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Editorial 9 MIN READ

How to handle an annual report you missed, 2019

Same fix, bigger fallout: post-Wayfair, a lapsed foreign qualification now compounds across every state you sell into

The Editors
Staff, Incorporator.org
9 min read Updated
Contents 7 sections
  1. What the 2019 penalty schedules actually look like
  2. The order of operations, unchanged
  3. The post-Wayfair cascade, which is the new part
  4. Reinstatement, in 2019 numbers
  5. Where the 2019 rules catch people who were fine in 2016
  6. Rule of thumb
  7. Sources

ou discovered it this August: the annual report was due in spring, nobody filed it, and the entity is now in bad standing in at least the state of formation and probably in three or four others. The fix is still procedural. The bill, in 2019, is larger than the one you would have paid two years ago, because a missed annual report no longer just lapses your charter. It now unwinds the economic-nexus registrations you opened after Wayfair.

This is the 2019 update to our 2017 playbook on missed annual reports. The order of operations has not changed. The blast radius has.

What the 2019 penalty schedules actually look like

The numbers worth memorizing, keyed to the four states that cover most operating companies:

  • Delaware. The LLC annual tax is a flat $300, due June 1, under 6 Del. C. § 18-1107(b). Miss it and § 18-1107(h) tacks on a $200 penalty plus interest at 1.5% per month on the unpaid balance, which compounds until paid. Three consecutive years of non-payment and the Division of Corporations will cancel the certificate of formation by operation of statute. The $300/$200/1.5% structure has not moved since 2014. What has moved is that Delaware began cross-referencing its tax-delinquent list against good-standing certificate requests more aggressively after a 2018 operational push inside the Division.
  • California. The LLC Statement of Information filing fee remains $20 biennially and $25 annually for corporations. If the statement is still unfiled 60 days after the SOS notice of delinquency, the Franchise Tax Board assesses a $250 late fee under Cal. Rev. & Tax. Code § 19141. The $250 figure is unchanged from our 2017 piece and arrives on a separate FTB notice that most founders do not connect to the missing SOS filing until their tax preparer does. Every LLC doing business in California also owes the $800 annual franchise tax under Cal. Rev. & Tax. Code § 17941, which is a separate delinquency if unpaid and earns its own penalty and interest stack.
  • Florida. Every LLC must file between January 1 and May 1 under Fla. Stat. § 605.0212. The base fee is $138.75. Miss May 1 and a $400 late fee attaches automatically and is non-waivable; the statute is explicit that the Department of State has no discretion to reduce it. Entities still unfiled by the third Friday of September (September 20, 2019) are administratively dissolved, and reinstatement under Fla. Stat. § 605.0715 costs $100 plus all back-year report fees and penalties.
  • Texas. Texas does not call it an annual report, but every taxable entity owes a Public Information Report and franchise tax return by May 15 under Tex. Tax Code § 171.203. Miss it and the Comptroller sends a notice of forfeiture of the right to transact business under § 171.251. If the return is still unfiled 120 days after the forfeiture, the Secretary of State forfeits the entity's charter under § 171.309. The no-tax-due threshold for 2019 reports is $1,130,000 in annualized total revenue, which means the franchise tax itself is often zero and the delinquency is entirely about the PIR paperwork, but the charter forfeiture cascade runs the same way.

These four states are where the typical multi-state operating company actually stacks its registrations. For any fifth state, pull the statute before calling the agency; phone scripts at most secretaries of state do not include penalty-waiver discretion, and the bill you are quoted is usually the one you owe.

The order of operations, unchanged

File first, pay second, pull the certificate third, check the other states fourth. That sequence has not moved because the states have not moved it.

File the delinquent return before sending money. In Delaware, Florida, California, and Texas alike, penalties stop accruing when the filing is accepted, not when a check is mailed. The online portals (Delaware through the Division's online services, Florida Sunbiz, California bizfile, Texas Webfile) all accept past-year reports, and all four calculate penalty and interest on the spot.

Pay what the state invoices you, not what you calculated. Delaware in particular runs interest from June 2 through the date of payment at the full 1.5% monthly rate, and the arithmetic at four or five months late is easy to underestimate. California's FTB bill arrives separately from the SOS receipt and sometimes several weeks later; do not close the file until both receipts are in hand.

Pull fresh good-standing evidence after the dust settles. A Certificate of Good Standing from Delaware, a Certificate of Status from Florida, a current Statement of Information on file in California, and a Certificate of Account Status from the Texas Comptroller. Each costs $50 or less. You want them in a folder before a bank or an investor asks, not the week after they ask.

The post-Wayfair cascade, which is the new part

In 2017 we called the multi-state chain reaction a foreign-qualification cascade. In 2019 it is bigger than that, and it runs through tax as well as corporate-registry filings.

