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Why incorporating my startup was my worst mistake

192 points by chamza 16y ago

ryanfitz 16y ago
I don't think incorporation was the mistake here, but rather incorporating with no help and without knowing what you're really doing is. I recently incorporated using harvard business services, for $300 I had everything taken care of for me and had all the paperwork in 2 days, well worth the money.
- davidu 16y ago
  His entire post is about dissolution, not incorporation. Read the post.
  - ryanfitz 16y ago
    I read both this article and his previous of where he created a company with 10,000,000 shares initially. This is why it cost him so much to dissolve the company. If he knew what he was doing he would have created far less shares, like 1500 total.
    - chamza 16y ago
      I've learned that 10,000,000 shares is fine if you have a low par-value per stock. I believe this many stocks are especially good if you're looking for outside investors/board members. But actually, don't listen to me, I'm the one whose in this ridiculous mess.
      - rosenjon 16y ago
        How stupid this was is dependent on the specifics, which we don't really have. Were you on the brink of raising a round of capital? Or did you just incorporate in anticipation of raising a round later? A C-corporation in Delaware is considered the best entity for raising outside investment. The State of Delaware knows this, and charges hefty fees for maintaining a C-Corporation, and apparently for dissolving one. So it makes very little sense to incorporate in Delaware unless you will be raising an outside round of capital, because the costs of maintaining the C-Corporation itself are very high for a start-up with no money. Recognize that a "do-it-yourself attitude" is awesome for developing start-ups. It is perhaps one of the worst attitudes to take in terms of corporate entity formation and maintenance. Documents on file with a law firm with appropriate date and timestamps are virtually bulletproof in court. This is one of the many reasons law firms exist. Documents pulled out of your filing cabinet, to which only you have been privy until the time they end up in court, are a bad, bad idea. Bootstrapping your legal documents or anything else having to do with your corporate entity is a flat out terrible idea, unless you basically do this for a living (in some cases, there are startups who create LLC's daily, in which case you presumably know all of this already).
- rosenjon 16y ago
  Totally agree. It would be unfortunate if anyone takes away from this that incorporating is a bad idea. What is a bad idea is incorporating with no idea of what you're doing. I disagree that this is a story of dissolution. It is a story of having incorporated with no understanding of the consequences, and finding out too late that he should have sought legal advice to begin with. There is a lot of talk online about Delaware being the best state for incorporation. This is true if you are seeking outside financing, and most angels/VC's want to see a Delaware C Corp prior to investing. However, if you are going to raise investment, you need to have a lawyer anyway. So at the point you take investment, your lawyer can handle doing an incorporation in Delaware. No one should be filing for C-corporation status by themselves, with no background in the legal requirements. In the meantime, if you are a startup who wants to put out a product for public use, or need to bring aboard paying customers of any kind, you should probably have an LLC. These are relatively cheap to create (and dissolve) and you can generally find law firms who will do pro bono work for startups in filing the appropriate paperwork (I have found several). Even LLCs require operating agreements and other paperwork before they are considered true legal entities. Any decent law firm does this all the time, and has the appropriate documents on file. Doing this yourself is again asking for trouble. For example, if you do business on behalf of your LLC as the "CEO", "President", or "General Manager", and have not specified that title in an operating agreement, you may be at risk of having the veil pierced (http://en.wikipedia.org/wiki/Piercing_the_corporate_veil http://en.wikipedia.org/wiki/Piercing_the_corporate_veil), because you are transacting business on behalf of the company in a role that does not legally exist. In most states, if you have an owner run LLC, your official title is "Member". However, most people don't want to represent their company as "Member", as this sounds weird, and is not a commonly used term. So in practice, you call yourself something else, like General Manager. If your operating agreement says that you can run the company under the title of "General Manager", or anything else you want to call yourself, then you are totally cool. If not, then you will be in trouble if a customer ever takes you to court.
  - theoj 16y ago
    Can you post some cases or background regarding piercing the corporate veil for an LLC based on "transacting business on behalf of the company in a role that does not legally exist"? Who is to say what does or doesn't exit? Based on this logic, a large LLC or LLP would be required to have its whole hierarchy listed in the operating agreement.
cheez 16y ago
Why did he have to pay?
- CoachRufus87 16y ago
  state law
  - cheez 16y ago
    Nice law.
davidu 16y ago
