Maintaining legal compliance is critical to running a business, perhaps more important than sales, marketing, and customer service. Legal compliance for businesses keeps your company in good standing with your regional and national authorities and industry players. Without this, your business faces tremendous risks that can hinder or even stop your operations altogether. Read this guide to understand what compliance is and how it impacts your business.
What is business compliance?
Business compliance refers to how a company follows the rules, processes, and policies governing its practice. Legal compliance for businesses involves good recordkeeping and regular auditing to prove that your company follows these rules. This means having robust, written-down guidelines to oversee your operations as legally required in your region. Business compliance also maintains high ethical standards that protect the company’s directors, employees, and customers from negligence, discrimination, and exploitation.
Why is business compliance important?
Entrepreneurs are responsible for compliance, from obtaining a business license to following health and safety regulations and paying taxes. Maintaining legal compliance can be challenging, but it helps your business in the following ways:
Supporting business growth
As your company expands, you become more responsible toward your employees, industry regulators, and government agencies. A strong compliance framework ensures you take full advantage of growth opportunities while maintaining good governance and standards.
Fewer legal issues
Compliance means fewer chances of facing lawsuits, penalties, or other legal challenges. If you’re in good standing with compliance agencies, you can address issues as they arise by heeding warnings. It also gives you a strong case against anyone wanting to sue your business for any reason.
Physical and psychological safety
Legal compliance creates a safe working environment in two main ways. First, a compliant business has all the necessary equipment and policies to prevent workplace injuries, such as fire extinguishers, clearly marked exits, warning labels, etc. It also outlines the procedures to follow in case of harassment, discrimination, or other unwanted behaviors that affect mental health outcomes.
Marketing opportunities
Businesses can leverage compliance for marketing and PR purposes. For example, indicating data security compliance on your company website makes customers more confident in your brand and services. You can also include the Occupational Safety and Health Administration compliance and certification during recruitment campaigns to attract more suitable candidates.
Employee loyalty
Since business compliance applies to everyone in an organization, it leads to a professional and productive workplace. You’re more likely to retain employees when they feel safe from harassment and discrimination. Clearly outlined policies also go a long way in overcoming communication challenges and resolving conflicts, leading to a more productive workforce.
What happens when you ignore business compliance?
In many cases, small business owners pay more attention to other operations like sales, marketing, inventory, and logistics because they directly contribute to the bottom line. However, you can manage all these tasks and maintain compliance for long-term success. Neglecting legal compliance for businesses has many consequences, such as:
Increased risk
If you fail to understand what compliance is in a legal context, you’re setting yourself up for future problems. Businesses face legal penalties, fines, license terminations, and even permanent closure for noncompliance.
Losing good standing
Compliance failure can cause your business to lose its good standing with your state, which means you may not be able to operate in other states if you plan to grow your reach. A certificate of good standing is only issued to compliant businesses to get licenses, financing, or even sell a business. The state can also dissolve your company if you lose your standing for an extended period.
Losing liability protection
In legal terms, a company that violates or neglects compliance has “pierced the corporate veil.” This veil or shield separates a corporation or limited liability company (LLC) from its owners, making them independent legal entities. Without this protection, a business owner becomes directly responsible for losses or damages if an employee, customer, or competitor sues the company. This can lead to significant financial and reputational problems for business owners.
Note: Liability protection only applies to corporations, LLCs, and certain partnerships, not sole proprietors — the owner and business are one legal entity. However, sole proprietors must still follow legal compliance for licenses, permits, insurance, and taxes.
Legal compliance requirements
Legal compliance for businesses falls into three categories: internal requirements, government (external) conditions, and permits and licenses. Remember that these requirements vary by state and industry, so check with your local authorities to determine which applies to your context.
Internal requirements
Corporations and LLCs have stricter internal compliance requirements compared to partnerships and nonprofits. For example, corporations need a board of directors, annual meetings, stock certificates, etc. To avoid future disputes, businesses must keep accurate and systematic records concerning decisions, transactions, and other changes.
Here are some examples of internal compliance requirements:
- Records of policies, procedures, and bylaws
- Records of all transactions
- Records of all licenses and contracts
- Records of all meetings, including written minutes, video, and audio files
- Keeping these records on hand in a secure storage system
These records matter because:
- They demonstrate integrity and transparency in running your business.
- They provide evidence in your favor in case of a lawsuit.
- They make it easier to sell a business.
Government requirements
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Businesses also have obligations toward the federal government at the local, state, and national levels. When the government talks about compliance, it usually means paying taxes. But here are other government requirements that may apply to your business:
- The Affordable Care Act: If you have 50+ employees, you must provide health coverage and report this to the IRS.
- The Fair Labor Standards Act: This law determines the minimum wage, overtime payment, and full-time and part-time recordkeeping standards, which vary by state.
- Franchise tax: Your state may require corporations and LLCs to pay an operation fee, calculated based on your annual revenue or stock value.
- Filing annual reports or statements: Your state may require you to submit a report annually or every second year, accompanied by a submission fee and a deadline.
