Mandatory Maintenance of LLC’s by Brandon Baker

 

Limited liability companies, or “LLCs,” have become very common in the business marketplace over the last 15 years.  One of the primary benefits of the LLC business entity, as opposed to the corporation or the limited partnership, is the LLC’s ease of operation.  However, “low maintenance” does not equal “no maintenance.”  Thus, business owners who are inattentive to certain requirements can encounter major problems.

Oklahoma LLCs, unlike corporations, are not required to pay annual franchise tax to the Oklahoma Tax Commission.  Instead, LLCs must file an Annual Certificate with the Oklahoma Secretary of State each year, along with a $25 annual fee.  The Annual Certificate is a simple, one-page document which recites the LLC’s name, states the street address of its principal place of business, and confirms that the LLC is an active business entity.  The Annual Certificate is due each year on the anniversary of the date the LLC’s Articles of Organization were filed with the Secretary of State.  The Secretary of State is required by statute to mail a notice of the Annual Certificate’s due date to each LLC no less than 60 days prior to the LLC’s anniversary.  The Annual Certificate may be filed through the mail, in person at the Secretary of State’s office, or even online.

However, a surprisingly high number of LLCs fail to file an Annual Certificate each year.  The failure to file an Annual Certificate is problematic because it could eventually lead to the cancellation of the LLC and the loss of the owners’ liability shield.  Oklahoma law gives the LLC a 60-day grace period from the anniversary date to file the Annual Certificate.  Once this period has expired, the LLC ceases to be in good standing under state law.  The loss of good standing prevents the LLC from filing lawsuits, filing documents with the Secretary of State (other than an Annual Certificate), and may inhibit contractual business dealings, though it does not prevent them.  

Within 3 years from the anniversary date, the LLC can be reinstated simply by filing the overdue Annual Certificate(s) and paying the delinquent annual fees.  There is no late fee.  If, on the other hand, an LLC allows 3 years to transpire without filing an Annual Certificate, the LLC is cancelled and may not be reinstated by the Secretary of State.  During this 3-year period, the liability shield to the members of the LLC remains intact and the LLC may defend lawsuits.  However, once an LLC has failed to file an Annual Certificate for 3 years, its Articles of Organization are cancelled and the LLC is no longer a valid business entity under Oklahoma law.

At that point, what becomes of the business, its assets, owners, and employees?  Practically speaking, these do not simply disappear.  Arguably, a cancelled single-member LLC simply becomes a sole proprietorship and a cancelled multi-member LLC becomes a general partnership under state law.  As the legal entity no longer exists under state law, there is no liability shield provided to the members.  Owners of a cancelled LLC are therefore personally liable for the company’s debts, obligations, and liabilities just as if their individual name was on the line.

The good news is that Oklahoma has passed recent legislation set to take effect in approximately 1 year, on January 1, 2010.  Under the new law, cancelled LLCs will have the opportunity to apply for reinstatement with the Secretary of State.  Though this provides some forgiveness to business owners, it has yet to take effect.  More importantly, even under the new law, a cancelled LLC which has not been reinstated is in the same predicament as before.  

LLCs continue to be an excellent choice for those looking to form a new business entity.  Though they are extremely user-friendly, LLCs do involve some ongoing maintenance.  Please feel free to contact our office if you have any questions or concerns about your current company, or if you are considering the formation of a new business entity.