IANAL and this is probably bad advice, but... You can let the company fall into bad standing. I have heard of the various risks with doing that, and I've never understood how those risks go away with dissolution. If the company is shutdown and not making money, then failure to file annual reports and tax returns is irrelevant because you will have no income to be taxed or fined against. You would have annual state filing fees that would go unpaid, but you would never be personally liable for them. And I can't imagine how you would be personally liable for the actions or inactions of a corporation that conducted no business.
- chamza 16y ago
  I've thought about this and asked around. I was told that if I did not pay my tax returns and annual reports, the State of Delaware can go after me personally. I'd rather not risk that, and there is a monthly fee that gathers up if I don't pay the annual reports on time; which is what happened this time around.
  - fleitz 16y ago
    Have you spoken to an attorney about this? They may be the best people who can advise you in this situation. Look around your area some lawyers offer free consults.
- aquark 16y ago
  IANAL either ... but directors of companies do have legal responsibilities, and is it possible that the authorities could choose to purse the directors for failing to fulfil those responsibilities. In the UK at least I believe you can be prevented from holding directorships in other companies, which may mess things up for you personally in the future even without a financial impact. Not sure what happens if all the directors in a company resign?!
A1kmm 16y ago
It sounds like Franchise Tax associated with annual returns is payable by the corporation, not you personally. From 8 Delaware Code §503: "All corporations accepting the provisions of the Constitution of this State and coming under Chapter 1 of this title, and all corporations which have heretofore filed or may hereafter file a certificate of incorporation under said chapter, shall pay ...". http://delcode.delaware.gov/title8/c005/index.shtml http://delcode.delaware.gov/title8/c005/index.shtml It is 8 Delaware Code §277 (http://delcode.delaware.gov/title8/c001/sc10/index.shtml http://delcode.delaware.gov/title8/c001/sc10/index.shtml) which says that Franchise taxes have to be paid by the corporation before the Corporation can be dissolved. It sounds like the corporation is behind on franchise tax, and so is therefore insolvent - it has liabilities exceeding the assets. If the corporation simply doesn't pay the franchise taxes for a year, the charter will be repealed (see 8 Del C. § 511, http://delcode.delaware.gov/title8/c005/index.shtml http://delcode.delaware.gov/title8/c005/index.shtml). Expect to lose all assets owned by the corporation, including any code. IANAL, but I suggest you get advice from a lawyer or accountant about this.
- jrockway 16y ago
  Expect to lose all assets owned by the corporation, including any code. How does this process work?
CoachRufus87 16y ago
I'm going through this exact same issue right now. I created a C-Corp in DE naively thinking that thats what everyone did and I expected to pay no more than the minimum ($75 or so) in franchise taxes at the beginning. Apparently, since the state needed more revenue, they passed a law that dramatically increased the minimum to $400. I was shocked when i realized this and called the state repeatedly to make sure that there wasn't a mistake. I paid $400 back in Feb and I'll pay another $400 soon so that I can dissolve the C-corp. I now have an LLC in Texas (my home state) which more than satisfies my needs, for now. Talk about an expensive mistake.
- seaotter002 16y ago
  As am I, I know exactly what you're going through. Have you thought about filing the dissolution as a 'Before Business Begins' dissolution (form 274)? We actually never got to the point of publicly releasing our project (and did not have a single cent of revenue), so I was looking at that type of dissolution to avoid this year's $350 minimum tax. I have still not found what they define as "Beginning Business" in their legal statutes, but I'm assuming a company that never released a product and made no money would fit that definition. Of course, IANAL.
  - CoachRufus87 16y ago
    I'd never heard of that form, but I'll look into it.
    - seaotter002 16y ago
      Yeah, check section 274 here: http://delcode.delaware.gov/title8/c001/sc10/index.shtml http://delcode.delaware.gov/title8/c001/sc10/index.shtml The various dissolution forms are here: http://www.corp.delaware.gov/disso09.shtml http://www.corp.delaware.gov/disso09.shtml
      - CoachRufus87 16y ago
        It seems that all dissolution forms have this requirement: "Before the Certificate can be filed, all applicable Annual Franchise Tax Reports must be filed. Please contact the Franchise Tax Section prior to submitting the document for filing to determine the Annual Reports due. Please make your check payable to “Delaware Secretary of State”"
michaelpinto 16y ago
Incorrect: Your worst mistake was not talking to a lawyer and an account before doing your incorporation. The value of these professionals isn't their ability to file paperwork but to give you advice that's customized to your situation. Too many geeks think they can reverse engineer what goes into passing the bar or getting a CPA, but the reality is that the smart ones really know enough to know what they don't know...
- deleted 16y ago
  [deleted]
  - rosenjon 16y ago
