UNDERSTANDING ANNUAL REPORTS: WHAT YOU NEED TO KNOW TO MAINTAIN GOOD STANDING

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James: Hello, everyone, and welcome to today's webinar, "Understanding Annual Reports: What You Need to Know to Maintain Good Standing." My name is James Weir, and I will be your moderator.

Joining us today are Ciela McDevitt and Christine Matarese. Ciela is the Corporate Solutions Manager for Corporate Legal Solutions division of CSC and has over 14 years of experience. Ciela is responsible for customer satisfaction, technology training, and new services. Christine is a corporate trainer and quality ops analyst on the Annual Report Services Team, based at CSC's global headquarters in Wilmington, Delaware. With over eight years of experience, Christine focuses on training new customer-facing team members and providing continuing education. And with that, let's welcome Ciela and Christine.

Christine: Thank you, James.

Ciela: Thank you, James. So my name is Ciela McDevitt. Christine and I have many years of experience with our clients. And actually, with annual reports, we see a lot of what goes wrong, because who do people call when things are wrong and it's not working out directly with the Secretary of State? They call us. So we're definitely going to be sharing that information in hopes that we can help you to avoid some of those problems.

To introduce CSC, CSC works with over 10,000 law firms throughout the U.S. We have over 180,000 corporate customers, from entrepreneurs all the way through 90% of the Fortune 500 using CSC. We are the world's largest corporate domain registrar. Sixty-five percent of the 100 Best Global Brands use CSC for things like domain names, DNS, online brand monitoring. We have over 3,000 financial clients who use us for real estate eRecording and UCC.

Today, of course, we'll be talking about corporate compliance. And going through a quick agenda, what is an annual report? So, for purposes of the call today, we're really going to focus on anything due to the Secretary of State or equivalent office to stay in good standing. Now, sometimes that does cross over with taxes, so we'll talk a little bit about that to help provide some clarification. We'll talk about what to do and when. We'll talk about what happens if a filing is missed. We'll talk about the differences between a business license and an annual report, because that gets confused all the time. And then, we'll also get into how CSC can help.

What is an annual report? So requirements to maintain good standing in most jurisdictions, and most jurisdictions do have something, whether it's a corporation, an LLC, even nonprofit corporations have annual reports due in many jurisdictions, as do limited partnerships. Now, these annual reports go by many names, and there's a few listed here. Statement of information is an example that you'll see in California. Other examples include things like an occupational tax report, annual list, and franchise tax.

Now franchise tax is that one that can get everyone sometimes a little bit confused, and that's with good reason because it is kind of confusing. So in a state like Delaware, the franchise tax is really an annual report. It's something you would pay to the Secretary of State to stay in good standing. And with it, you would provide some standard information, so for corporations, things like EIN, business activity, officer and director information and address. You get that in with the payment and you stay in good standing.

Now, in a state like California, when you say a franchise tax, you're really talking more about the corporate income taxes, and what they have is an annual report, which would be just paying the fee to the Corporation Division. And giving them your office and director information is called the statement of information.

So we'll get into more detail on that. I'd encourage you to stay on for the demonstration purpose, because we have both states on our calendar, and it's a nice visual to give some clarity on that.

Christine: All right. So now that Ciela has explained exactly what an annual report is, I am going to talk a little bit about when annual reports are due. It seems like it's a pretty simple, straightforward question, but it actually has a pretty complicated answer. And the reason for that is that the due dates vary depending on the jurisdiction. Some states are going to base your annual report due date on your fiscal year end. Some are going to be based on your anniversary month, meaning the anniversary of when you register to do business in that state. Some are going to be the actual anniversary date that you registered. And still others are going to be on a specific day annually as determined by the jurisdiction.

Fiscal year end dates, typically tends to be the 15th day of the third month following your fiscal year end. If you have a calendar, fiscal year end of December 31st, that's going to put you usually somewhere in the first quarter, either mid-March or April. Some of those states are Kansas, North Carolina, Tennessee, Vermont, and Massachusetts, but only for corporations.

Some states base their due date on the anniversary month, either the first day or the last day of the anniversary month, such as Idaho, Nevada, New Jersey, Virginia, Washington, and Wyoming. Some due dates based on the anniversary month just use that as a jumping off point. Colorado is typically due two months following your anniversary month. Hawaii is going to be due the end of the quarter that your anniversary date falls in. In Illinois, corporate reports are you prior to the first day of your anniversary month. So there can be a lot of complexities with these due dates.