Before June 2018, a company sold into a state without registering unless it had a physical presence there. After South Dakota v. Wayfair, Inc., 138 S. Ct. 2080 (2018), a remote seller crossing a state's economic-nexus threshold (often $100,000 in sales or 200 transactions, though Kansas adopted a zero-dollar rule effective October 1, 2019, and California set $500,000) is required to register for sales tax and, in many states, to foreign-qualify the entity as well. The Streamlined Sales Tax states and most non-SST states had enacted Wayfair-style thresholds by mid-2019, which means most venture-backed operating companies and most e-commerce sellers are now registered in ten or fifteen states, not the two or three they used to be.

Here is where the administrative-dissolution problem gets worse.

When the home-state entity (say, a Delaware LLC) falls out of good standing, the foreign-qualification files in every operating state are now sitting on stale home-state evidence. California, Florida, and Texas all require a current certificate of good standing from the home state at foreign-qualification and sometimes at renewal. New York's LLC publication files reference it. If Delaware cancels the certificate of formation under 6 Del. C. § 18-1107 after three years of non-payment, the entity has legally ceased to exist, and every foreign-qualification is retroactively void because the underlying entity is a legal ghost. Revival under 6 Del. C. § 18-1109 restores the entity but does not automatically restore foreign registrations. Each state must be re-qualified, which means re-filing, re-paying, and re-submitting the (now-revived) Delaware certificate.

Layer the sales-tax dimension and it gets ugly. A foreign-qualified entity that has been administratively dissolved in the home state and whose sales-tax registrations are still active in fifteen states is technically collecting tax under a charter that no longer exists. In most states that is a bookkeeping problem at worst; in a few, including California and Washington, a successor-liability argument attaches to officers who signed the returns. The Multistate Tax Commission has been circulating model guidance on this since 2018, and state departments of revenue have been slow to enforce it, but the exposure is real and it is the kind of thing that surfaces on acquisition due diligence two years later.

The compressed version: a missed $300 Delaware tax in 2019 can become, within one calendar year, a $200 Delaware penalty plus 1.5% monthly interest, a $250 California FTB assessment, an $800 California franchise tax delinquency, a $400 Florida late fee, a Texas Comptroller forfeiture notice, and an awkward disclosure on whatever term sheet shows up next.

Reinstatement, in 2019 numbers

If the home state has already moved to administrative dissolution or cancellation, reinstate before anything else. The rest of the chain cannot be repaired while the parent entity is void.

Delaware's revival procedure under 6 Del. C. § 18-1109 is a mechanical one: file a Certificate of Revival naming an agent, pay back taxes, penalties, and interest for every delinquent year, and receive a revived entity. Three years of missed $300 annual taxes with penalties and 1.5% monthly interest compounds to roughly $2,100 to $2,400 by the time the Division issues the revival certificate, depending on the exact timing. Expect a two-to-four-week turnaround once the back-tax invoice is calculated, longer if the name has been taken by another filer in the interim, in which case you are also buying a name-availability fight.

Florida reinstatement under Fla. Stat. § 605.0715 costs a flat $100 plus the delinquent annual report fees, and Florida is unusual in that reinstatement relates back to the date of dissolution (no gap in entity existence). California reinstatement of an FTB-suspended LLC requires filing all delinquent Statements of Information, paying the $20 per missed filing plus the $250 penalty per year, and paying all back $800 franchise taxes plus their own penalty and interest. The FTB issues a certificate of revivor under Cal. Rev. & Tax. Code § 23305b once the tax ledger is clean. Texas reinstatement after charter forfeiture under § 171.313 requires filing all delinquent reports, paying back tax and penalties, and filing an Application for Reinstatement with the Secretary of State along with a Tax Clearance Letter from the Comptroller.

None of this is fatal. All of it is expensive, and the bill scales non-linearly with time, because every state's interest clock compounds independently.

Where the 2019 rules catch people who were fine in 2016

Three changes worth naming, because each of them has quietly moved the failure mode since we wrote the 2017 piece.

The first is that economic-nexus registration is now routine. Before Wayfair, a company with a ten-person Delaware LLC sold into all fifty states and was registered in maybe two of them. After Wayfair, the same company is registered in ten or twelve. Each of those foreign qualifications has its own annual filing and its own penalty schedule, and the compliance surface is no longer one SOS; it is ten, plus ten departments of revenue, plus the home state.

The second is that state cross-referencing has improved. California's SOS and FTB have been actively matching records since 2018. Delaware's Division of Corporations tightened its good-standing workflow that same year. Florida's Sunbiz has cross-agency data flows with the Department of Revenue. The trick of quietly paying late and hoping nobody notices works less well than it did.

The third is that M&A diligence looks further back. A 2019 data room will pull good-standing certificates from every state the target is qualified in, and diligence counsel will check the dates. A three-year gap in Ohio or Illinois that nobody ever paid attention to becomes a closing-condition discussion when the acquirer's law firm flags it. The fix is still cheap in absolute dollars; the negotiating cost, and the cost of a delayed close, is not.

Rule of thumb

File the delinquent return first, pay what the state invoices second, pull a fresh good-standing certificate third, and run the same check across every state you registered in for sales tax after Wayfair by the end of the week. If the home state has already cancelled the entity, revive before touching anything else; every foreign qualification downstream is void until the parent is alive again, and fifteen downstream registrations cost fifteen times what two used to.

Sources

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