    "Regardless of if I talked to a professional, I'd actually have to pay the same amount to dissolve this entity." Really? There is a reason companies like G.E. (http://online.wsj.com/article/SB10001424052748704530204576235090332473366.html http://online.wsj.com/article/SB1000142405274870453020457623...) legally pay essentially no federal taxes. Because there are sophisticated lawyers and accountants (a.k.a. professionals) who figure out how to shift the law to their advantage. For example, there may be laws in place that allow you to write-off of the dissolution of your business against your personal income taxes. Or perhaps there is a way to file a grievance with the state to prevent having to pay the dissolution fees, based on some statute pertaining to small companies. However, you won't ever know, because you don't want to talk to a professional. Recognize that you're in this situation in the first place because you didn't want to talk to a professional. Now, as the situation has escalated, you still don't want to talk to a professional. This does not bode well for your future business dealings. There are law firms that do work for free for start-ups. I'm guessing one of your friends from high school or college is a lawyer at one of these firms. Reach out to the people you know, and figure out how to leverage your connections to get some professional advice. Remaining ignorant is not the solution to this problem.
    - bugsy 16y ago
      GE is incorporated in New York not Delaware. GE pays NY state franchise taxes not Delaware. Overall, GE paid $2.7 billion in income tax in 2010 and over $1 billion in payroll, state and local sales and property taxes.
dlevine 16y ago
It cost me about $1000 recently to dissolve a Delaware Corporation.
petercooper 16y ago
It's a shame these things aren't more straightforward. This is a somewhat detached and subjective view of the US but it seems to me that US regulations are designed to nickel and dime you at every turn. If you incorporate here in the UK, don't trade, and dissolve, you owe diddly squat and any taxes you do pay are reasonably simple and well known. I'm far from a defender of the UK in most cases - especially tax rates - but as a business person in the UK, I at least don't feel like the government or regulations are out to trick me and that I need an expert or a lawyer by my side for every decision I make.
- nkassis 16y ago
  It's mostly due to delware (other states are very different). The state of Delaware uses its lenient coporation laws as a way to make a ton of revenues for the state. These laws attract most corporations (for foreigners some of these laws are very useful) in the US and franchise taxes for a state the size of Delaware are incredibly important. Like I said other states have very different laws but most people will tell you that with all the bad delaware is still not decent choice to incorporate.
  - cyrus_ 16y ago
    In fact, Delaware makes so much from these taxes that it doesn't even have a sales tax. Other taxes for Delaware residents are also very low compared to its neighboring states.
- tptacek 16y ago
  Are you sure about this? That the UK is a more straightforward place to incorporate than the US? I'm dubious. * First, there's not much evidence that the person we're talking about really owes a dime to Delaware. He set up a C-Corp (!), which apparently owes some corporate tax, but that doesn't make him personally liable. So, despite choosing the most complicated conceivable way to incorporate in the US, he can probably still just walk away. * Second, does the UK have an LLC or S-Corporation equivalent? That is to say: is there a structure you can use to get pass-through taxation (business proceeds taxed once, as income) instead of corporate taxation, and have a shareholder structure that allows you to grant equity to employees? Because that is exactly the structure most pre-VC and bootstrapped startups want. * Third, the US doesn't have the UK's system of rules requiring qualified directors; for instance, a bankruptcy in the US can't prevent you from being a principal in a company. * Fourth, isn't it more expensive to incorporate in the UK than it is in the US? It costs under $100 to get a liability shield to do business under in the US. What's the equivalent UK cost? * Fifth, and finally, aren't the laws in the US simply more business-friendly than in the UK? UK employees need to be given reasonable notice or compensation prior to termination; the UK is also not an "at-will" employment regime, making it harder to fire and thus harder to hire employees. The UK is, from what I've read, the best of the business regulatory regimes in Europe, and the rules don't look onerous; they only look marginally more annoying than those of Delaware. However, I think that by looking at the weird choice made by one blogger (a full-on C-Corp), you might have gotten a distorted idea of what the regs in the US actually are.
nkassis 16y ago
I don't think incorporating was a mistake, I incorporated a c-corp last year and read that getting 5K shares was the maximum while remaining at a minimum franchise tax. From my understanding, the initial amount of shares is not a big deal as this can be changed later (emitting new shares, blah blah blah). I created the corp as an experiment and will see how it goes.
- ovi256 16y ago
  Consider it cost of learning. OTOH, you could have went to a lawyer who may have or may have not already known of the franchise increase. You would have paid an amount in the same ballpark as your c-corp taxes for this consultation.
BerislavLopac 16y ago
Oh, come on guys, if you think these are troubles related to incorporating a business, you should really try to do it in Croatia. For starters, all companies need to be registered at the Court of Commerce, and each new company needs to have a name approved by a judge. Second, you're legally bound to have a name either in Croatian, Latin or Ancient Greek (or presumably another "dead" language, if you can prove it); and even if you do, a judge has to OK it (a friend of mine has recently been through about 30 names and still hasn't been approved; the whole process of approving a name can take days). Then you have to physically go (yourself, or your lawyer) to 3 or 4 offices to file various registration papers; all in all it can take a better part of the month to incorporate. And to top it all, even if your company does nothing, has no income or expenses, it has some monthly dues to the state from day one, simply because it exists.
