Fees, Reports, and Records, OH MY!
Another rant from the Grumpy Old Company Lawyer.
5 things a startup should cross off its “to do” list each year
Startups seeking to interest various types of funding sources are usually required to establish a formal entity to continue to grow and expand their funding possibilities. These entities can take many forms, such as a limited partnership, limited liability company, or a “regular” corporation.
“Regular” corporations are often referred to as C Corporations because they are taxed under subchapter C of chapter 1 of the Internal Revenue Code (IRC). The privilege of doing business as a corporation comes with certain federal and state filing and tax obligations. Owners are entitled to limited personal liability by properly forming and maintaining the corporation, but that limited liability can be lost (through a legal process called “piercing the corporate veil”) if basic annual corporate housekeeping is not followed.
There are a couple of types of periodic filings you need to attend to very closely in order keep from being shut down in a hurry:
1. Federal Income Tax
Generally, a corporation must file its federal income tax return by the 15th day of the 3rd month after the end of its tax year. For most corporations, that is March 15th, but if the corporation has a tax year that is not based on a calendar year, that date would be different.
2. Franchise Tax to your state of incorporation
Many C Corporations end up being organized under Delaware law, (for reasons that are beyond the scope of this article). Because of the popularity of Delaware as a state of incorporation, we’ll spend a little time on that state’s provisions.
Delaware imposes an annual stock-based franchise tax for the privilege of being able to incorporate under state law. The deadline to file the Delaware Corporate annual report and franchise tax is March 1.
All corporations incorporated in the State of Delaware are required to file an Annual Report and to pay a franchise tax. Exempt domestic corporations (generally, not-for-profit organizations) do not pay a tax but still must file an Annual Report. The Annual Report filing fee for all other domestic corporations is $50.00 plus taxes due upon filing of the Annual Report. Taxes and Annual Reports are to be received no later than March 1st of each year. The minimum tax is currently $175.00 for corporations using the Authorized Shares method and a minimum tax of $350.00 for corporations using the Assumed Par Value Capital Method. All corporations using either method will have a maximum tax of $180,000.00. Taxpayers owing $5,000.00 or more pay estimated taxes in quarterly installments with 40% due June 1, 20% due by September 1, 20% due by December 1, and the remainder due March 1. The penalty for not filing a completed Annual Report on or before March 1st is $125.00 Interest at 1.5% per month is applied to any unpaid tax balance.
Notification of Annual Report and Franchise Taxes due are sent to all Delaware Registered Agents in December of each year. If you do not receive your notice by January you should go to the Delaware Corporations website and make arrange to change the company’s contact information, if necessary. Delaware has mandated electronic filing of domestic corporations Annual Reports.
You may view the methods used to calculate Franchise Taxes here.
If you would like to file your corporation’s Delaware Annual Report taxes online CLICK HERE.
3. Other State Taxes
If your company is qualified to do business as a foreign corporation in states other than its state of incorporation, then it will owe similar taxes in those states.
For example, since we’re here in Iowa, if your company is a Delaware corporation that is qualified to do business in Iowa as a foreign corporation, then your company will pay annual taxes to Delaware and Iowa.
In Iowa, corporation tax returns must be filed by the last day of the fourth month after the close of the corporation’s tax year. This may not be April 3oth if your corporation does not use the calendar year as its tax year. The total tax due is required to be paid in full at the time of filing the return.
The corporate income tax applies to each corporation “doing business” in the state, or deriving income from sources within the state. The term “doing business in this state,” is not statutorily defined, but “doing business” is defined by administrative rule to include all activities or transactions conducted in Iowa for the purpose of financial or pecuniary gain or profit. This includes every corporation organized under the laws of Iowa and any foreign corporation operating in interstate commerce that does business in Iowa. The term “deriving income from sources within this state” means income from real, tangible, or intangible property located or having a situs in this state. Tangible property has a situs in Iowa when it is habitually present in Iowa or it maintains a fixed or regular route through Iowa. Intangible property, while not physically present in any particular place, generally has situs in Iowa if the corporation’s commercial domicile is in Iowa or if it has become an integral part of some business activity occurring regularly in Iowa.
