Where Do I Go From Here?

Now that your corporation or LLC has been formed, what do you need to do now? The steps you will follow will depend on the type of company, the nature of your business and the state or states in which you will do business. This article is intended to be generic and should be taken by you as a guide only. You should always review the matters discussed with your accountant or attorney.

1. Employer Identification Number
2. Bank Accounts
3. State Qualification
4. Business Licenses
5. Tax issues
6. Corporate Governance
7. Maintaining Corporate Identity

Step 1: Employer Identification Number
Every corporation or LLC filing a state or federal tax or informational return must have an employer identification number (E.I. number). An E.I. number is your company’s "social security number" and it is used by banks and other companies as an identification number. The number is obtained by completing IRS form SS-4. The instructions tell you that after you complete the information required on the form, you can either call IRS at the number on the instruction and obtain the E.I. number by phone or mail it to IRS and they will send the number to you in about 2-3 weeks. The form calls for your social security number, however if you are not an US citizen or do not otherwise have a social security number you may omit that information. Delaware Corporate Agents  will prepare the form for you for a fee of $25 USD. However, IRS procedures do not permit us to obtain the number, you must either call the IRS or sign and mail the form to IRS. You will need an E.I. number to open a bank account, obtain a business license and for many other purposes.

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Step 2: Bank Accounts
Your company must have its own bank account into which all income must be deposited and expenses paid. The account should be opened at a bank convenient to you, it need not be in either Delaware or the US. US banks are reluctant to open accounts for new companies and generally will not open a bank account where they have not met the principals. Some banks will open accounts through their web sites (see http://www.netbanker.com/ for a good list of banks with web sites). Unless you open a secured card account, it is unlikely that a US bank will create a credit card account or ATM account for a company owned by non US based shareholders.

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Step 3: State Qualification
Most states have laws which require companies not formed in that state, referred to a "foreign corporations" or "foreign LLC’s" to register with that state before "doing business" in that state. What constitutes "doing business" varies from state to state. Activities which are wholly interstate such as catalogue sales and solicitation of business from outside the state generally do not require registration. Qualification has nothing to do with the obligation to collect and pay sales taxes. However, almost universally having an office in the state, owning or leasing real property or providing labor or services in the state will constitute doing business. If your company is "doing business" in a state without registration, there are penalties which will attach. Almost all states prohibit you from using their courts and in some cases prohibit a non qualified company from raising a counter claim if sued. Most states permit you to register after either commencing an action or having been sued so as to cure the problem. Some states impose monetary penalties and in some states the penalty is a personal obligation for persons acting on the behalf to the non qualified company.

The registration process is done through the state’s office of Secretary of State. Most states have the forms available and they will send them to you. You will need to complete the information required on the form, provide them with a copy of the certificate of incorporation or the LLC’s certificate of formation and pay a qualification charge. The state may require a Certificate of Good Standing from Delaware. We can provide you with the certificate, which certifies that the company validly exists and is in good standing with the state, for a fee of $50 USD including our service fee.

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Step 4: Business Licenses
Wherever your company does business it will not only have to qualify, but also obtain a business license (which is a revenue issue separate from qualification). Generally the state has a business license requirements, as does the county, town, city and/or village. Obviously, you may be required because of the nature of your business to obtain multiple business licenses. You may also be required to obtain some type of license or registration from a state labor department dealing with unemployment taxes and workmen’s compensation insurance or state workers compensation fund.

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Step 5: Tax Issues
A wise business person uses an accountant to make tax decisions. Starting up your company will involve decisions regarding selecting a "tax year," selecting an accounting method, selecting an inventory method, selecting whether to amortize start-up costs, setting up accounting records and books and establishing a chart of accounts. While off the shelf accounting programs are available and relatively inexpensive, do not fall victim to the allure of trying to establish these records yourself. You may find yourself at tax time with records that are either useless or which will require your accountant to spend hours sorting things out for your (at substantial cost).

If your company operates wholly outside the US and does not transact any business in the US or any of the states, you will still be required to file a US tax return. We suggest that you speak to a knowledgeable accountant to assist you in preparing your tax return. Many countries other than the US require that accounting records be filed with the county and assign the company a "company number." Except for the requirement that companies earning "US income" file a return and pay any applicable tax, there is no requirement that any accountings be filed with any regulatory agency and neither Delaware nor the US assign a "company number" as opposed to a E.I. number.

If your company is a subchapter S corporation, an election must be filed with the IRS by the fifteenth day of the third month after the beginning of the corporation’s tax year. For a new company the regulations say that the tax year begins when the company first has shareholders, acquires assets, or begins doing business, whichever first occurs. The form must be mailed to the IRS at the service center where your company will file its returns. It should be mailed certified or registered mail, return recent requested. The burden is on you to prove that you filed the election. You should make a note to check after 15 days to make sure that you received back the green return recent card and after 45 days that you receive an acknowledgment of filing from the IRS.