- nikcub 16y ago
  Why don't you open in Bosnia or Montenegro? Both are very liberal and have western banks. I have used businesses + accounts in both as offshore vehicles. You can get a business registration, bank account and merchant account with gateway in Montenegro for a few hundred dollars and in a couple of days. Heck, with a few thousand dollars you can register your own bank in Montenegro.
  - BerislavLopac 15y ago
    Nik, if the solution is to open a company in another country, I'd rather do it in the UK, which is even more sophisticated than the ones you mention, and is only a couple hours' flight away. Actually, I did it already. ;)
- meinhimmel 16y ago
  It's not a competition though. This guy has been through a rough experience dealing with starting a company, and he has decided to share it with us. Not to be rude, but I'm unsure exactly where your story fits into that.
  - deleted 16y ago
nikcub 16y ago
the company is bankrupt and can't pay its taxes. File ch11. I don't know why you think you have to pay this, it isn't money you owe (the whole point of setting up the business, isn't it?)
- originalgeek 16y ago
  This is a good object lesson in why you shouldn't take legal advice from someone posting on the web. The dude was wrong once, and perhaps twice if you are correct. Not to argue with your point, I just want to avoid playing armchair lawyer.
  - nikcub 16y ago
    I had a Delaware C corp go bust and my advice from a highly-paid startup lawyer was to file bankruptcy and let it go. It was eventually struck off the registry and I never heard anything again, and have even registered other corps since. The only time you wouldn't is if you have taken an investment and want to provide a tax writeoff to investors, or if there are assets to divide. Then it needs to be disolved properly. (Edit: to add here, if you have been negligent or criminal the creditors will usually be granted a court order to chase up debt with the directors personally. This is rare. In this case you have franchise fees that were run up in the course of doing business. The one thing to learn here that should have been in the original article is that Delaware's main source of revenue is franchise tax, which is calculated on the number of shares issues, so keep that number very low (ie. 3 founders = 3 shares). That is a pretty big thing to miss, IMO.)
arn 16y ago
You really should update your original "How I Incorporated My Startup" article http://heyhamza.com/33994010 http://heyhamza.com/33994010 to admit you got in over your head. It really changes the whole lesson of the first article. I see you've added disclaimers, but you need to also link back to the potential $89,000 mistake.
resdirector 16y ago
Wow. Incorporating in Australia is a breeze by comparison. AFAIK, a four page form and ~$400. With an annual fee of $212.
- deleted 16y ago
  [deleted]
alain94040 16y ago
This is the poster child for using http://foundrs.com http://foundrs.com : virtually incorporate with your co-founders, see how far it goes, when it gets serious convert into a real corporation. Benefits: no corporate taxes, no accountant to pay. Vesting is automatic (4 years, monthly, just like founder stocks in a Silicon Valley startup). And it's legally binding (thank you copyright law, for once you were useful).
- rprasad 16y ago
  Stock is treated as taxable compensation once/as it vests, whether or not the entity is incorporated. Even worse, because the entity is not incorporated, the IRS could treat the stock as a partnership interest. Partnership tax accounting is a goddamn nightmare. You could find yourself on the hook for thousands of back taxes plus fines if your "virtual corporation" is successful. And that doesn't even include potential state tax liabilities or self-employment taxes.
forensic 16y ago
Someone never learned what "limited liability" means. The whole point of a corporation is that you aren't personally liable for its debts! You just paid $400 for no reason!
grellas 16y ago
Corporations are not particularly hard or expensive to start, maintain, or dissolve - but you need to be at a stage of life where a thousand dollars here or there is not a major burden. If you are not yet at that stage, that is a different story and there is no doubt that forming or dissolving an entity such as this will normally set you back a thousand or two on either side. In that case, you should tread cautiously unless you can raise some funds (even if it friends-and-family money) to be able to handle such costs without too much pain. As a lawyer, I would have to say that you should do it by the book and dissolve the entity. I have, however, had a variety of clients over the years who left a Delaware corporation to die without dissolving it and they have not had trailing personal liabilities as a result of the accrued corporate franchise taxes (of course, it is a different matter if the corporation earned a net profit and has an obligation to file income taxes - in that case, failure to file can cause serious problems for the corporation and for its management). The $89K tax bill is typical of any Delaware corporation that has large numbers of authorized shares, even with a low par value. This often proves a shock to unsuspecting founders who file