Non-Existent LLC. You Forgot to Renew! LLC Mistake Number 7
Feb. 25, 2015
An LLC is created under state law and does not exist until the state accepts the papers for it. The LLC only stays in effect when its management pays the LLC’s annual fees to the state and complies with any additional filing requirements.
Sounds simple, doesn’t it. File, pay, play. File, pay, play. Year in and year out. Yet people forget—or neglect—to pay the annual fees to keep their LLC in effect all the time.
So forgetting to ante up the state’s fee every year is a minor annoyance with minimal consequences, right?
No! It’s a big problem! With potentially huge consequences!
Not renewing the LLC registration is so common that in our law practice we have to annually remind most of our clients for whom we serve as registered agent. Where we are not the registered agent, we only hear about the failure to file when the clients get in trouble and are seriously in arrears before we even know about it.
Worse yet, when the client instead serves as his own registered agent, we receive no annual notifications on his behalf. So while the client saved the very modest annual registered agent fee, the client also removed the safety valve from the state’s pressure-cooker bureaucracy. Miss the payment and the state blows its top.
The penalties for no payment or late payment can be enormous. The client may lose his company name and with it his corporate identity, vulnerable to being lost to another firm in the state. The client may have to start organizing the LLC all over again. New company name. New bylaws and charter. New legal paperwork. New filing. New letterhead. New signage. New bank accounts. New deeds and leases. Ugh. It is like grinding salt into the wounds.
However, if the state allows the individual to reinstate the lapsed LLC, the filer has to—at the very least—submit additional paperwork and pay additional penalties and wait for the state to act before any LLC action can take place. Reinstatement often allows an LLC founder to go back to the original date of formation so that legally the LLC was always in effect—even during the period when the management failed to pay the state fees.
In this league, you’ve got to pay to play. Or else.
Sadly, over the last 30 years, a majority of LLC clients who served as their own registered agent have had their LLC registrations expire for failure to pay the annual fee or do other required paperwork. Even our prompting them to “use it or lose it” didn’t make a difference. They lost their companies and the legal protection those LLCs provided the owners.
It doesn’t have to be this way, but here are several scenarios that illustrate what can happen if the LLC registration lapses.
Angel lost everything. Angel founded her own bakery known as Angel Cakes LLC. Angel hired an online service to establish the LLC and made herself the registered agent. Then life intervened. Juggling hot ovens, demanding clients, cake-burning employees, and a roller coaster ride of slow and fast times, Angel never got around to sending the $50 renewal fee to the state for maintaining the LLC in year two and every year thereafter.
Then, while high on marijuana, one of her delivery truck drivers drifted into the bicycle lane and killed a bicyclist. The deceased bicyclist’s lawyer sued Angel Cakes LLC and Angel for $5,000,000 and won a $2,000,000 judgment against both Angel Cakes LLC and Angel personally. Angel’s insurance covered $500,000 and Angel had to personally pay $1,500,000, essentially bankrupting her.
The court entered the judgment against Angel because Angel Cakes LLC was not in effect at the time of the accident. Why? Angel had forgotten to pay the $50 fee that year. Because Angel Cakes LLC was legally nonexistent, it could provide no protection for her against the claim, even though she was not personally at fault for the accident. The negligent truck driver was on business for Angel and Angel was held responsible.
Stump almost lost his property. Stump set up his LLC in Virginia by using an online service. In a cost-saving move, he named himself registered agent. Stump transferred his apartment building at 123 Main Street to the ownership of Main Street LLC. Seven years later, the building having doubled in value, Stump wanted to refinance the property to pull out some cash. The title company required Stump to provide proof from the state that Main Street LLC was in good standing, usually a simple task of requesting a certificate from the state to confirm the company was still operating legally.
The title company found that Stump had never paid the annual $50 fee to the State of Virginia to keep the LLC an existing legal entity there. Subsequently, the State had dissolved Stump’s Main Street LLC several years prior.
Because so much time had expired since the last payment to Virginia, it was too late for Stump to reinstate the LLC by paying back fees and penalties. No refinance can take place until the LLC management fixes this oversight.
Even worse, in the seven years since Stump’s last payment, another person, Fred, had set up another Main Street LLC in another part of Virginia. Fred was able to do so as Stump’s right to use the name had expired upon non-payment of the annual registration fees. The State of Virginia refused to grant Stump the right to use the Main Street LLC name anymore because Fred had used the name for several years.
As a result, Stump discovered to his great chagrin that he no longer owned the LLC that owned the 123 Main Street property. Worse yet, Stump could not deed the 123 Main Street property to a new LLC because Stump was not in control of the Main Street LLC. Stump had to pay an attorney $10,000 to file suit and straighten out the mess.
Preplanning Prevents Problems. Preplan to keep your LLC alive. One simple way to do so is to pay someone to remind you to pay your annual state fees in a timely manner. Retain a company or a law firm to serve as your registered agent. The firm should notify you when it is time to file. If you still forget, they should send you a more urgent notification prompted by the state’s warning that the state is intending to close the company for lack of a fee payment.
Another advantage to having a lawyer serve as your registered agent is if you are sued, the law firm may be able to settle the case before going to court, or may find the right lawyer to defend you. Also, you save yourself embarrassment and employee rumors when the Sheriff or police show up at your office to serve you legal papers when you are your own registered agent.
Yes, this additional level of support has a cost—usually only a few hundred dollars per year. But those annual fees are small compared to the consequences of not keeping the LLC in legal status.
Bottom line: Create a plan that works, then work the plan.
State Fees and Requirements Vary. Registration fees and processes vary greatly from state to state. Fees can range from $50 to $750 a year. Similarly, some states require a lot of paperwork to keep the LLC active, other states demand only minimal paperwork.
When establishing an LLC, take into account the annual state registration fees and filing requirements. If you don’t know what your home state requires, call a lawyer, look up the information online, or call the appropriate state office. And indeed, it may make more sense to establish your LLC in a “foreign” state to take advantage of the more protective law in that state.
Are you protected? Don’t know? Schedule an appointment for an LLC audit. Call us or email at email@example.com.