"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 (it may have been one of your columns, actually).
"We formed the corporation online to save money, and it seemed like everything was OK.
"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 Because our corporation was no longer active, somebody else grabbed our name in Delaware and is now trying to register it as a trademark.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 that person succeeds in doing that, we will have to hand over our website domain name even though we've spent a fortune building a website around it.
"The lawyer also told us that because we never registered in the state where we are actually doing business, we owe tons of money in penalties even though we've paid taxes here every year.
"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 it may be true that I once wrote a column about the benefits of tech startups incorporating in Delaware, let's be clear: I never, ever advised someone to form a corporation or limited liability company (LLC) online, and this is one of the reasons. 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. This email is a perfect example of what can happen when you don't stay on top of things compliance-wise.
Having wagged my finger at this reader, I have to say I'm sympathetic to her plight. When you are building a fast-growing tech company, you are working 24/7 365 days a year, living on Red Bull, ramen noodles and three hours of sleep a week. Nobody is thinking about legal compliance. Yet failing to keep on top of things can kill your startup, as this reader's email attests.
Here are four easy rules that will help keep your corporation or LLC on life support.
Rule No. 1: Hire a Lawyer and an Accountant, and Listen to Them! It is 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 that the state of Delaware or the corporation's registered agent sent this reader both emails and snail mail reminders telling her when annual reports, franchise tax reports and other compliance paperwork were due. She probably threw 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, IT 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 to your lawyer and accountant IMMEDIATELY. Let them tell you whether it's important or not. If they say it's important, follow Rule No. 1.
Rule No. 3: 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 its services. Pay it promptly. If it doesn't get paid, it will withdraw as your registered agent, and the state will dissolve your corporation or LLC.
Rule No. 4: Register in Your Home State. Forming a Delaware corporation does not allow you to operate legally in your home state. For that you need to register as a foreign corporation with your state's secretary of state and pay taxes to the state tax authority. You have to do both. 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 costs money. But it's money well-spent. Find the money, and get them done.
Cliff Ennico ([email protected]) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our webpage at www.creators.com.