a court to decide to pierce the corporate veil and remove the personal liability shield for owners in the event of legal action against the company. A court may take that action if a Corporation does – or fails to do – specific things, including not treating the business as a separate entity from its owners.

A Corporation is expected to meet compliance regulations including getting all necessary business licenses and permits, filing annual reports, holding annual meetings, creating corporate bylaws, keeping records, and so forth. Failure to do those things can result in a court determination that the business is not operating as a separate entity and lead to action, including the removal of personal liability protection.

Considering that liability protection is a major incentive for incorporating a business, having that protection removed is something you clearly want to avoid at all costs.

Not Reporting Changes in Ownership or Company Management

Failing to report changes in the ownership or management of a company can have serious consequences, as states need that information to maintain accurate records, know who to contact if legal issues arise, and be able to inform the public about business ownership. Courts and regulatory agencies also rely on state information that is accurate and up to date.

Generally, Limited Liability Companies (LLCs) must inform the state of changes in managers or managing members, while Corporations report changes of directors or officers. Some states may require additional information, such as ownership interests or the number of authorized shares.

Not reporting important management or ownership changes to the state can lead to fines that increase over time and, in some cases, loss of your business license. The state could revoke your good standing status, which can adversely affect banking and financing operations. In worst-case scenarios, the state can administratively dissolve the business.

Not Paying State Fees and Franchise Taxes

Companies that are registered with the state are in most cases required to pay annual fees to remain in good standing and be able to operate. These fees are usually required to be paid when annual reports are submitted. About a dozen states also levy a franchise tax, which is basically a fee a business must pay for the right to operate.

While no one likes to have to pay simply to conduct business, not paying these fees and taxes can result in fines, loss of good standing, and, eventually, administrative dissolution of the business.

Other potential consequences include:

• Not paying state fees can result in late fees that accumulate until you’ve paid them.
• State officials may impose tax liens on companies that regularly fail to pay fees or franchise taxes, meaning the state can claim business assets – including in some cases the property – as collateral.
• Damage to credit rating of the business, making it more difficult to secure financing in the future.

As with submitting annual reports, understanding what you have to pay, when fees are due, and paying them on time is your best bet for avoiding issues and remaining in good standing with the state.

Neglecting to Keep Company Records Up to Date

Keeping company records up to date and making sure they’re accurate is not only an important and often overlooked compliance issue, it’s just good business. Records that are sloppy, outdated, or inaccurate can contribute to poor decision making based on incorrect assumptions about how the business is doing and where it stands.

Compliance issues can occur if documents such as financial records, employment reports, and safety procedures are not on file when requested by a regulatory agency, or in the case of an audit. Not having accurate records can make it extremely difficult to show compliance and could result in fines or loss of your business license. In some cases, owners could risk being held personally liable for damages due to non-compliance.

Keeping files and company records up to date requires a systematic approach that ensures they are safe, accessible as needed, and well organized. A variety of software solutions are available to help.

Missing Federal and State Tax Deadlines

Missing business tax deadlines can result in having to pay penalties, interest charges, and an increased chance of audits. In some cases, letting a deadline pass could have legal consequences.

State and federal tax systems have different filing requirements, deadlines, and penalties, meaning that it’s important to understand and keep track of all regulations that apply to your business. It’s likely that the deadline for filing your federal tax returns is different from when you must file state returns.

Federal tax deadlines vary for different business structures. While the 2025 deadline for C Corporations is April 15, S Corporations must file their returns by March 17. When LLCs must file depends on how they are classified for tax purposes, meaning dates may vary.

If you realize you’re not going to be able to file your federal tax return by the deadline, you can request an extension using Form 7004. This keeps your business in compliance but only applies to filing the return – not to paying owed taxes – which you still must estimate and pay by the original deadline to avoid penalties.

Business tax deadlines vary depending on the state, and some have different deadlines for different types of business entities. While the IRS requires that you file for an extension if you need additional time, some states automatically extend tax deadlines. Also, the type of taxes imposed by states vary.

Penalties for missing tax deadlines vary depending on the state, and the IRS applies penalties on a case-by-case basis. You may have to pay an IRS late filing penalty if you didn’t file your return or request an extension by your deadline, or a late payment deadline if you missed the deadline for paying taxes. You also are likely to be charged interest on unpaid taxes.