a do-it-yourself entity without understanding the issues. However, in almost all cases involving an early stage startup, you can deal with this easily by using the alternative valuation method tied to value of assets in the company. Use of the alternative method usually reduces the franchise tax to a very low level. It is easy to find out how to use the alternative method (forms and instructions are available online through the Delaware Secretary of State). It seems that you needed to set up the entity in order to try to manage the issues with your co-founder and so the choice to set up a corporation was not really a mistake. The choice to set it up in Delaware for a simple situation can be a mistake, in my judgment, but I am probably in the minority among startup lawyers on this issue in believing that a home-state incorporation in the interests of keeping things simple can be and often is the best choice for founders (see http://grellas.com/faq_business_startup_002.html http://grellas.com/faq_business_startup_002.html). It is no disgrace for a Silicon Valley startup to incorporate in California, even for a public company (no less than Apple itself is a California corporation). Had you done a home-state incorporation, you would have avoided the hassles with the $89K tax bill, as most states besides Delaware states have a fixed, low amount that you pay every year as a minimum franchise tax (in California, $800). Incorporation is definitely not for everyone. When and if to incorporate can be tricky questions. I also have outlined a few of the factors to guide that decision as well (http://grellas.com/faq_business_startup_007.html http://grellas.com/faq_business_startup_007.html). There are a good number of early-stage startups that really can't easily afford professional fees and so the answer is not to use a lawyer in all cases to incorporate. But, even if you can't afford a lawyer, it is always worth consulting with one for strategic advice on incorporating before you do so. Such a first consultation is dirt cheap in most cases, and sometimes free. The modest amount paid is well worth it just to be alerted to the main issues and pitfalls involved in setting up an entity. Thus, while it was probably not a mistake in itself to set up your corporation, it likely was a big mistake to do so without some guidance of this type (I had made this comment in connection with your original piece as well - http://news.ycombinator.com/item?id=1924719 http://news.ycombinator.com/item?id=1924719). Sorry to hear about the business failure. I know the HN community often stresses what a valuable learning experience this can be but there is no denying that it is a very painful affair by any measure.
ericb 16y ago
Has anyone stopped to consider what the real risk of being sued (and losing) is for your average startup website? Is incorporation premature optimization?
- georgieporgie 16y ago
  Simple incorporation is really quite low cost, and very quick. CA is the worst I know of, with its $800 minimum franchise tax. I just (re) incorporated in Oregon. I think it cost $150 (was $50 until 2009), and took about two days. IMO it's well worth it for legal protection from losing personal assets.
  - ericb 16y ago
    What are you paying your accountant each year? Is there a minimum corporate tax in Oregon? In MA I think it is 400 minimum a year.
    - georgieporgie 16y ago
      I don't have an accountant. I'll get one once I'm making money so consistently that it's not worth my time to do it myself. :-) The minimum corporate tax in OR is $150. In 2009, they raised it from $50, and (I think) increased the tax rates across the board. The biggest change is that they now tax on gross receipts which means you can't deduct expenses.
fourply 16y ago
This article should be entitled, "Why failing to hire an attorney was my worst mistake." It's easy to think that some googling and reading statutes will get you where you need to be, but there are very real pitfalls and tax traps out there that attorneys are far better equipped to help you avoid. If you're not serious enough about your new business to pay for professional advice - you're not serious enough to start it.
- lawnchair_larry 16y ago
  It is odd that you have conflated seriousness with access to capital.
mjs00 16y ago
Regarding the amount owed, from my lawyer when I did this two years ago: Please note that there are two methods to determine the tax – the authorized share method and the assumed par value capital method (both methods are detailed on the website). DO NOT sure the authorized share method as this will calculate a tax balance of over $75,000.00. Do use the assumed par value capital method as this will calculate the balance at roughly the $75.00-125.00 range.
ecaradec 16y ago
I'm surprised that nobody is horrified by how deceiving this is. Its definitly a way for delaware to make money. May be it's just the way law is, you can't use your own judgement on if something is fair or not. Bringing it back to a computer metaphor would be : Of course you should have done backup, everybody knows that ! You now need to pay 89000$ whether or not you need your data on that drive. You should have consulted an enginineer before buying a computer of course ! See... small mistake, disproportionous response. At least think that you did nothing wrong, it's just that the law is unfair.
16s 16y ago
When someone sues you, you'll better understand why having a corp, LLC, etc. is important.
dgallagher 16y ago