- Change of particulars: If you change or update any essential information about your business, e.g., business name, physical address, or contact details, you must inform your state within a specified time.
Permits and licenses
The main challenges for small businesses are knowing which licenses and permits you need and when to renew them. Some industries have numerous compliance rules, so if your company straddles multiple sectors, licenses can expire before you know it. In addition, if your business operates in numerous jurisdictions, various boards oversee your licenses and permits, so you must keep up with them all.
For example, a restaurant needs at least 15 licenses and permits, including food service, liquor, music and live entertainment, employee health, resale, dumpster placement, and valet parking. On top of that, these permits vary by state, county, and city, so opening a new location requires compliance with new regulations. Since these licenses expire at different times, you can create a “license calendar” to remind you to renew them or outsource compliance to a third party to handle this on your behalf.
How to achieve legal compliance for businesses
As you can see, legal compliance depends on your type of business, location, and industry. So, how do you become compliant in the first place? Follow these tips to get started.
Know your legal responsibilities
It’s up to entrepreneurs to understand the compliance landscape in which their businesses operate. Start with an online search to discover compliance information from government agencies and oversight organizations for your company. You can also speak to fellow small business owners for insights about auditing, risk management, and best practices.
Consult a professional
For many business owners, compliance matters fall outside their areas of expertise. Company registration processes and website requirements are straightforward, but compliance becomes complex when you add new employees.
Experts dealing with legal compliance for businesses have vast knowledge in:
- State
- Federal
- Financial and corporate law
- Accounting
- Risk
- Organizational management
If you plan to start a business, a free consultation can give you a good idea of your compliance requirements. If you have an established business, consider hiring a compliance expert to streamline your processes.
Use compliance software
The most significant benefit of compliance software is automation: you can track your policies, get notified of license renewal dates, and generate reports to make auditing easier. Various compliance software is available today, dealing with regulatory requirements, industry-specific compliance, and environmental, health, and consumer standards. Choose one that best fits your use case and build policies that enable compliance for your business.
Tips on how to maintain legal compliance
Once you secure all your licenses and establish company policies, you’ll need to keep them up to date to avoid the penalties we highlighted earlier. Here is some practical advice on maintaining legal compliance for businesses.
Manage your time
Running a business puts a significant strain on your time, especially compliance-related tasks. If you manage your time well, you’ll know when to start filing your taxes, apply for license renewals, and respond to compliance challenges. Dedicate time for compliance in your daily schedule because it will increase your awareness of it and help avoid warnings and fines.
Put everything in writing
Document everything from receipts and invoices to guidelines on misconduct. Automate receipt scanning, link your business bank account to bookkeeping software, and transcribe audio and video content. Keep updated backups of all your documents, and store them in a secure cloud server, ready for tax filings and audits. It takes time to build a habit of documentation, but it’s worth it in the long run.
Use policy templates as a foundation
You don’t have to build compliance policies from scratch when templates are readily available. For example, the Health Insurance Portability and Accountability Act compliance document is an excellent tool for forming your internal compliance. It includes information about digital security, business continuity, risk analysis, and audits. Government agencies and independent regulators also supply compliance templates and checklists to make policy development easier for companies.
Hold compliance meetings
Ensure every team member knows what compliance is and can access policy documents whenever they need them. Explain why compliance matters, what constitutes a violation, and the consequences of compliance breaches at every level. This is particularly important when implementing compliance policies in a challenging work environment. If there’s any resistance to new compliance rules, open your communication channels to address these concerns.
Conduct compliance training
Compliance training is mandatory for employees and management to align business values to legal and ethical standards. It involves training in information security, data protection and privacy, workplace safety, diversity and inclusion, anti-harassment, and more. It also reinforces awareness about the consequences of neglecting compliance, such as loss of employment and criminal prosecution. Run these programs within regulatory deadlines to maintain compliance.
Handle misconduct promptly
If misconduct in a business goes unnoticed, the work environment quickly becomes hostile and toxic. A culture of discipline can address misconduct as soon as it’s reported. Demonstrate that breaching compliance policies carries consequences you’re ready and willing to enforce in your company. The earlier you sort these issues, the better you avoid employee turnover and lawsuits.
Choose a certified, licensed compliance partner
If you decide that outsourcing compliance functions is ideal for your business, choose a reputable compliance partner with a good reputation in your industry. Remember that you want to avoid compliance errors, from late tax submissions and license renewals to unnecessary lawsuits that could potentially destroy your reputation. Therefore, your compliance partner should have the expertise you need to support your company.
Conclusion
Legal compliance for businesses is complex, ongoing, and ever-changing. It’s common for small companies to fall short of the numerous requirements unintentionally. Unfortunately, noncompliance can be disastrous for your company’s progress and reputation. Regulators pay close attention to businesses to ensure compliance, so make it a priority in your operations. You can reduce compliance complexity by using compliance software, seeking expert advice, and partnering with a trusted compliance partner. Give compliance the time and energy it deserves, and you’ll grow your business without a hitch.