Congratulations, you’ve formed a business! Now you need to make sure that your business’s operations fully comply with all applicable regulations. Regardless of whether that business is a corporation, LLC, or even a non-stock/non-profit entity, it will require regular and careful attention to the ongoing work of corporate compliance.

Best Practices for Corporate Compliance

At a fundamental level, corporate compliance is the set of legal responsibilities that keeps a business in good standing with state and federal authorities. Corporate compliance is especially critical for protecting limited liability status, minimizing legal risk, and positioning a company for investment or sale. It is crucial to understand that compliance is an ongoing task, and as such, businesses must be proactive and remain vigilant of new regulations that apply to its operations.

Listed below are the major considerations businesses should keep in mind as part of their compliance work.

Franchise Taxes

Franchise tax is not a tax on revenue but a fee paid for the privilege of being incorporated in a particular state. Delaware — home to over 60% of Fortune 500 companies — calculates this tax using either the Authorized Shares Method or the Assumed Par Value Capital Method.

Ellisa Habbart, founder of The Delaware Counsel Group, emphasizes that choosing the right method affects what you owe: “If you authorize too many shares, you’ll pay a huge franchise tax unless your actual assets are small enough to use the par value method.”

Annual Shareholder Meetings

Many states, including Delaware, require corporations to hold annual shareholder meetings. The Model Business Corporation Act and the Delaware General Corporation Law (DGCL) provide for court-ordered meetings if none occur.

Even in closely held corporations where the shareholders and board members are the same, these meetings help maintain corporate formality and satisfy legal requirements. As Daniel Cotter, a partner at Dickinson Wright notes, companies that don’t document meetings risk trouble down the road, especially in an M&A or fundraising scenario.

Meeting Minutes

Minutes are the official record of corporate decisions. Rob Sieland, founder of Lighthouse Legal Counsel, emphasizes a balanced approach: “In documenting minutes, avoid including excessive detail that may expose confidential strategy, but include enough to show the board considered its fiduciary duties.”

Minutes can serve as crucial evidence that directors fulfilled their duty of care (acting prudently and with oversight) and duty of loyalty (putting the company’s interests above personal gain). Habbart stresses that “you’ve got to show you’re doing the right thing.”

The Sarbanes-Oxley Act

The Sarbanes-Oxley Act (SOX) was designed for public companies, but many private companies voluntarily adopt its principles to improve transparency and controls.

As Sieland explains, “SOX best practices make your company a better acquisition target and help defend against litigation.” These practices include having an audit committee, maintaining proper internal controls, and producing clean financial statements.

SOX-style compliance can also position a company for IPO readiness.

Written Consents

Written consents allow corporate actions without holding a formal meeting. Under Delaware law, shareholder consents are allowed unless the charter prohibits them — but board consents must be unanimous.

If even one director doesn’t sign, you have to hold a meeting. Public companies are generally more restrictive with consents, as shareholder activists often seek to leverage them to force governance changes.

The Corporate Transparency Act: A Moving Target

The Corporate Transparency Act (CTA) was enacted in 2021 to crack down on anonymous shell companies by requiring many businesses to disclose their beneficial owners to FinCEN.

But enforcement is in flux. A federal court recently found the act unconstitutional as applied to certain entities, leading to confusion. It doesn’t apply to US companies anymore, but it still applies to foreign companies registered in the US.

Despite the legal uncertainty, some companies are filing reports preemptively, while others are waiting. Habbart cautions that if enforcement resumes after the fact, a company that failed to comply by the 2024 deadline might be at risk.

Should Legal and Compliance Be Separate Functions?

Who should oversee compliance — the General Counsel or a dedicated Chief Ethics & Compliance Officer (CECO)? Increasingly, regulators recommend a standalone CECO to avoid conflicts of interest.

Sieland notes that in several cases, dual roles have led to oversight failures. Cotter stresses that segregating legal and compliance isn’t just about rules, it’s about credibility.

The US Sentencing Guidelines back this up, requiring that ‘high-level personnel’ take responsibility for ethics and compliance and that designated individuals have appropriate authority and direct access to the board.

A Word of Caution: Deceptive Compliance Solicitations

Sieland warns that Delaware entities have been targeted by scammers posing as government agencies and demanding bogus compliance payments.

Habbart adds that unless you’re getting a communication from your registered agent, it’s probably not legitimate. Delaware’s Secretary of State has issued formal alerts about these scams.

Final Takeaways

Proper compliance requires discipline and an ongoing commitment to the process of ensuring your business stays on the right side of the law and regulations. Put another way, compliance is about keeping your footing as the ground shifts.

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To learn more about this topic view Corporate & Regulatory Compliance Boot Camp / Overview of General Corporate Law Compliance. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about compliance.

This article was originally published here.

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