I made a similar mistake myself, forming an LLC in Massachusetts. I did IT consulting for the SoHo and home market. It was around $550/year to keep the LLC in business ($500 plus filing fees), ~$50 to register with the town you're based for four years, and something like $250 to dissolve the LLC with the state. Every state has different fees; some are quite high, and others very low, pending on the type of business created. I did it mainly to limit liability, among other reasons. However a little while after forming, I spoke to a lawyer and he said that it basically doesn't limit you from being sued personally. You "can" attempt to deflect personal lawsuits with the LCC (easiest if you keep its finances/files/bank-account separated from your personal stuff, which I did), but it's no guarantee. He basically advised me that forming the LLC was a waist of money in my situation, and I would have been better off simply as a sole-proprietor (e.g. DBA - doing-business-as). From the IRS's perspective, I was treated as a sole-proprietor for tax purposes (they don't recognize LLC's for single individuals). Of course by then, it was too late to easily dissolve the LLC and "switch" it to a DBA, so it was money wasted. What annoyed me the most is the same problem Hamza had in the article. You have to pay money to dissolve a business! Really? REALLY?!? Obviously the business failed, or is being abandoned, because it didn't make enough money. Charging a "death tax" on a business seems pretty harsh. I understand if there's a filing fee of $20 or $30, but anything higher than that is ridiculous. Delaware wanting $1,600 from Hamza is downright insane. Perhaps there's more work involved dissolving a C-Corp than an LLC, but still, $1,600 is ridiculous. Charging a business death-tax reduces seed capital needed to form a new business. Second, it reflects badly on the state, reducing the likelihood of incorporating in it again. Lastly, why not ignore paying the fee altogether, declare bankruptcy, and waste the time/money of the court system dealing with it all? I'm not sure about the legal implementations of that, but it might be a valid option if the C-Corp has no assets left. AFAIK you cannot ask shareholders to pay for it since they're legally shielded from the debts of a C-Corp.
- rprasad 16y ago
  What your lawyer meant was that its very easy to "pierce the veil" of the business entity (your LLC) to go after the owner when the business is owned and operated by a single person. In such instances, it is very difficult to show that the business has a separate identity from the owner. This is especially true for consulting, where the consultant is the business. On the other hand, it is very difficult to pierce the veil of a business entity with more than one owner (unless the second owner is a spouse or family member of the first).
jasonkolb 16y ago
Unless he signed and recorded something saying otherwise he is not personally responsible for the debt of anyone else, including the Corp, and the state is trying to levy a tax on ignorance.
TheBaron 16y ago
I've been here with several things in life. While winging it has been the source of some "winning" in my life, it has also been the source of many losses. I'm more of a creative mind/sales guy. I'm an okay web designer, with very minimal programming skills. I tried to develop a tech driven start up and handle everything on my own including the programming. I worked so long & hard trying to take care of things I wasn't skilled enough to do that I was too exhausted to maximize on my talents. So, I would say focusing on your strengths is a key to success. Marcus Buckingham has nice insights on strengths. Check him out. -Cheers
kirpekar 16y ago
I hope you filed Form 1120 also
georgieporgie 16y ago
To anyone thinking about incorporating: unless you have a very good reason for doing so -- by which I mean solid legal and accounting advice, and money to pay associated costs -- do not bother incorporating outside your home state. As others have said, DE has a great, business-optimized court system. But if you don't live in DE, you're instantly at a huge legal disadvantage if anything comes up. Meanwhile, you'll be stuck paying: * annual corporate filing fees (WY), minimum franchise taxes (DE), licensing fees (NV), income taxes (many states), etc. in the state in which you've incorporated. * foreign corporation fees/taxes and income taxes in your state of residence. * foreign corporation fees/taxes and income taxes in any other state where you do conduct significant business beyond sales. * registered agent fees in the state in which you've incorporated. * possibly mail forwarding fees, depending on what you're trying to do. (I incorporated in Wyoming last year, then realized how dumb that was, dissolved the corporation, and re-incorporated in my home state this year)
nerd_in_rage 16y ago
for a corp with no assets, i would've refused to pay and not bothered with the annual reports. after a number of years that stuff just goes off the books. you might get some nasty letters. yawn.
mynewcompany 15y ago
1) This is why we tell our clients, right on our online order form that increasing shares will increase the cost. If they still insist on increasing the # of shares, we'll call and explain to them that you can file a low # of shares now and file "Articles of Amendment" to change it to a higher # later when you are better capitalized. Besides, most VC's are going to amend your original articles of incorporation anyway to create multiple classes of stock, etc. so it's really not worth it to authorize too many shares. Finally, I've posted this link to our site before: http://www.mynewcompany.com/annual-report.htm http://www.mynewcompany.com/annual-report.htm Bookmark it, and then you can check a) when and if you have an annual fee due for your company/state and b) what the filing fee is.