Specific days that certain jurisdictions have. Every entity in Florida has an annual report that's due May 1st. Similarly Maryland is April 15th. Minnesota is December 31st. What happens with these dates is you tend to see a high volume of filings as we approach the due date, and it's common for those state websites to start to experience delays and problems just due to the volume of everyone trying to file and get in there before the due date.

Something else that affects your due date, some states have a bi-annual requirement. Instead of an annual filing, it's every other year. Indiana and New York are bi-annual on your anniversary month. New Mexico is bi-annual based on your fiscal year end. And the District of Columbia and Iowa each have a specific date of April 1st, but it's bi-annual depending on when you initially registered.

So let's say you're not sure who's managing your annual reports. What happens if an annual report gets missed? There are a couple of different things. And once again it depends state-to-state what can happen. But the biggest thing is that if your report is late, most states are going to assess some type of late fee.

So the size of that fee depends on the jurisdiction. Illinois is going to assess an additional fee every month that your report is late, and it is a percentage based on your financial information you provided. Illinois reports can cost into the hundreds of thousands of dollars. So if your report is late and the late fee is a percentage of that $100,000, those fees can be quite substantial. Illinois and many other states will eventually revoke your entity after a certain amount of time if the report is not filed. In Illinois, you have about five and a half months after the due date to get that report in.

Wyoming, like Illinois, bases their fees somewhat on your financials. Reinstatement costs can be over $10,000 if you fail to file your report in the allotted time.

Other states, if you need to reinstate if you have fallen into that revoked status, the process can be quite lengthy. States like Missouri require tax clearance from the Department of Revenue in order to reinstate with the Secretary of State's office. Many times that tax clearance process can be lengthy and quite involved.

And some states like Utah will actually require you to re-qualify your entity. You have to. You can't reinstate the one that fell into bad standing. You actually have to file a new certificate of authority or a new qualification, which results in a new state ID number, a new qualification date with the state, which can affect your business in other areas.

So continuing with that, if you didn't file your report, now what? So we already talked about some of the financial implications.

Off the bat, many states will immediately change the status from something like active or good standing to delinquent. Ceased good standing is the terminology Delaware uses. Eventually, many of them will become revoked or forfeited. Once again, that is a terminology that varies from state-to-state.

Once you become revoked or forfeited, you may lose your corporate name in that state. Your name is no longer protected because your entity is not in good standing. If someone else tries to register with that name, they will be able to do so.

If you're not in good standing, you cannot obtain a certificate of good standing from the state. These documents are used for a variety of reasons from bank accounts to business filings to registering in other states.

You may lose the ability to bring a lawsuit. You no longer have that corporate veil protection if you have not adhered to the state statute to keep your corporation or your LLC in good standing. Similarly, your ability to conduct business is compromised. You're no longer active. You are no longer protected.

We talked about the penalties and fees and interests that may occur. And you may be unable to open a bank account. Any bank will ask for either a certificate of good standing. They may also check the online state database to ensure you are currently registered. And if you're not active and in good standing, they may not be able to open that for you.

Ciela is going to speak a little bit about international entities and what CSC can do for you.

Ciela: Thank you, Christine. So for everyone who is taking copious notes on the due dates, we do have a handout which will go into more detail. But I think you can see it in the side panel on annual report due date as a chart. So if you're taking copious notes, that's good, but we also have a handout.

I'm going to go over some of the requirements with registrations outside of the U.S. So I'll cover the U.S. territories first. U.S. Virgin Islands, Guam, Puerto Rico, they all have an annual report requirement. So don't forget about them. We can help you with them. And one of the main reasons not to forget is, as an example, Puerto Rico, if you are one day late on your annual report, they have a $750 late fee. No kidding. So you definitely want to have those calendared and making sure that, if you do have those entities, that you're keeping an eye out for the annual reports.

Canada also has requirements. In Canada, you may have an entity that is domestic to Canada. It was formed there. In that case, that entity often does have an annual report requirement, maybe even some additional requirements, such as a registered office in that jurisdiction and also a minute book kept onsite. But there often is part of that an annual report that needs to be filed. Also in Canada, you may have extra provincial registration. They work a lot like a foreign qualification in the U.S. or a certificate of authority, where it may not be your domestic state registration, but it's the same company registered in an additional province. So somewhat similar to the U.S. Almost every province in Canada with an extra provincial registration does have an annual report that's due. So we can help you with those, and we can also help with clarity on due dates if needed.

