Now that your corporation or LLC has been formed, the next 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 operate. 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.
Every corporation or LLC (other than a single-member LLC which does not have employees, which may use the member’s social security number or TIN) filing a state or federal tax or informational return must have an employer identification number (E.I.N.). An E.I.N. is your company’s “social security number” and is used by banks and other companies to identify your business. It’s important to get an E.I.N. because you will need it to open a bank account, obtain a business license and for many other purposes. It is obtained by going online to irs.gov, under “tools”, go to “Apply for an Employer ID Number” or completing IRS form SS-4. The form calls for the social security number of the company’s executive officer, however, if you are not an US citizen or do not otherwise have a social security number, you must obtain an ITIN. Delaware Corporate Agents will obtain the number for you for a fee of $50 USD. To prevent identity theft, we recommend that every single-member LLC obtain an EIN and not use your social security number.
Your company must have its own bank account for depositing income or paying debts. The account should be opened at a bank that is convenient to you. It does not need to be in Delaware or even in the US. Under the USA Patriot Act, US banks cannot open accounts for new companies if they have not met or do not know the principals of your business. 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.
Most states have laws which require companies that were not formed in that state, (referred to a “foreign corporations” or “foreign LLC’s”) to register with that state before “doing business” in its borders. What constitutes “doing business” varies from state to state. Activities which are wholly interstate such as catalog sales and solicitation of business from outside the state generally do not require registration.
However, almost universally having an office in the state, operating 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, but it is always advantageous to start out with a legal business. 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. Remember that qualification has nothing to do with the obligation to collect and pay sales taxes.
The registration process is generally done through the office of the state’s Secretary of State. Most states have the forms available on line or 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.
Wherever your company does business it will have to qualify for and obtain a business license (which is a revenue issue separate from qualification). Generally, the state has business license requirements, as does the county and city. Because of the nature of your business, you may be required to obtain multiple business licenses. You may also be required to obtain some type of license or registration from a state labor department for unemployment taxes, workmen’s compensation insurance or a state workers compensation fund.
A wise business person knows to use an accountant to make tax decisions. Starting up your company will require you to select a “tax year,” an accounting method, an inventory method, and whether to amortize start-up costs. You’ll also have to set up accounting records and books and establish a chart of accounts. While off the shelf accounting programs are relatively inexpensive, do not fall victim to the allure of trying to establish these records yourself. At tax time, You may find yourself 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 country, you will still be required to file a US tax return. We suggest that you contract 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 for any accounting records to be filed with any regulatory agency and neither Delaware nor the US assign a “company number” as opposed to an E.I.N. Delaware does assign a file number to each company. A tax treaty between the US and your country will determine your US tax liability.
If your company is a subchapter S corporation, an election must be filed with the IRS within 2 months and 15 days 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. If the company elects S status after its first tax year, it must file Form 2553 by March 15 providing it is a calendar year taxpayer. The IRS provides limited relief for late filers of Form 2553. The form must be mailed to the IRS at the service center where your company will file its returns. It should be sent via certified or registered mail, with return receipt 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 the green return receipt card from the Postal Service 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 shareholders. Likewise, an S corporation 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, the IRS may re-characterize the payments and assess penalties and interest. The S shareholder does not have to pay self-employment tax on the earnings an profits. Under tax regulations, Members of a LLC must pay-self employment tax if 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.
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.” No matter what, all activities are governed by the company’s operating agreement. Delaware law requires that every LLC must have a LLC agreement or sometimes called an operating agreement, though Delaware law recognizes oral agreements it is foolish to opt for an oral agreement. In cases where matters are not addressed in the company agreement, Delaware state law governs. You may not be satisfied with the result determined by reference to the Delaware Code, so it is very important to take the time to properly draft a written agreement. Your banker will certainly want to see a written operating agreement. Suggested forms of member-managed, manager-managed and single member operating agreements are available from Delaware Corporate Agents.
Corporations need to adopt By-Laws which 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. Action by directors in lieu of meeting must be unanimous. If the consent of shareholders 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. The corporation must have a meeting of shareholders and a meeting of the board of directors no less than once every 18 months. These meetings may take place by written consent in lieu or meeting. 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 electronic means, provided that all participants can hear or see all matters. 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 and by-laws.
It is very important for a corporation or LLC to preserve records of its actions so there is 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(s) 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.
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.
John Smith, President
John Smith, Manager (or Member)
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 minutes of the Board of Directors or LLC resolutions.
Stock or Membership certificates are only evidence of ownership. Stockholders 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. DelCorp® can provide you with a corporate or LLC kit which contains stock or membership certificates, transfer records and a place for minutes.
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 to you.
If your company has adopted a pension plan, consult your accountant or plan administrator at least annually for a review because the law and regulations change.
Annually review minutes and records with your attorney and accountant.
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, there must be a written lease. Rent and expense obligations need to conform to the lease to make it tax-deductible.
If you have multiple companies, steps must be taken to avoid confusion. Just as you 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.