One of the most important decisions a small business needs to make is what legal entity to organize under. For tax reasons and legal protections, it’s often not wise for owners to operate under their own names as sole proprietors. But incorporating can be a complex, costly process that’s impractical for many businesses.

That’s why LLCs (limited liability companies) are such a popular entity. In addition to being used to operate businesses, LLCs are also widely used to own rental properties or simply to hold real estate for investment. An LLC can be owned by just one person or other entity, or owned by multiple persons or entities.

LLCs are widely used because of their simplicity and for the legal protections they may provide.
But in our accounting practice, we often see a problem with LLC owners, who fail to file annual reports required by the State of North Carolina.

The law requires every LLC to file this report with the Secretary of State. This filing is separate and apart from the filing of state income tax returns. It’s a requirement for each domestic limited liability company – that is, based in North Carolina – and every foreign, or out-of-state, limited liability company authorized to do business in North Carolina. The only exceptions are for professional limited liability companies, such as those operating medical or legal practices.

Each LLC subject to this requirement must deliver its annual report to the Secretary of State, for filing, on a prescribed form. The forms can be downloaded from the Secretary of State’s website, at

www.secretary.state.nc.us/corporations/

Note that new forms are required for filings after Jan. 1, 2014. So if you happen to have any older forms, you’ll need to get the updated version.

The report is due every April 15, starting the year after the LLC was created. It can be filed electronically, or a “pre-populated” annual report form can be downloaded, printed, and mailed to the Secretary of State’s office in Raleigh. The mailing address is listed at the bottom of the printer-formatted form.

The annual report must be accompanied by a $200 fee.

Most of the time, the Secretary of State will mail out a reminder postcard. But this is not a requirement in the law, and many taxpayers do not receive these reminders.  Failure to file annual reports may result in the Secretary of State “administratively dissolving” the LLC. The result is that it ceases to exist as a legal entity.

This can wreak havoc with loans the LLC may have with a bank or with loans the LLC is trying to obtain. It also creates problems with customers who want to do business with the LLC and can lead to tremendous complications if the LLC owns real estate.

If you should be audited either by the IRS or by the North Carolina Department of Revenue, the LLC may be treated as though it did not exist. That potentially exposes each member of the LLC to tax liabilities or penalties they wouldn’t face if the LLC remained in good standing.  Additionally, a dissolved LLC may result in the loss of whatever legal liability protection it may have previously afforded.  If you find yourself in this situation, there are remedies. The simplest is to bring all your annual reports up to date and pay all outstanding annual report fees. When that’s done, the LLC can be reinstated.
Don’t let this simple filing process slip by and ruin the purpose of having the LLC to begin with.
 
My goal is to give my clients and the public useful information, explained in plain English, about their finances and taxes. If you have a question you’d like me to answer in a future article, please let me know.
 
Randy McIntyre is a Certified Public Accountant and a partner in McIntyre, Paradis, Wood & Company, CPAs. He has worked in public accounting since 1977, in Wilmington since 1992. His firm is built on a history of service, technical expertise, and innovative to provide the expertise of larger firms with a personal, one-on-one approach. To learn more about McIntyre, Paradis, Wood & Company, see www.mpwcpas.com. He can be reached at  [email protected] or 910-793-1181.