By Cliff Ennico
“Some friends and I started a high tech business a couple of years ago and formed a Delaware corporation to run the business. We live and work in another state but were told that Delaware was the place to be for tech startups (it may have been one of your columns, actually . . . ).
We formed the corporation online to save money, and it seemed like everything was okay.
A couple of weeks ago we signed a letter of intent with an angel investor who wants to put $3 million into our company. Needless to say, we were very excited.
But when the investor’s lawyer looked into our company, he made some horrifying discoveries. It seems Delaware killed off our corporation two years ago because we didn’t pay a ‘franchise tax,’ whatever that is. Because our corporation was no longer ‘active’, somebody else grabbed our name in Delaware and is now trying to register it as a trademark – if they succeed in doing that, we will have to hand over our website domain name to them even though we’ve spent a fortune building a website around that domain name.
The lawyer also told us that because we never ‘registered’ in the state where we are actually doing business, we owe tons of money in penalties even though we’ve paid taxes here every year.
Now the investor is not so excited about doing business with us. While we are embarrassed as Hell, shouldn’t someone have told us we had to do this stuff?”
While it may be true that I once wrote a column about the benefits of tech startups incorporating in Delaware, let’s be clear that I never, ever wrote a column advising someone to form a corporation or limited liability company (LLC) online, and this is one of the reasons. While the online services can get you up and running quickly and cheaply, they don’t help you with the things you need to do on an ongoing basis to keep your corporation or LLC alive. This e-mail is a perfect example of what can happen when you don’t stay on top of things compliance-wise.
Having wagged my finger at this reader, I have to say I’m sympathetic with her plight: when you are building a fast-growing tech company you are working 24/7/365, living on Red Bull®, Ramen noodles, and three hours of sleep a week. Nobody is thinking about legal compliance. Yet failing to keep on top of things can kill your startup, as this reader’s e-mail will attest.
Here are four easy rules that will help keep your corporation or LLC on life support.
Rule # 1: Hire a Lawyer and Accountant, and Listen to Them! It is impossible – impossible – to run a tech startup in the United States without a good lawyer and a good accountant. You need both, especially if you are too busy to deal with government paperwork. Whenever your lawyer or accountant tells you something needs to be done, DO IT IMMEDIATELY! They are not just trying to “run up a bill.” They are trying to save your butt.
Rule # 2: Watch Your Mailbox and Inbox. I am certain the State of Delaware or the corporation’s “registered agent” sent this reader both e-mails and “snail mail” reminders telling her when annual reports, franchise tax reports and other compliance paperwork were due. What this reader probably did is throw them away thinking they were “junk mail” or “spam”.
This point is so important that I need to scream: WHEN YOU HAVE A CORPORATION OR LLC, AND YOU GET MAIL FROM A STATE OR GOVERNMENT AGENCY ADDRESSED TO THE COMPANY, THAT IS NEVER, EVER TO BE TREATED AS JUNK MAIL! If you are too busy to deal with it, you should forward the e-mail, or scan and e-mail the paper correspondence, IMMEDIATELY to your lawyer and accountant. Let them tell you if it’s important or not. If they say it’s important, follow Rule # 1.
Rule # 3: Pay Your Registered Agent. If you are incorporated in Delaware, or a state other than where you are actually located, your online service hired a “registered agent” in that state to act as your local presence. That company will send you a bill each year for their services. Pay it promptly. If they don’t get paid, they will “withdraw” as your registered agent and the state will dissolve your corporation or LLC.
Rule # 4: Register in Your Home State. Forming a Delaware corporation does not allow you to operate legally in your home state. For that you need to register as a “foreign corporation” with your state’s Secretary of State, and pay taxes to the state tax authority. You have to do both. Failing to register with the Secretary of State can lead to heavy penalties and bar you from your state courts if you ever have to sue someone.
Yes, doing these things cost money. But it’s money well spent. Find the money, and get them done.
Cliff Ennico (cennico@legalcareer.com) is a syndicated columnist, author and host of the PBS television series ‘Money Hunt’. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our Web page at www.creators.com. COPYRIGHT 2017 CLIFFORD R. ENNICO. DISTRIBUTED BY CREATORS SYNDICATE, INC.
