Many companies incorporate and stop there. Failing to take the next steps can cause problems, including “piercing of the corporate veil.” This takes place when a judge determines that shareholders and/or directors should be personally liable for a corporation’s debts. At this point, the wrongful shareholders/directors are treated as if they are agents of the corporation.
The major factor used to justify piercing the veil is when shareholders and directors fail follow corporate formalities. Corporate formalities are those requirements that officers and directors have to complete in order to maintain the protections the corporation provide. Aside from piercing the corporate veil, companies can also face hefty fines, penalties, back taxes, and lose valuable property for failing to complete important tasks. Here are some of the things to take care of post-incorporation:
- Invention assignment agreement – This agreement is a must for any new business. Co-founders, employees, contractors, and consultants should be asked to sign away any rights they have to intellectual property created for the company. For founders and employees, this type of agreement can be contained within a stock purchase agreement. Importantly, the new owner (the corporation) who is assigned a patent or trademark, must make a record of the assignment to the USPTO within three months.
- Employer identification number (EIN) – An EIN is a business version of a Social Security number. You’ll need to obtain one in order to open a bank account for your C-corp. When you sign up the bank will likely require a certified copy of the certificate of incorporation, along with your EIN.
- Foreign state qualifications – This is necessary if you’re going to do business in states in addition to the state you incorporated in. This doesn’t mean you have to create a new company in every state you do business in. Rather, you can choose — for example — Delaware to be the legal home of your company and then apply for permission (called an “application of authority”) to use that Delaware corporation to do business in other states.
- Licenses & permits – Before starting to operate, a business often must file registrations and obtain permits or licenses that may be required in the countries, states, and municipalities where it intends to conduct business. Depending on the company’s industry, operations, location, products and services, a variety of registrations and approvals will be necessary.
- Corporate bylaws – The formal operating rules for your corporation, the bylaws detail the intricacies of a company. You can’t just take some random set of bylaws found through Google because they serve as the foundation of your business and need to address your business to a “T.” However, it can be risky to be too specific because you’ll have to abide by everything found within the bylaws. Investors are used to certain language so it’s important to have bylaws that can be utilized when fundraising time comes.
- 83b election importance, deadlines etc. – Generally, 83(b) elections are used in the case of founder stock with vesting attached to it. An 83(b) election must be completed and mailed within 30 days of sale of founder stock.
- Pay your taxes (Delaware specific): Each year businesses incorporated in Delaware are required to file an Annual Report and to pay a franchise tax. 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 tax is calculated based on the authorized shares for the company by using either the Authorized Shares Method or the Assumed Par Value Capital Method, whichever is less expensive. The calculations can get complicated so check out the Delaware Secretary of State’s Office for a solid explanation on how to determine the tax amount. At the federal level, there is income tax, including corporate and personal, capital gains tax, income tax on dividends, and interest and royalties, as well as employee payroll taxes.
The process of incorporation is one thing, but as you can see post-incorporation is a series of steps that need to be addressed on their own. There are other formalities too, such as holding your first organizational meeting and issuing stock certificates. It’s smart to have a seasoned attorney walk you through the best and most efficient ways to tackle your post-incorporation tasks.