Now, outside of the U.S. and Canada, it's really a whole different ballgame. Sometimes we do talk to clients and they're thinking it's as simple as a registered agent and an annual report. And once you get outside of the U.S. and Canada, it's not necessarily good to oversimplify it. There's often other requirements, maybe a registered office. There is often an annual filing of some sort, but maybe it's more an annual filing of financial statements or a VAT filing. So it's really a topic for a whole other webinar. But if you have questions, we are happy to assist with any of that.

Getting into business licenses versus annual reports. We get this question all the time.

Christine: Yes, we do.

Ciela: And it's for a good reason. You know, I went to school for business, and they didn't cover this. They didn't even come close to covering this. So it's usually something that has to fall into your lap for you to get some experience with, so we completely understand, and I hope to clarify a little bit for you today.

So with business licenses, it's often location driven. So if you think about anywhere where you have a physical presence. So if it's retail, maybe your retail store or a warehouse. It could be just a business office or a sales division. Anywhere where there's a brick and mortar, often the local jurisdictions will want something above and beyond the corporate registration. So it could be a sign permit, a business license, a business tax receipt. So it's location-driven often. It's also often industry-driven. So a restaurant is going to need different business licenses than a warehouse, which will also need different business licenses from a professional, like a contractor an architect.

So business licenses are normally industry and location driven, and they're often with other filing offices than the Secretary of State. It's usually a city or a county, or sometimes, if it's a professional license, it can be state level.

On the flip side of that, annual reports are normally the same for all industries. Now, they may ask a question on what your business activity is, but it's the same application for all different types of businesses. It normally just varies on the entity type. So for an annual report, it's more based on: Is it a corporation or an LLC? Is it the domestic state or a foreign state? And that'll determine what's required. And CSC can certainly assist with both.

So with annual reports, I think the hardest thing is knowing when they're due. And the due dates are spread out through the year, and they can really just pop up at a bad time. Maybe the legal team who's doing the annual report has a lot of other big projects going on, and then all of a sudden, these annual reports pop up, and they can be missed. So there's a lot of bad timing involved. It's risky. We talked about, you know, what happens if you lose good standing. And often, you know, there's internal employees that may be better suited to work on other projects that can't be outsourced, whereas CSC can really step in and help with these and save time and money while reducing risk.

The other thing that we do is we track legislation changes. So when states are making changes to the duties or the requirements, we're tracking all of that, and then we are working that into the service so that's not something you have to track. Now, if you're deciding to keep the annual reports in-house, we do keep that compliance calendar for you.

We also have a blog. So if you go to cscglobal.com/blog, you can see where we post all of those legislation changes. It also will give you state closings, which is nice around the holidays. If you have to get a rush filing in, it'll let you know when the states are closed for holidays and you can really work with their schedule. So a lot of good information there if you're deciding to keep them in-house. That's cscglobal.com/blog. And you can get jurisdictional status updates, office closings, webinars, insight reports, our CLU webinars too. So that's nice.

Christine: So some other benefits to using the CSC service, Ciela, just gave a lovely demonstration for you guys of the compliance calendar, the good standing calendar in Navigator. If you engage CSC to monitor your annual reports, if you enroll in our Prep and File Service, we will give you access to Navigator 24/7. As Ciela just showed you, you can view everything in there. You can track what's going on with your order. You can see what's coming up.

The filing responsibility column is the biggest thing that I show our customers. That way you can track what is CSC filing for you and what is your responsibility to take care of. Some of those are the income tax filings that Ciela mentioned. But we do have some customers who choose to still file some of their annual reports in-house. That column will let you know exactly what we are doing for you.

We will perform an audit of your current entity portfolio before we even begin monitoring your report. We will go out, we will check your entities at all the jurisdictions, we will see what the status is, and then we will help you to reinstate or file any past due reports. We'll identify anything that's in a negative status, come back to you, ask you, "What do you want to do with this state? Is this a state you should be active in, or is it a state you're no longer doing business and you want to leave it as is?"

