IncFile.com - Business Incorporation Solutions

Is forming an LLC or corporation in Nevada or Delaware the right choice for my business?
The states of Delaware and Nevada have become popular destinations for incorporation formations. There are several reasons for this. For one thing, the state of Delaware has very strong history of corporate case law that is very favorable to business. This is why most major US corporations are headquartered there. Another advantage is that each of these states does not levy corporate taxes to corporations and LLCs that conduct business outside of the state.
What many incorporation service providers whose core business is concentrated often leave out is a very important piece of information that can have significant ramifications to the uninformed consumer. A company that is formed in one state and conducting business in another is not officially recognized or authorized to conduct business in that state. A corporation, LLC, or other such entity is organized under the statutes pertaining to business entities within that state and the authority to conduct business does not necessarily extend to any other state.
In order to legally conduct business in a state other than that in which the corporation or LLC was formed, a company must file what is typically known as a foreign qualification in each state where a nexus exists. While this may make sense for a multi-million dollar corporation with locations in multiple states, it does not necessarily extend to small business owners. In order to obtain a foreign qualification in a state as a foreign corporation or LLC additional filing forms and fees must be filed within each target state. Furthermore, upon obtaining rights to conduct business in that state the foreign company is subject to the same taxes and laws to which domestic (in-state) entities are subject, therefore negating the benefits of filing outside of the home state in the first place.
Additionally, both Nevada and Delaware levy annual taxes in the form of annual reports, which cost $125 in Nevada and a franchise tax in Delaware which varies depending on whether the entity is a corporation or an LLC. Another annual fee that is also overlooked by incorporation service companies is the registered agent fee which can be anywhere from $99 to $300 per year, depending on the company providing the service within a given state. Maintaining an agent is mandatory, and if an agent is not maintained it will result in the administrative dissolution of your LLC or Corporation upon the resignation of the registered agent.
The state filing fees to register as a foreign corporation can be quite substantial as well, Texas for example charges $750 to file a foreign qualification while the fee to file as a domestic entity is only $325. The truth is that in the long run filing a company in a state outside of your home state can end up being much more expensive than filing it in the home state to begin with, while providing no financial incentive to do so. In essence, the person who chooses to file in Delaware or Nevada may be required to meet the compliance and ongoing requirements of the two states, instead of just one.
While many individuals choose to file in these states without registering within their home state without incident, they ultimately jeopardize the advantage of incorporating sought in the first place, which is the limitation of their personal liability. If a corporation or LLC is registered in the state of Delaware but conducts business in California and neglects to register they could find that any and all liability could accrue to them personally in the event that a legal judgment was made against the company. This is because the state will not recognize the unregistered foreign corporation legitimacy thus piercing the corporate veil of the company.
While we are merely a filing company and have no personal incentive in swaying our clients to file in one state over another we do feel it is important to disclose this information to our clients and site visitors in the hopes that they will can avoid committing to a decision that for the majority of business owners could be a short sighted solution with potentially negative long term consequences and higher long term liabilities. If you would like to discuss this matter in further detail with one of our incorporation specialists feel free to call us anytime as we would be more than happy to answer any additional questions you may have.

The need for compliance with government requirements only gets more important after forming a corporation or LLC. Very often the corporation or LLC was set up in the first place to help protect personal assets and provide tax-deductible benefits for owners and employees. Failure to satisfy these ongoing requirements, however, could result in the organization losing those very benefits.

Small business owners are especially at risk of stumbling into this particular pitfall. Since they are often overwhelmed with the multiple facets of their business’ day-to-day operating needs, they may not know how to avoid noncompliance and the resulting crippling or fatal business consequences. IncFile.com can help.

Corporations and LLCs have both internal and external ongoing requirements. The internal requirements must be met by the directors of the corporation or the members of the LLC, and then documented in company records. External requirements are those imposed by the state in which the LLC or corporation was formed; these often include, at a minimum, an annual (every year) or biennial (every two years) filing with the state, as well as some kind of fee.

Internal Requirements

Internal requirements are frequently overlooked, but are vitally necessary to effective decision-making and communication within the organization. A corporation has more internal requirements than an LLC; these include holding and properly documenting director and shareholder meetings, adopting and updating bylaws, issuing stock to shareholders, and recording stock transfers. While these actions are not specifically required for an LLC, it’s still a good idea to adopt an operating agreement (and keep it up to date with amendments as needed), issue membership shares, record interest transfers, and hold annual meetings.

Owners use a consolidated corporate records book to organize and maintain important corporate documents such as articles, bylaws, meeting minutes, resolutions, stock certificates, deeds, and so on. Many business owners use a Corporate Kit or LLC Kit for organizing and maintaining these vital records. Many businesses also use a metal or rubber corporate seal—the kind that leaves the company name in raised letters on a document—to signify that the document is an authorized, official transaction of the corporation. These can be obtained as part of a corporate kit or from a stationery store.

Bylaws lay out the corporation’s basic operating principles; they should be planned for and drawn up as part of the incorporation process. It is not required to file the bylaws with any government agency, but a corporation is required to have at least an initial and annual meetings, adopt bylaws, and keep minutes of the meetings, and keep these on file with the corporate records. Bylaws are important because they set down formal rules for such things as: when and how meetings can be held; notice, quorum, and voting rules for meetings; how decisions can be reached and recorded outside of meetings; basic titles and responsibilities of corporate officers; and the requirements for providing periodic (usually at least annual) information to shareholders.

