#1 - Corporate Formalities

Relevant Background Facts:• Naming a Registered Agent• Filing Annual Reports• Giving Notice of Annual Meetings• Holding Annual Meetings• Documentation (Minutes)

What to do if this Happens:• Maintain an effective calendaring system• Document Official corporate meetings

Implications:• Out of compliance/Good-standing• Corporate Veil “pierced”• Expensive to reinstate

#1 - Corporate Formalities – Marta

Marta owns a corporation where she and her husband are the only shareholders. They also operate as the directors and officers. She received a notice from the state that her corporation was not in good standing.

After calling the secretary of state she realized that she and her husband needed to file an annual report with the state containing all of the information that is required by statute since they were the officers and directors of her corporation.

After compiling the proper records, filing more paperwork with the state, and paying additional fees and penalties she is now back in good standing.

#2 – Registered Agent Required

Relevant Background Facts:

• All states require businesses to maintain a registered agent.

• Required to accept legal and official documents on behalf of a business.

• A RA (that is distinct from the business itself) allows the business a certain amount of separation from the public.

What do you do if this happens:

• Name the agent for service of process on the legal filings (Articles) and/or Statement of Information/Annual Report.

• If a third party is offering the service, ensure that the fees are timely paid so that the RA service is maintained.

Implications:

• The corporation/LLC will be out of good standing without meeting the state’s official requirements.

• Documents such as franchise tax notices, annual reports & official legal notices may not be received by the corporation/LLC.

#2 – Registered Agent - Bob

Bob recently changed the registered agent that he was using for his business. This was a big decision because he had been using the same registered agent since he started his company.

However, he forgot to update the registered agent information that was in his articles of organization. He didn’t realize he was supposed to file another form to update his registered agent information with the new name and address.

Not only is he now out of compliance with the state, but he was just sued by a company who was unable to serve his company because the information on his articles is out of date. This certainly means more time and money to get back in compliance and could cause some legal problems if he fails to respond to the lawsuit in time.

#3 – Corporation vs. LLC

Relevant Background Facts:

• Formed an LLC because it seemed simpler

• Intent to go public

• Cannot go public with LLC as entity type

What do you do if this happens:

• Dissolve & re-form OR

• Prepare & file a conversion

Implications:

• Expensive

• Time consuming

#3 – Corporation v. LLC - Michael

Michael started the company “Cool Blue Glow Video Games, LLC” with the intent that he would grow the company and then take it public.

Since this was a start-up, and he was trying to save money, he did everything himself and thought that an LLC would be the best option since it was easier to form and didn’t require as much paperwork during the year to maintain. He failed to realize that only a for-profit corporation can offer stock publicly.

Since he has been operating his company for two years his only options are to dissolve his LLC and reform it as a corporation, or to file a conversion. Both these processes require a lot of paperwork and more money than it would have been to just form a corporation to begin with.

#4 – Missing the “S-Corp” Deadline

Relevant Background Facts:

• For an existing corporation, the election to become an S-Corp is due by March 15th

• For a new corporation, the election must be file within 75 days after the corporation begins conducting business, acquires assets or issues stock (whichever is earlier).

What do you do if this happens:

• An S-corp election may be filed as soon as you remember, but will not be effective until the following year.

Implications:

• Potentially double-taxation (taxed as a C-corp) until the following year.

#4 – Missing the “S-Corp” Deadline - Suzie

Suzie Sato just started a new corporation that offers knitting products. She wants to change the regular “C-Corporation” into an “S-Corporation” to reap the benefits of having all the profits and losses pass directly through to her.

With all of the affairs that come from starting a new company and getting things running smoothly she didn’t submit the IRS Form 2553 until three months after she starting purchasing stock using her corporation.

Suzie missed the 75 day deadline for new corporations to file their “S-Corp” election so now she will have to operate her company as a regular C-Corporation for another year and may face taxation twice. Once for corporate profits and again for any dividends paid to her as the sole stockholder.

#5 – Failure to Qualify as an S-Corp

Relevant Background Facts:

• In order to remain eligible for S-Corp tax advantages the company must always meet the following requirements:

– it must be a domestic corporation;

– it must have no more than 100 shareholders;

– all shareholders must be individuals, estates, or certain exempt organizations or certain trusts;

– the shareholders must be US citizens;

– the corporation must have only one class of stock; and

– the corporation’s calendar year must end on December 31st.

Implications:

• If these requirements are not met, the S-Corp will be subject to the C-Corp taxation scheme and double taxation.

#5 – Failure to Qualify as an S-Corp

Ahmed recently immigrated to the United States and since becoming a resident alien is excited to start his own business.

He recently formed a corporation with his wife Helene and has filed IRS Form 2553 to become an S-Corporation. This seemed like the best option for tax purposes since they want all of the profits and losses to pass through to them personally.

He did not realize he needed to be a U.S. citizen however, and since he is only a resident alien his S-Corp status was denied. He now only has a regular C-Corporation and faces the prospect of being taxed twice.

#6 – Someone else using your name

Relevant Background Facts:• A corporate name is reserved and protected when the corporate documents are filed

at the state level.

• The corporate name does not protect a logo or brand name (trademarks & corporate names are distinct).

• The corporate name is being used as a trademark in association with goods and/or services

• A third party has the same name in another state.

What do you do if this happens:• Prepare in advance by undertaking a comprehensive search for availability of the

business name – especially if the plan is to use it as a brand name (trademark)

• Speak with trademark counsel about the options:

• Talking with the other entity using the same name?