We did just talk about the Good Standing Calendar. Now, it is fully integrated with our Prep and File Service. So Ciela demonstrated how if you are managing your reports on your own, you can update it to indicate when you filed something, who you filed it with. It's integrated with our service. So as we have our orders pool for your annual reports and as we proceed with working on them, you will see the status change. So start is in progress once the order is in the system, and then they will move along to either submitted or filed as we are proceeding with the order. Sometimes it may say "Document not submitted." We use that if we need to reach out to you for some jurisdiction-specific information.

Apologies. We also file and store all of your evidence is stored right there in Navigator for you. So you are able to click on the Filing Cabinet. We have a folder there for all of our annual report clients, and all of your annual reports are available there in a PDF format for you to view and review as you need to. Or maybe you need to go back and pull and see what you did last year, you are able to do that as well.

Point in time reporting on your entity status. As I said, we are updating that calendar as we are going and as the filing changes, so you can actually see those result changes as they're happening. You're also able to view that if you are a current CSC customer and you're used to using the Order Results tab, they're visible there as well, because each annual report filing is entered as an order, so you can see that as well.

You'll have a dedicated team to provide you with peace of mind. Our annual report team currently has over 80 members on it. We are in offices across the country here in the U.S. So we do have a very large team of experts here to handle the annual reports. But you will be assigned a dedicated annual report specialist that you will be working with to maintain your portfolio. You'll receive email updates from them. They will be sending you out a monthly calendar of your upcoming filings.

We do ask for some basic information up front when you enroll in the service for your entity. In most states, we can file with that basic information. It's going to be your officers and directors, if you're a corporation, your members and managers if you're an LLC, your business address, a brief statement of purpose, your CIN number. Basic information like that and we can file the majority of the annual reports online.

Some states do have state-specific questions that they ask, and your annual report specialist will reach out to you monthly for that information. My favorite example is West Virginia. They want to know, "Are you a scrap metal dealer?" And if you say yes, they have a bunch of follow-up questions.

So we will reach out to you. We know with each state what specific information they need, so we will make sure that we have it in advance in order to complete the filing.

We do advance fees on your behalf. I do have to add as a caveat that we advance up to $10,000. So if you are one of those special companies that owes $200,000 to the State of Delaware, we will reach out to you first and ask for a wire. We do reach out well in advance to give you plenty of time to get that payment in. But for the majority of other states, where your filing fees are fairly minimal, we will advance that and we will simply invoice you for the state and service fees after the fact. And we do have a number of invoicing options to fit your workflow. We can send you invoices individually as we complete each filings. We do have monthly summarized options available as well, and that is something that your corporate solutions manager would be happy to discuss with you.

Let's see. I think that is all that I have. So then Ciela is going to talk about a few more things.

Ciela: Thank you, Christine. I think everyone's favorite is the audit where we check the last filed annual report in each state so they know where they're at and also so we know, you know, we don't duplicate what's already been done. And if anything was missed, we can prioritize it. That and the advancement of state fees, because a lot of people don't want to give their credit card to the Secretary of State website. And then there's the cost of cutting checks.

Christine: And a lot of the states we actually have depository accounts with the state, so it's easy for CSC to advance those fees on your behalf.

Ciela: Perfect. So six questions to evaluate the process. And this is something maybe to talk about internally offline. But just to give you, you know, our thoughts on these questions. What I see happen a lot is maybe the person doing the annual reports leaves for whatever reason, and then there's this crossover where no one knows to pick them up. So number three, I think is a good one to talk about. What's the process for transitioning annual report filings when the current person changes roles?

What is your backup plan to file an annual report on time if the state website goes down? We talked about that a lot. So I think the backup plan is actually just to start a little earlier. Whenever you get close to the due date, that's going to be a problem.

A lot of states now are sending postcards with a PIN, so talking internally about how to track those PINs and getting them to the right person. I've noticed for our CSC-registered agent clients, a lot of times we'll have a compliance mail contact. That's someone like a general counsel who then gets the postcard and hands it off to somebody else, maybe a paralegal who's actually doing the annual report. Sometimes I think it's a little bit better if the person who's getting the annual reports actually gets the postcard so there's no delay in handing it over. Just something I've noticed, and that's easy to change, just give us a call.

And then how to track evidence of filings. Very handy to have a repository of those annual reports. When we do them for you, we do store all the filed annual reports on the CSC website perpetually.