I once wrote a column about the benefits of tech startups incorporating in Delaware, but I never, ever wrote a column advising someone to form a corporation or limited liability company (LLC) online. The experience a reader of my columns described to me is one of the reasons why.
Here’s what the reader wrote:
“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. We formed the corporation online to save money, and it seemed like everything was OK,” the reader wrote me.
“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. 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 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. Here are five easy rules that will help keep your Delaware corporation or LLC on life support.
Rule No. 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 No. 2: Watch your mailbox and inbox. I am certain the state of Delaware sent this reader email 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 email, or scan and email 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 No. 1.
Rule No. 3: Pay the Delaware franchise tax. Delaware imposes an annual “franchise tax” on corporations and LLCs incorporated there. The tax is paid on or around the anniversary of your incorporation date. For example, if you incorporated in January/February, the tax will be payable March 1 of each year.
The annual tax for LLCs is a flat $300. For corporations, it’s a bit more complicated, but unless your corporation has substantial assets, you should be eligible to pay only the minimum tax, which is around $400. Fail to pay the tax and you incur interest and penalties for each three-month period you are delinquent. Fail to pay the tax two years in a row and Delaware dissolves your corporation.
To find out how much you owe, go to https://corp.delaware.gov/paytaxes/. You will need your Delaware Corporate ID Number, which you can find at https://icis.corp.delaware.gov/Ecorp/EntitySearch/NameSearch.aspx.
Rule No. 4: 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 No. 5: Register in your home state. Forming a Delaware corporation or LLC does not allow you to operate legally in your home state. For that you need to register as a “foreign” (out-of-state) corporation or LLC with your state’s secretary of state AND your state tax authority. You have to do both. Even if you pay your state taxes religiously each year, 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.