• Rights available to each party

Implications:• Exclusive use of the corporate name/brand name may more limited than anticipated.

#6 – Someone else using your name

Nathaniel Smith has been selling his delicious hot dogs made with his signature buns and sauce from a cart since he was in high school.

Everyone in his small town knows about “Nathan’s Hot Dogs” and they are so popular that Nathanial decided to open a large scale hot-dog-only restaurant and call it “Nathan’s Hot Dogs.” As his restaurant grows and he is approached to start selling is signature buns and sauce in stores, he receives notice of a lawsuit by the Nathan’s hot dog people in New York.

Being that he is from a small town, Nathaniel is shocked to find out that someone else has already been using that name and that now he is in the unpleasant position of totally changing his branding after it has been doing quite well for him.

#7 – Filed a Delaware Corporation

Relevant Background Facts:• Filed an LLC in Delaware

• Understood Delaware to have the most favorable business/corporate laws.

• Business is based in California

What do you do if this happens:• Local state laws may require the business to be

“foreign qualified”.

• Pay taxes in the business’ home state & the state of incorporation.

Implications:• Paying taxes in two states

(even though based only in 1).

• Subject to litigation in multiple jurisdictions.

• Time & money to be qualified to do business in 2 jurisdictions.

#7 – Filed a Delaware Corporation

After doing some research of her own, Taysha figured that forming her new corporation in Delaware would be the best option because of the tax benefits they give to businesses.

She forms her company as a Delaware corporation to take advantage of the favorable tax structure even though her company is based in California. When tax season comes around her business has been doing very well.

To her dismay, however, her accountant informs her that she is subject to taxation in both California and Delaware because her business actually operates in California but is incorporated in Delaware. What’s more, she has been served with a trademark lawsuit by another corporation and finds out her corporation is subject to the jurisdictions of both Delaware and California.

#8 – DBA Filing Required?

Relevant Background Facts:

• Official corporate name is not the same as the business name. (i.e., Intuit = official corporate name, but Quickbooks is business name)

• Whenever a name other than an individual name or the name of the corporate entity is used, a “doing business as” (“DBA”) must be filed.

What do you do if this happens:

• File DBA documents at the relevant county/state agency.

• Publish all DBA documentation, where necessary.

Implications:

• Checks made out to the business name cannot be cashed without a DBA.

• Filing a DBA may take some time (especially when publication is required).

#8 – DBA Filing Required?

Javier runs his own photography studio out of his home. He is one of the most sought after photographers for weddings, senior class pictures, and family portraits.

He recently decided to call his studio “Forever Photos” and to start charging a little more to capitalize on his popularity. After receiving his first check he goes to the bank to deposit it but realized that since it is made out to “Forever Photos” he can’t put it into his account. The bank informs Javier that he needs to file a DBA in order to deposit checks made out to “Forever Photos” into his account.

This is going to take some time since Javier’s state requires publication of the DBA. It could be weeks before he is able to deposit the checks from his photo jobs.

#9 – Relevant & Updated Governing Documents

Relevant Background Facts:• Corporate Bylaws & LLC Operating Agreements are

a critical mechanism for governing the entity.

• Failure to update these documents can result in confusion among shareholders/members.

What do you do if this happens:• Always document business re-organization,

changes, and official discussions by updating the Bylaws & Operating Agreement.

• Often if there is confusion/disagreement over the governing documents, a lawyer or mediator will be required to aid in the interpretation.

Implications:• Ambiguous governing document clauses can lead to confusion & expense.

• Failure to document business agreements in writing can lead to inaccurate & out-of-date governing documents.

#9 – Relevant & Updated Governing Documents

Ken has been on the board of directors for a corporation for about 15 years. Recently two members of the board stepped down in order to spend more time with their families. Before this happened, the board had decided to leave these board positions empty and reduce the size of the board of directors.

The big problem was that this was not recorded in minutes and was not added to the corporate bylaws or amended as part of the articles of incorporation. Now, a young and very wealthy investor in the city who has heard about the stepping down of the board members is using his recent purchase of a lot of shares as an opportunity to try and get involved in the affairs of the corporation. He has been told the board has been reduced, but the company’s records indicate otherwise.

This is leading to a now public dispute over the operation of a very profitable publicly traded company. Lawyers have been hired and a fight is ensuing to see what is really going on here.

#10 – Business Licenses Required?

Relevant Background Facts:• Depending on the type of business and location,

multiple business licenses may be required to comply with governmental regulations.

• Business licenses are distinct from corporate/LLC filings.

• Different governing agencies oversee varying types of business licenses.

What do you do if this happens:• Utilize available services to evaluate business

license requirements needs.

• File for necessary business licenses as soon as you become aware of the requirements.

Implications:• Failure to register appropriately can result in

penalties and prevent you from operating your business.

#10 – Business Licenses Required?

Sandra has recently set up a limited liability company for her new nail salon and beauty shop. She knows it was done correctly because her attorney brother did all of that for her.

Her store is stocked and she has all of the equipment she needs. The night before she if ready to open for business, she is informed that she doesn’t have the necessary business licenses for her state and county to operate a shop that does nails and hair. Now Sandra will have to delay her opening for weeks while she gets the necessary licenses.

This will cause her some financial difficulties since she will be paying for her stock, equipment, and lease even though she isn’t bringing in any money.

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