In short, bylaws are the corporation’s major decision-making and operating procedures set down on paper. This can help owners refine and improve their common practices, and can also serve as a “referee” when uncertainty or disagreements arise on what the official solution is to a given situation or need. Bylaws also give your firm credibility in the eyes of shareholders, creditors, potential investors, other businesses, and even the IRS. Owners should take care, though, to make sure their bylaws do not conflict with their state’s Business Corporation Act or its equivalent.

If the board of directors is not already appointed in the articles of incorporation—a requirement in some states—the initial board’s names and addresses will need to be listed in a separate document. These directors will serve on the board until the first annual shareholders’ meeting, when a new board will be elected.

One of the new corporation’s most important tasks is to prepare minutes for the first board of directors meeting. This first meeting is where several key company actions should be approved, such as electing officers, adopting bylaws, selecting the main office or headquarters location, choosing a bank for corporate accounts, the accounting period or fiscal year, initial tax elections, and issuance of initial shares of corporate stock. Normally the groundwork and supporting research is done before the actual meeting, although the board can change or amend the minutes as prepared if they vote to do so. Any of the initial directors can prepare the minutes, but the entire board must sign them at the meeting, incorporating any amendments or changes as needed.

Thereafter, at a minimum, the corporation must hold a shareholders’ meeting and a board of directors meeting at least annually; accurate, complete minutes for both are essential, because these documents will be used as reference materials for future decisions. Remember: “If it’s not written down, it didn’t happen.”

A limited liability company, on the other hand, comes officially into being when its articles of organization are filed with the state’s LLC office. The articles contain basic organizational information about the LLC, such as its name; whether it’s managed by its members or by selected members called managers; the name and address of its members; and where its office is.

Next to its articles of organization, the most important document for an LLC is its operating agreement. This isn’t required by the state (except for New York)—but it’s a key internal document that officially records how the LLC will run. It is very much the same as a partnership agreement; except for an LLC it is called an operating agreement. It lists the members, how much each member has invested, how profits will be divided, and how much weight each member has when matters come to a vote. It may also specify requirements for meetings (notice, quorum, voting rules, etc.) and the like, but it doesn’t have to. Normally, however, the operating agreement does include state-mandated requirements.

 External Requirements

External requirements usually consist of a periodic report to the state and some kind of fee. Most states require corporations and LLCs to file an annual or biennial statement or report, along with an associated filing fee of some kind. LLCs may also be liable for payroll tax, property taxes, sales and use taxes or “seller’s permits,” or business license renewals. Other state or local filings, such as business licensing or state or municipal tax registrations, may also be required. Owners will also still file their individual state and federal income tax returns.

Some states also impose a franchise tax—basically a fee paid by the company for the state’s permission to operate there. Different states use different methods to calculate the franchise tax; it may be based on revenue, or on some measure such as a corporation’s total number of authorized shares and their value.

Each state has its own deadlines for annual statements and franchise taxes. Some states determine these based on the formation anniversary of the corporation or LLC. Other states set one deadline for annual statements for all corporations and another for all LLCs. Business owners need to know how and where to research these requirements so that they can plan for them before incorporating, and then keep up with changing requirements as their business continues to operate and progress.

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For any business, paperwork is inevitable.

And to almost any business owner, this means there are tens if not hundreds of different forms and paperwork you must fill out in order to be in “good standing” with the government, the IRS, and more.

One such form deals with the Employer Identification Number (EIN).

What is the EIN?

Also known as the “tax id number”, you can think of the EIN as a social security number for your business.

Look at it this way: people need a Social Security Number. Why? Because is probably the most definitive form of ID you have, and you can’t do anything without it. You need it to open a bank account, apply for credit cards, get a marriage license, etc.

The point is; you need that 9-digit number for virtually everything.

Here’s one quick example: it’s simply too hard for the IRS to keep track of the myriad of business names when it comes to payroll taxes and such (how many “Tony’s Pizza” do you think there are?)

Another example is buying goods in many cases / states, you will not have to pay sales tax if you are buying items for resale. The proof you need? You guessed it, your EIN.

When forming a new business, an Employer Identification Number must be applied for.

If you either:

• Have employees
• Operate as a Corporation or a Partnership

File one or more of the following tax returns:

• Employment
• Excise
• Alcohol, Tobacco, and Firearms

• Withhold taxes on income paid to a non-resident alien
• Have a Keogh plan

Or involved with any of the following types of organizations:

• Trusts and estates
• Real-estate mortgage investment
• Non-profits
• Farmers Cooperatives
• Plan administrators

then you will need an EIN.

To get an EIN, you will need to fill out the IRS form SS4.

There are also circumstances in which you will have to apply for a new number. Your EIN must be changed if:

• Your existing business is purchased by another individual, creating a sole-proprietorship.
• A sole proprietorship, partnership, corporation, or LLC changes from one to another.
• The owner of a company passes away, and the estate takes over the business.

Click here to have IncFile obtain and email you a FEIN / Tax ID Number.