If the IRS suspects willful tax evasion, you could face fines of up to $250,000 or criminal charges. Ignoring tax debt is another serious issue that can result in the IRS placing a federal tax lien on your business, seizing your bank account or other property to pay owed taxes, revoking passports, or pursuing legal action.

Missing tax deadlines is not uncommon for businesses but can be avoided by taking note of when your returns are due and using accounting software or hiring a tax professional to help you. Also, remembering to make estimated tax payments if you’re required to do so will help keep your business in compliance.

Failing to Renew Necessary Business Licenses and Permits

Obtaining and maintaining necessary business licenses and permits is necessary to keep your business operating legally. Depending on where your business is located and what it does, you could need licenses or permits from your city, county, or state, and in some instances, the federal government.

Business licenses and permits are meant to regulate the types of businesses that operate in certain locations with the goals of protecting public health and safety and regulating land use. If you forget to renew your required licenses and continue to operate, there could be severe legal consequences, including suspension of business activities and loss of licensing privileges. You also could risk an investigation by regulatory authorities.

Your business also could face daily fines and penalties for late renewal processing. Operating without required licenses also can affect the reputation of your business and erode customer confidence.

Business owners should make it a point to renew all licenses and permits on time. If you miss a renewal deadline, contact the agency that issued the original license and explain your situation. In most cases, you’ll be able to renew without problem, although you may face fines or late penalties.

Overlooking DBA Filings

If your Sole Proprietorship or General Partnership uses a name that’s different from your legal name, or you operate an LLC or Corporation under a name that’s different from the name that’s registered with the state, you must obtain a DBA, or “doing business as.”

Not obtaining a DBA when opening your business or not renewing to keep it valid can cause a variety of problems, including having your business shut down by the state. In addition, any contracts you sign under an unregistered business name cannot be enforced, opening the door to legal problems.

While getting a DBA is one thing, keeping it up to date is another. Whether you need to renew your DBA and how often you must do so depends on where you live. Many states require business owners to renew their DBAs every five years, but some states have shorter time frames for renewals. Other states offer renewal terms of up to 10 years, while a few states do not require any renewal of DBAs

Many states send out notices when DBA renewals are coming up, but it’s good to be aware of your state’s rules concerning them. If your DBA expires, the name could become available for another business to use, meaning your company would have to choose a new name, which can significantly disrupt your business.

Mixing Business and Personal Finances

Commingling business and personal finances is a serious compliance issue that can result in a court deciding to pierce the corporate veil, opening business owners up to personal liability in the event of legal action against the company.

Commingling of personal and business finances can including depositing checks made out to the company into a personal bank account, using business funds to pay personal bills, or using a company vehicle for a family vacation.

Loss of personal liability protection due to commingling of funds can result in financial disaster for business owners, sometimes forcing the business to shut down. In addition to jeopardizing your personal liability protection, mixing business and personal finances can lead to tax issues and accounting inaccuracies, and should be avoided at all costs.

Not Maintaining a Registered Agent

Every state requires LLCs, Partnerships, and Corporations to have a registered agent, which is a person or company designated to receive legal correspondence on behalf of the business. A registered agent must be physically located in the state in which the business is registered, and a company that is registered in more than one state must have an agent in each one.

Typically, a registered agent is responsible for receiving and passing along government correspondence, documents dealing with lawsuits or compliance-related matters and other important mail. Businesses must identify a registered agent when filing formation documents.

Failing to get or maintain a registered agent can lead to both compliance issues and business risks, such as missing notice of a pending lawsuit that could result in a default judgment by a court. A business that does not have a registered agent risks losing its good standing status and faces fines and penalties. In severe cases, the state could impose administrative dissolution of the business.

Some Final Thoughts

Keeping a business in compliance is not an easy task when coupled with all the other responsibilities of running a company. Regulations change, requiring constant attention and vigilance.

And yet, making sure your business remains in compliance is necessary, as not doing so can lead to all kinds of negative consequences. If you feel overwhelmed by compliance issues or are worried about meeting all the requirements, consider seeking outside assistance to save your time and ensure that regulations are met.