Session 108
Top Ten
"Gotchas"
Regarding
Incorporating or
Forming an LLC
TUE
9:10am
Moshe Meppen
Sr. Product Leader
MyCorporation.com an Intuit Company
Mr. Meppen is the product development and product management leader for the
MyCorporation division at Intuit, and is responsible for the technology, engineering, and
user experience of MyCorporation’s online offerings.
Previously, Mr. Meppen served as Director of Sales and Marketing for Interlink
Electronics, Inc. where he pioneered the adoption of electronic signature technologies at
Wells Fargo Bank, Charles Schwab, State Farm Insurance, Farmers, and Prudential
Financial. He also served as founder and CEO for NearCom Technologies where he led
the creation of secure video monitoring technologies for home and enterprise use. Mr.
Meppen has a BA from the University of California at Santa Barbara and an MBA from
Pepperdine University.
#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
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#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.
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#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
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#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.
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#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.
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#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.
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#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.
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#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).
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#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.
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#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.
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#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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