A C corporation (general corporation) must pay FICA tax on all salaries or other compensation, including any bonus paid to a shareholder. An S corporation likewise must pay FICA on salary paid to shareholders, but does not have to pay FICA on distributions of earnings and profits. Be careful if you do not pay any salary but only distribute earnings and profits as IRS may re-characterize the payments. The S shareholder does not have to pay self employment tax on the earnings an profits. Members of a LLC must pay self employment tax if under the regulations they participate sufficiently in the operations of the company or have that authority. The company does not have to pay FICA on distributions to the members.

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Step 6: Corporate Governance
Under Delaware law, the business of a corporation is managed by its Board of Directors. Everyday functions are overseen by its officers. The business of an LLC is managed by it manager or managers if it is a "manager managed company" or by it members if it is a "member managed company." The manner in which the managers or members act is governed by the company’s operating agreement. Every LLC should have a written operating agreement, though Delaware law recognizes oral agreements and in those cases where there is neither a written nor oral agreement, the state law governs. You may not be satisfied with the result determined by reference to the Delaware Code. Certainly your banker will want to see a written operating agreement. Suggested forms of both member managed and manager managed operating agreements are available from Delaware Corporate Agents for a charge of $60 USD. We provide the agreements in both printed and ascii format on 3 ½ inch disk.

Corporations need to adopt By-Laws. Suggested form By-Laws are available from Delaware Corporate Agents. By-Laws set out the basic outline for the corporation’s governance. In addition to By-Laws, a corporation needs to hold meetings of its shareholders and of its directors. Minutes must be maintained of those meetings. In lieu of a meeting, shareholders and directors may take most actions by written consent. If the consent is not unanimous, but only by a vote necessary to pass the resolution, notice of the action must be sent promptly to the non consenting directors and shareholders. The consent must be filed with the corporate records of the company. No less than annually the corporation must have a meeting of shareholders and a meeting of the board of directors. Unless otherwise provided in the certificate of incorporation or in the by-laws, all persons need not participate in person. Meetings of shareholders and directors may be held by telephone, provided that all participants can hear each other. A shareholder may designate another to act for him as a proxy at meetings of shareholders. A director may not use a proxy for a directors meeting. Delaware Corporate Agents provides suggested forms for minutes an by-laws for a fee of $40 USD. The forms are provided in printed and ascii text format on 3 ½ inch disk.

It is very important the a corporation or LLC preserve records of its actions so as to evidence that it has preserved it franchise and is an entity separate from its shareholders or members. If the assets of the company and its owner or owners are commingled, that separate identity will not be preserved. The company must have its own bank account. Only company expenses may be paid from that account, not personal obligations. The company must maintain accounting records of its income and expenses. In the absence of fraud Delaware will generally recognize a corporation or LLC as an entity separate from its owners if the company is in fact treated by the owners as being separate from them. If the company did not maintain accounting records, did not keep written minutes of meetings and commingled funds between the company and its owners, that separate identity will not be recognized and the owners may then become personally responsible for the company’s debts or obligations.

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Step 7: Maintaining Corporate Identity
In addition to the issues discussed in the previous paragraph, there are a number of steps which you should take to preserve your corporation or LLC’s identity separate from its owners.

• Make all annual filings with the Secretary of State and pay the franchise fee on time.
  
• Operate the company under its proper name or properly filed trade name.
  
• Make sure that people dealing with your company understand that it is a corporation or LLC and that they are not dealing with you as an individual.
  
• Avoid, to the extent possible, giving personal guarantees. Any document signed on behalf of the company should clearly indicate that the person signing is doing so as an officer of the corporation or as a member or manager of the LLC without personal guarantee. Check the "small print". The proper way to sign a document is as follows:

ABC Corporation

By:___________

John Smith, President

or

ABC, LLC

By:___________

John Smith, Manager (or Member)

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• As noted above, treat the company as a separate financial entity. Payments to the company need to be documented as capital contributions, loans, compensation, dividends or loan repayments. These are items which should be enumerated in the annual minutes of the Board of Directors.

• Stock or Membership certificates are only evidence of ownership and not necessary for ownership. Stockholder and members are not required to be US citizens and are not required to be US residents. Ownership must appear in the company’s minutes and on the transfer records. It is the better practice to issue stock or membership certificates. Any restriction on transfer must appear on the certificate to be effective against third parties.

• If you let employees drive their own cars on company business, make sure that both your and their insurance is sufficient and make sure that your company is listed as an "additional insured" on their policy of insurance. Do not take inconsistent positions with your insurance company (no business use) and then deduct car expenses on your company’s tax return.

• If you lend money to the company the company should adopt a resolution authorizing the borrowing and should issue a note.

• If you have a pension plan, consult your accountant or plan administrator at least annually for a review because of changes in the law or regulations.

• Annually review minutes and records with your attorney and accountant.

• Except in the case of S corporations, the company should have a written employment contract with an owner employee and the company’s minutes should reflect the adoption of the contract.

• If an owner leases property to the company the lease should be either favorable to the company or at arms length with the owner. Rent and expense obligations need to conform to the lease to make it deductible.

• If you have multiple companies, steps must be taken to avoid confusion. Just as with the case of your need to maintain your company as a separate financial entity, the same must be observed with parent subsidiary relationships as well as brother sister relationships. Document all inter company transactions and maintain financial separation.

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