For more detailed discussion of Iowa corporate taxation see the following publication: https://www.legis.iowa.gov/docs/publications/LG/24337.pdf
4. Other Annual State Filings
Many states require that your company report certain corporate information with the applicable Secretary of State. For example, the California Secretary of State requires that each California corporation (or foreign corporation qualified to do business in California) prepare and file an annual Statement of Information in order to update basic corporate information, including the name and address for each of the three principal corporate officers (i.e., Chief Executive Officer, Chief Financial Officer, and Secretary) and each Director.
Last, once you’ve taken care of those pesky government filings, it’s time to do a little spring cleaning (even if your fiscal year ends in the summer):
5. Basic Corporate Housekeeping
The corporation must comply with all government requirements, such as submitting an annual report to the states as discussed above and maintaining necessary state and local business licenses. The corporation must adhere to all corporate laws, which usually require annual shareholder meetings, board of directors’ meetings, and minutes (a transcript) of those meetings. In addition, shareholders must be made aware of decisions that impact the welfare of the corporation. Any major decisions, such as mergers, acquisitions or a liquidation, should not move forward until a shareholder vote has been taken. If the corporation has other security holders, such as convertible note, warrant, or preferred stock holders, the terms of those instruments should also be reviewed before major decisions, since those security holders may have additional rights.
Director and Shareholder Meetings
The Corporation should have annual director and shareholder meetings and keep minutes of those meetings in the minute book of the corporation. Furthermore, business decisions made outside of the ordinary course should be reviewed and ratified by the Board (and in some cases the shareholders) and records of meetings or written consents approving those decisions should also be kept with the minutes of the corporation.
Organize Corporate Records
The minute books of the corporation should be updated to include minutes of all director and shareholder meetings. It’s a good idea to do this all year, but critical that you update at least yearly.
Review the Bylaws
The directors should review the bylaws of the Corporation to ensure that the corporation is operating in compliance with its bylaws.
Elect New Officers and Directors and Remove Inactive Officers and Directors
Directors and officers who don’t participate and are not involved in the corporation should be removed, and people who will be involved in the affairs of the corporation should be elected as officers and directors. Resolutions of the shareholders (for directors) and resolutions of the directors (for officers) to that effect should be prepared and filed in the corporate minute book.
The corporation should be capitalized adequately to keep it running. Courts will look at whether a corporation is undercapitalized in making a determination to pierce the corporate veil.
Review Banking and Accounting Records
It is important that corporation funds not be commingled with funds of shareholders or affiliated entities. You should review the company’s banking and accounting records to ensure there is no commingling of funds. A legitimate business reason for the transfer should always be documented in writing whenever funds are transferred between affiliates and shareholders. Loans or capital contributions from a shareholder to the corporation need to be carefully documented, both for the corporation’s and the shareholder’s finance and tax records.
Make Sure Agreements Are Arm’s Length and Documented
If the corporation has any agreements, especially with affiliates, those agreements should be at arm’s length and should be reduced to a writing. For example, if a shareholder is providing services or assets to the corporation, the services or assets should be provided for arm’s length consideration and pursuant to a written agreement. What is “arm’s length” can vary, but it must have a reasonable relationship to what the service or assets would be available to the corporation in the market. The absence of such documentation may point toward a commingling of assets or an alter ego status of the corporation, which are both factors courts use in making a determination to pierce the corporate veil.
This article is for general information only, and is not intended to be, nor may it be taken as personal legal advice. You should consult qualified independent legal and accounting experts to make sure your corporation is set up for success. The calendar and corporate housekeeping tips in this article are not intended to be an exhaustive list of actions you should take to avoid piercing the corporate veil. Courts will consider other factors in making a determination to pierce a corporate veil (including, fraud, insolvency, lack of corporate assets, payment of excessive dividends, functioning as a facade or an alter ego of the shareholders and improper use of corporate assets), but it should make you aware of some basic things that you can do to help maintain the protection from liability that corporate entities generally provide to their shareholders.