The COVID-19 pandemic has disrupted every facet of American life. Everything from how we dine out and socialize with each other, to the very paradigm of doing business has changed. Now several months into an ongoing crisis, many small businesses have adopted a remote working arrangement, either in direct response to state and local regulations or as a way to keep non-essential employees safe.
Small business owners face the particular reality of running a business and managing employees from their home office. In addition to navigating a fully remote world of providing profitable products and services, small businesses must also develop ways to ensure ongoing compliance with the various federal, state, and local requirements needed to operate.
Traditionally, compliance has been viewed as a non-core, administrative function. In the age of COVID-19, however, it steps into the limelight as a way to ensure continuous operation and even profitability. Small business owners should adopt a strategy to ensure compliance throughout their company and support those initiatives with the techniques presented in this article.
The Basics of Legal Entity, Tax, and Licensing Compliance
In every state your company does business, it must maintain good standing with entity, tax, and licensing authorities. This generally allows the company to keep operating legally. It also preserves the limited liability protection of owners, officers, and directors. While every business faces unique requirements for its location or industry, most can expect to do the following in each state.
Maintain a Registered Agent for Service of Process
Business entities are required to appoint and maintain a registered agent in each state where they are registered. The registered agent receives important legal notices, such as service of process, on behalf of your business and forwards them to you with enough time to respond.
During the COVID-19 pandemic, it is especially important to know who your registered agents are. Most states allow you to designate any physical address, as long as it is not a P.O. Box or a virtual office. It is possible that your business’s publicly listed registered agent is currently its physical place of business. Of course, while you are busy running your business from your home office, it is equally likely that no one is at your usual address to fulfill the registered agent’s duties.
Tip: Ensure that you have appointed a reliable registered agent who can perform its role in each state. This helps you avoid missing the delivery of critical legal notices and provides your business with coverage as you deal with limited availability of in-office resources.
File Secretary of State Annual Reports
Your business is generally required to file an annual report with each state in which it has registered. Most states require business entities to file annually, though some have irregular due dates, such as every two or ten years. Secretary of state reports are information updates designed to keep your business’s public record current. They are also required to maintain good standing in that jurisdiction.
Unsurprisingly, you will encounter statutory deadlines that vary by state and even depend on the type of legal entity you have. This complexity increases when your business expands into multiple states, or when you manage a portfolio of companies.
Tip: Establish a process to manage secretary of state annual reports on an ongoing basis. Ensure that you have designated key individuals to file them on time. You may also need to invest in technology to ensure that all parties have access to the company information needed to file.
File and Pay Tax Returns
In almost every state, your business will be required to pay taxes on its income, the sale of products and services, and other specific activities. Most tax accounts are administered separately, which means your business needs to register and file returns in each state, and often with multiple agencies within that state. In many places, like California and the District of Columbia, failure to maintain tax compliance impacts your corporate good standing and your ongoing right to do business.
Tip: While you’re running your business from home, ensure that you have a process to register, maintain tax identification numbers, and file returns on time. Consider contacting accounting and tax professionals for advice and investing in software to handle ongoing reporting.
Maintain Necessary Licenses and Permits
A business license gives your business or nonprofit the authority to operate or provide its goods or services legally. You may need a general business license for your particular location or to conduct a specific activity. Depending on your product or service, you may already have these licenses and permits in place. As you transition to a remote location, check with your state, city, and county to check whether you need any additional licenses to operate your business from your home office.
Tip: Similar to your other legal entity and tax compliance requirements, ensure that you have a system to track and manage renewals of your various licenses. The last thing you want to do is find yourself out of compliance for an expired license!
Hiring and Managing Employees from Your Home Office
There’s a terrific upside to hiring and managing employees from your home office. In a remote arrangement, you can consider hiring outside your local area, giving you access to a wider talent pool. From the employee’s perspective, they may enjoy the flexibility of a remote schedule, save on commuting costs, and even reward you with higher productivity.
From a compliance perspective, do some due diligence before hiring a remote employee. In addition to your usual process of interviewing, background checking, and onboarding employees, review the requirements of the state where that employee lives and will work. Depending on your situation, your business may be required to open state withholding and unemployment tax accounts in order to pay wages. Many states also require that out-of-state employers foreign qualify their legal entity and appoint a registered agent.
Tip: Review your employment situation with legal counsel as you hire employees in other states.
When hiring a new out-of-state employee, a proactive approach is essential. Every state has varying processing times to open your payroll tax accounts and issue the tax identification numbers needed to pay your new hires. Unfortunately, the COVID-19 pandemic has placed extra strain on government agencies, especially unemployment offices. It is not uncommon to experience processing delays extending several weeks or more.
Tip: Before hiring that top talent in another state (and we’re not saying don’t), take some time to research the requirements and get the appropriate registrations and tax accounts in order. This will improve your overall time-to-hire and help your new employee earn their first paycheck on time.
Creating Systems to Support Organizational Compliance
With staff and company resources in disparate locations, management is charged overseeing company compliance from their home office. This creates a need for systems to manage various compliance tasks and deadlines. Only you can determine the right mix for your business, but you might expect to address the following areas.
Technology to Drive Compliance Insights
With so many diverse compliance responsibilities, your business needs a system to manage entity registrations, registered agents, tax deadlines, and licenses. Many companies utilize spreadsheets or calendar software. As your company grows, you may consider investing in purpose-built compliance software to manage your compliance obligations. This gives your employees (and yourself) the peace of mind that key deadlines are being met.
Consider, too, that attorneys, accountants, consultants, and insurance providers play a role. These vendors may directly handle some elements of your legal entity, tax, or licensing compliance. The right technology solution will give them the critical insights needed to provide their services to your company.
Tip: Disparate systems for tracking compliance deadlines can lead to the loss of good standing and other negative consequences for your business. Using a central system for managing compliance reduces your overall risk.
Records Management
Individuals responsible for preparing and filing various reports and returns should have access to company information in a central location. This includes any organizational and ownership data needed to prepare and submit state compliance filings. Consider also storing copies of corporate records, such as your articles of incorporation, bylaws, contracts, or resolutions. State agencies, banks, vendors, and even customers may require copies of these records on short notice.
Tip: With one system to store and track records, you reduce the risk of missed filings and misreported information. You also have better oversight of your employees’ activities.
Policies and Procedures
Much of the business information needed to stay in compliance is considered confidential, if not highly sensitive. Anything from social security and tax identification numbers to financial statements and contracts should be properly secured. Only individuals who need it to do their jobs should have access to it. In a technological era, security is paramount. Ensure any system you implement is designed to keep company information secure.
Many businesses also have a sensitive information policy and employee training programs, both of which are designed to train and guide employees on the proper handling of sensitive or confidential data. In the event of a breach or an employee infraction, these tools provide parameters for rectifying the situation.
Tip: A remote working environment may require additional management oversight. Be sure each employee understands their respective role, and that they have access to the tools and policies to make them successful.
The New Normal
With so many businesses being run from a home office, management should develop systems and processes to ensure critical compliance deadlines are met. This helps ensure the continuous, efficient operation of your business. And, when it comes time to hire that star employee or negotiate that next large opportunity, it could be a source of competitive advantage.
In an era of COVID-19, remote work is the new normal. But, with the right practical improvements, your company can leverage compliance to drive productivity and profitability into the future.
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Harbor Compliance does not provide tax, financial, or legal advice. Use of our services does not create an attorney-client relationship. Harbor Compliance is not acting as your attorney and does not review information you provide to us for legal accuracy or sufficiency.
