Client Alerts
July 16, 2012

Is your business in "bad standing" in Kentucky?

Stites & Harbison, PLLC, Client Alert, July 16, 2012

Recently, the Kentucky Secretary of State announced that almost one in five entities doing business in Kentucky failed to file an annual report––that’s nearly 37,000 entities. The Secretary of State has designated these entities as “inactive” and in “bad standing.” If not corrected soon enough, the Secretary of State will administratively dissolve the entities or, for entities formed in states other than Kentucky, revoke their certificates of authority to do business in Kentucky. These consequences are not only unattractive to potential business partners, but also cause businesses unnecessary hassles and expenses. They, however, can be avoided. Is your business among the nearly 37,000 others that have not filed annual reports this year?

The Kentucky Business Entity Filing Act requires that corporations (including nonprofit corporations), LLCs, business trusts, limited partnerships, and other entities doing business in Kentucky file annual reports with the Secretary of State by June 30th each year. Annual reports include basic information regarding a business, such as its current officers and principal address. If a business fails to file an annual report on time, the Kentucky Secretary of State immediately designates it as being “inactive” and in “bad standing” and publishes this designation on its website. The Secretary of State also will send the business a notice to this effect.

While the reasons for missing the June 30th deadline may be benign, entities’ potential business partners will not like the resulting “bad standing” designation. For example, businesses in “bad standing” will not be able to obtain commercial financing. The same is true if a business is looking to undertake certain types of strategic transactions, such as mergers. For nonprofits and other businesses, potential donors and business partners may be wary of a business officially listed as “inactive” and in “bad standing” on the Secretary of State’s website.

One reason for their wariness is that a “bad standing” designation can lead to more serious legal problems. An entity in “bad standing” has sixty days from receiving notice from the Secretary of State to file its annual report. If it doesn’t do so, the Secretary of State may administratively dissolve the entity or, for a foreign entity, revoke its certificate of authority. Once an entity is administratively dissolved, it lacks legal authority to continue its business as usual and may only take actions necessary to wind up its affairs. The risk for a foreign corporation doing business in Kentucky without a certificate of authority is that it will be denied access to Kentucky courts and may face monetary penalties.

Both of these situations are remediable, but only at additional expense and hassle for the business. Reinstatement after administrative dissolution requires, among other things, payment of late fees, obtaining a letter of good standing from the Kentucky Department of Revenue and, for business corporations, obtaining a letter of good standing from the Kentucky Division of Unemployment Insurance. The only way to remedy a revocation of a certificate of authority is to file an application for a new certificate of authority, which is more expensive than filing an annual report and could trigger additional fines for each day the entity transacted business in Kentucky without a certificate of authority. Even after taking these corrective actions, however, an administrative dissolution or revocation of a certificate of authority will remain part of an entity’s public record.

This is an avoidable problem. Entities often fail to meet Kentucky annual report deadlines because they are unaware of them or because the Secretary of State’s notice of “bad standing” is overlooked, sent to an old address, or addressed to an individual no longer affiliated with the entity. Designating a professional agent for service of process avoids these issues. Professional agents for service of process know states’ deadlines, consistently file on time annual reports, and can remain the same through an entity’s leadership and employment changes, relocation, and reorganization. If your business is one of the 37,000 others that failed to file an annual report this year, a professional agent for service of process can help get your business back in good standing and keep it in good standing.

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