192 points by chamza 16y ago

I don't think incorporation was the mistake here, but rather incorporating with no help and without knowing what you're really doing is. I recently incorporated using harvard business services, for $300 I had everything taken care of for me and had all the paperwork in 2 days, well worth the money.

davidu 16y ago
His entire post is about dissolution, not incorporation. Read the post.
- ryanfitz 16y ago
  I read both this article and his previous of where he created a company with 10,000,000 shares initially. This is why it cost him so much to dissolve the company. If he knew what he was doing he would have created far less shares, like 1500 total.
  - chamza 16y ago
    I've learned that 10,000,000 shares is fine if you have a low par-value per stock. I believe this many stocks are especially good if you're looking for outside investors/board members. But actually, don't listen to me, I'm the one whose in this ridiculous mess.
    - rosenjon 16y ago
      How stupid this was is dependent on the specifics, which we don't really have. Were you on the brink of raising a round of capital? Or did you just incorporate in anticipation of raising a round later? A C-corporation in Delaware is considered the best entity for raising outside investment. The State of Delaware knows this, and charges hefty fees for maintaining a C-Corporation, and apparently for dissolving one. So it makes very little sense to incorporate in Delaware unless you will be raising an outside round of capital, because the costs of maintaining the C-Corporation itself are very high for a start-up with no money. Recognize that a "do-it-yourself attitude" is awesome for developing start-ups. It is perhaps one of the worst attitudes to take in terms of corporate entity formation and maintenance. Documents on file with a law firm with appropriate date and timestamps are virtually bulletproof in court. This is one of the many reasons law firms exist. Documents pulled out of your filing cabinet, to which only you have been privy until the time they end up in court, are a bad, bad idea. Bootstrapping your legal documents or anything else having to do with your corporate entity is a flat out terrible idea, unless you basically do this for a living (in some cases, there are startups who create LLC's daily, in which case you presumably know all of this already).
rosenjon 16y ago
Totally agree. It would be unfortunate if anyone takes away from this that incorporating is a bad idea. What is a bad idea is incorporating with no idea of what you're doing. I disagree that this is a story of dissolution. It is a story of having incorporated with no understanding of the consequences, and finding out too late that he should have sought legal advice to begin with. There is a lot of talk online about Delaware being the best state for incorporation. This is true if you are seeking outside financing, and most angels/VC's want to see a Delaware C Corp prior to investing. However, if you are going to raise investment, you need to have a lawyer anyway. So at the point you take investment, your lawyer can handle doing an incorporation in Delaware. No one should be filing for C-corporation status by themselves, with no background in the legal requirements. In the meantime, if you are a startup who wants to put out a product for public use, or need to bring aboard paying customers of any kind, you should probably have an LLC. These are relatively cheap to create (and dissolve) and you can generally find law firms who will do pro bono work for startups in filing the appropriate paperwork (I have found several). Even LLCs require operating agreements and other paperwork before they are considered true legal entities. Any decent law firm does this all the time, and has the appropriate documents on file. Doing this yourself is again asking for trouble. For example, if you do business on behalf of your LLC as the "CEO", "President", or "General Manager", and have not specified that title in an operating agreement, you may be at risk of having the veil pierced (http://en.wikipedia.org/wiki/Piercing_the_corporate_veil http://en.wikipedia.org/wiki/Piercing_the_corporate_veil), because you are transacting business on behalf of the company in a role that does not legally exist. In most states, if you have an owner run LLC, your official title is "Member". However, most people don't want to represent their company as "Member", as this sounds weird, and is not a commonly used term. So in practice, you call yourself something else, like General Manager. If your operating agreement says that you can run the company under the title of "General Manager", or anything else you want to call yourself, then you are totally cool. If not, then you will be in trouble if a customer ever takes you to court.
- theoj 16y ago
  Can you post some cases or background regarding piercing the corporate veil for an LLC based on "transacting business on behalf of the company in a role that does not legally exist"? Who is to say what does or doesn't exit? Based on this logic, a large LLC or LLP would be required to have its whole hierarchy listed in the operating agreement.

cheez 16y ago

Why did he have to pay?

CoachRufus87 16y ago
state law
- cheez 16y ago
  Nice law.

davidu 16y ago

IANAL and this is probably bad advice, but... You can let the company fall into bad standing. I have heard of the various risks with doing that, and I've never understood how those risks go away with dissolution. If the company is shutdown and not making money, then failure to file annual reports and tax returns is irrelevant because you will have no income to be taxed or fined against. You would have annual state filing fees that would go unpaid, but you would never be personally liable for them. And I can't imagine how you would be personally liable for the actions or inactions of a corporation that conducted no business.

chamza 16y ago
I've thought about this and asked around. I was told that if I did not pay my tax returns and annual reports, the State of Delaware can go after me personally. I'd rather not risk that, and there is a monthly fee that gathers up if I don't pay the annual reports on time; which is what happened this time around.
- fleitz 16y ago
  Have you spoken to an attorney about this? They may be the best people who can advise you in this situation. Look around your area some lawyers offer free consults.
aquark 16y ago
IANAL either ... but directors of companies do have legal responsibilities, and is it possible that the authorities could choose to purse the directors for failing to fulfil those responsibilities. In the UK at least I believe you can be prevented from holding directorships in other companies, which may mess things up for you personally in the future even without a financial impact. Not sure what happens if all the directors in a company resign?!

A1kmm 16y ago

It sounds like Franchise Tax associated with annual returns is payable by the corporation, not you personally. From 8 Delaware Code §503: "All corporations accepting the provisions of the Constitution of this State and coming under Chapter 1 of this title, and all corporations which have heretofore filed or may hereafter file a certificate of incorporation under said chapter, shall pay ...". http://delcode.delaware.gov/title8/c005/index.shtml http://delcode.delaware.gov/title8/c005/index.shtml It is 8 Delaware Code §277 (http://delcode.delaware.gov/title8/c001/sc10/index.shtml http://delcode.delaware.gov/title8/c001/sc10/index.shtml) which says that Franchise taxes have to be paid by the corporation before the Corporation can be dissolved. It sounds like the corporation is behind on franchise tax, and so is therefore insolvent - it has liabilities exceeding the assets. If the corporation simply doesn't pay the franchise taxes for a year, the charter will be repealed (see 8 Del C. § 511, http://delcode.delaware.gov/title8/c005/index.shtml http://delcode.delaware.gov/title8/c005/index.shtml). Expect to lose all assets owned by the corporation, including any code. IANAL, but I suggest you get advice from a lawyer or accountant about this.

jrockway 16y ago
Expect to lose all assets owned by the corporation, including any code. How does this process work?

