What Is Corporate Compliance and Why It’s Important For Investors

If you go through the effort of forming, building, and growing a company, you want to be sure to do everything you can to protect your business. One thing you simply can’t afford to ignore as a business owner is compliance. Let’s talk a bit more about what corporate compliance means, involves, and looks like.

What is Corporate Compliance?

Broadly speaking, corporate compliance describes how closely your company adheres to the law and any other policies it should be following. You can break it down into two basic categories:

  • Internal compliance. Founding documents, company policies, and operating procedures fall into this category.
  • External compliance. This type of compliance relates to the laws, ordinances, and any other regulations from other bodies you must follow. For investors with property in multiple states, you may be dealing with multiple state-level agencies for compliance reasons.

Internal and External Compliance: What You Actually Need to Worry About

And don’t worry, that headline’s not a tease. We’re seriously going to show you how to not give a single solitary F-bomb about compliance in terms of “anxiety.” You won’t know this emotion by the end of this article, because you’ll know what’s up and how to get it. Let’s begin with some expanded definitions now. Pay attention to why each will be a concern for you, because they truly are crucial points to grasp (and mighty cocktail trivia for your next netowrking mixture.) Let’s start with these descriptions, then move to what the real issues you need to deal with to have TOTAL compliance are. 

Internal compliance matters because it allows you to control your “in-house” liabilities, such as setting up the proper type of company, asset protection, contractor and property manager issues, and much more about your day-to-day.

External compliance, on the other hand, is more focused on the legal pieces of your company needs. This is just one of several reasons why attorneys offer services to assist. Attorneys can help you satisfy the most critical pieces of external compliance, which in our opinion are:

  • Federal law compliance. Obviously we keep the Department of Labor and Taxman happy as investors. The reasons should be fairly obvious, and we can prevent lawsuits on matters like housing discrimination by being familiar with legislation like the Fair Housing Act. We’ve actually authored some educational pieces on understanding how the Fair Housing Act affects lawsuits, liability, and your daily operations.
  • State law compliance. State laws determine which entities you can access most easily and which will ultimately offer you the greatest protections. You may wish to form out-of-state based on your lawyer’s advice, because other states may be friendlier to real estate investors like us. Yes, we’re all investors too.
  • Local ordinances and regulations. Local law seems silly but can screw you over if you get it wrong. Chat with another local investor for free advice, or rub elbows with a local pro at a networking event to get some free tips on “stuff you didn’t know about your city’s rental property quirks.” 

Of course, pros are happy to give you tips too, but generally good ones don’t do it for free. Use your network as well–as lawyers, we endorse this tactic. Other attorneys will thank us if you give them the business. We’re thirsty for it right now, and paid consultations–even low-cost ones–will help support one of your kindly local lawyers. One huge reason we endorse this method of abusing expertise is because we genuinely believe it helps the whole legal profession as well as the investors who embrace a competent real estate support team.

  • Tax issues. Technically this is federal law too, but since you’ll also need a CPA if you’ve got specific enough concerns, we’re separating it out here so you guys (the people smart enough to read this little “Too Long Didn’t Read” breakdown) won’t forget. Keep Uncle Sam happy. He’s a real G about getting his money. He will get it. You can’t outrun him, not even internationally. And he WILL enforce collections the dirty way. Keep your taxes clean, friends. By any means necessary: Excel, Turbotax, CPA, little envelope-back calculations, standing on your head while you collect receipts, praying to Our Lady of Perpetual Exemptions, or whatever works for you.

Both concepts of compliance are vital and can be offerings of full-service corporate compliance firms or agencies. Let’s dive into why you might think about using one, and your alternatives if you’d rather not pay.

Why Your Company’s Compliance is Crucial

The consequences of noncompliance aren’t pretty. What consequences will depend on the severity and type of noncompliance, but none are pleasant. If your LLC is noncompliant because you got a LegalZoom or similar company’s weak cookie cutter LLC, it may be totally useless as a business entity and thus offering you no real lawsuit protection. With so much on the line, why play around? 

Setting up Your Company’s Corporate Compliance: The Real Estate Investor’s How-to Guide

While all of these rules and regulations may seem like a drag, fortunately, you don’t have to wade through all the legalese and paperwork on your own. Professionals can help you be certain of your company’s compliance, with many offering specific corporate compliance services. Let’s talk about what these services look like in real life.

Your Quick and Dirty Guide to Your Real Estate Compliance Options

Generally, here are the kinds of services you can purchase from full-service firms. The value of a full-service firm is greater for real estate investors who have more expensive time. “Expensive” by the way can be measured in numbers for most of us. Look at what you average as an hourly rate and decide if putting even one or two hours of time towards compliance is “worth it.” If you can’t get the job done for under $100-300, you absolutely want to think about full-service. Even if your hourly rate is $20, that gives you five hours a year to devote to compliance. The idea that compliance services are for “rich investors only” or those who are well on the way to success is BS, to be blunt. Here’s the quickest, but not only, reason why. 

You can pay a full-service legal firm (not an online LLC-in-a-box shop because lawyers are more effective than LegalZoom or template companies, always) very little money to have them address that list of obligations above. Moreover, investors who purchase a compliance package usually get these things:

  • Peace of mind. Your work’s being done by actual trained real estate attorneys or other types of real estate experts if you choose pros wisely.
  • Flexibility. If you just need tax services from a real estate-experienced CPA, for instance, this is usually an option with firms familiar with investors. This piece can be cheap or nearly free, or you can spend a little bit more for more services. Many firms (and we’ve joined this party too) are embracing a la carte financial, legal, and tax services. You can even sometimes pick and choose what you need, and get a few things you may need someday on top, depending on how much time you’re willing to put into shopping. Again, would you rather spend an hour learning about this type of quick, easy-to-read info and comparing your options or trying to learn law, tax, and financial strategy all at once? Unless you simply enjoy pain, the choice is a no-brainer.
  • Financial degrees of service. If you’re skilled in compliance say, because you’re a real estate agent, CPA, or lawyer (thanks for reading, by the way–we love our attorney readers!), you can save serious cash by DIYing the services you provide and simplifying paying for the rest.

Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.

Discuss the legal safety of your real estate investment portfolio?

Give Our Real Legal Team a Call Now!

(512) 871-0843