CoachRufus87 16y ago

I'm going through this exact same issue right now. I created a C-Corp in DE naively thinking that thats what everyone did and I expected to pay no more than the minimum ($75 or so) in franchise taxes at the beginning. Apparently, since the state needed more revenue, they passed a law that dramatically increased the minimum to $400. I was shocked when i realized this and called the state repeatedly to make sure that there wasn't a mistake. I paid $400 back in Feb and I'll pay another $400 soon so that I can dissolve the C-corp. I now have an LLC in Texas (my home state) which more than satisfies my needs, for now. Talk about an expensive mistake.

seaotter002 16y ago
As am I, I know exactly what you're going through. Have you thought about filing the dissolution as a 'Before Business Begins' dissolution (form 274)? We actually never got to the point of publicly releasing our project (and did not have a single cent of revenue), so I was looking at that type of dissolution to avoid this year's $350 minimum tax. I have still not found what they define as "Beginning Business" in their legal statutes, but I'm assuming a company that never released a product and made no money would fit that definition. Of course, IANAL.
- CoachRufus87 16y ago
  I'd never heard of that form, but I'll look into it.
  - seaotter002 16y ago
    Yeah, check section 274 here: http://delcode.delaware.gov/title8/c001/sc10/index.shtml http://delcode.delaware.gov/title8/c001/sc10/index.shtml The various dissolution forms are here: http://www.corp.delaware.gov/disso09.shtml http://www.corp.delaware.gov/disso09.shtml
    - CoachRufus87 16y ago
      It seems that all dissolution forms have this requirement: "Before the Certificate can be filed, all applicable Annual Franchise Tax Reports must be filed. Please contact the Franchise Tax Section prior to submitting the document for filing to determine the Annual Reports due. Please make your check payable to “Delaware Secretary of State”"

michaelpinto 16y ago

Incorrect: Your worst mistake was not talking to a lawyer and an account before doing your incorporation. The value of these professionals isn't their ability to file paperwork but to give you advice that's customized to your situation. Too many geeks think they can reverse engineer what goes into passing the bar or getting a CPA, but the reality is that the smart ones really know enough to know what they don't know...

deleted 16y ago
[deleted]
- rosenjon 16y ago
  "Regardless of if I talked to a professional, I'd actually have to pay the same amount to dissolve this entity." Really? There is a reason companies like G.E. (http://online.wsj.com/article/SB10001424052748704530204576235090332473366.html http://online.wsj.com/article/SB1000142405274870453020457623...) legally pay essentially no federal taxes. Because there are sophisticated lawyers and accountants (a.k.a. professionals) who figure out how to shift the law to their advantage. For example, there may be laws in place that allow you to write-off of the dissolution of your business against your personal income taxes. Or perhaps there is a way to file a grievance with the state to prevent having to pay the dissolution fees, based on some statute pertaining to small companies. However, you won't ever know, because you don't want to talk to a professional. Recognize that you're in this situation in the first place because you didn't want to talk to a professional. Now, as the situation has escalated, you still don't want to talk to a professional. This does not bode well for your future business dealings. There are law firms that do work for free for start-ups. I'm guessing one of your friends from high school or college is a lawyer at one of these firms. Reach out to the people you know, and figure out how to leverage your connections to get some professional advice. Remaining ignorant is not the solution to this problem.
  - bugsy 16y ago
    GE is incorporated in New York not Delaware. GE pays NY state franchise taxes not Delaware. Overall, GE paid $2.7 billion in income tax in 2010 and over $1 billion in payroll, state and local sales and property taxes.

dlevine 16y ago

It cost me about $1000 recently to dissolve a Delaware Corporation.

petercooper 16y ago

It's a shame these things aren't more straightforward. This is a somewhat detached and subjective view of the US but it seems to me that US regulations are designed to nickel and dime you at every turn. If you incorporate here in the UK, don't trade, and dissolve, you owe diddly squat and any taxes you do pay are reasonably simple and well known. I'm far from a defender of the UK in most cases - especially tax rates - but as a business person in the UK, I at least don't feel like the government or regulations are out to trick me and that I need an expert or a lawyer by my side for every decision I make.

nkassis 16y ago
It's mostly due to delware (other states are very different). The state of Delaware uses its lenient coporation laws as a way to make a ton of revenues for the state. These laws attract most corporations (for foreigners some of these laws are very useful) in the US and franchise taxes for a state the size of Delaware are incredibly important. Like I said other states have very different laws but most people will tell you that with all the bad delaware is still not decent choice to incorporate.
- cyrus_ 16y ago
  In fact, Delaware makes so much from these taxes that it doesn't even have a sales tax. Other taxes for Delaware residents are also very low compared to its neighboring states.
tptacek 16y ago
Are you sure about this? That the UK is a more straightforward place to incorporate than the US? I'm dubious. * First, there's not much evidence that the person we're talking about really owes a dime to Delaware. He set up a C-Corp (!), which apparently owes some corporate tax, but that doesn't make him personally liable. So, despite choosing the most complicated conceivable way to incorporate in the US, he can probably still just walk away. * Second, does the UK have an LLC or S-Corporation equivalent? That is to say: is there a structure you can use to get pass-through taxation (business proceeds taxed once, as income) instead of corporate taxation, and have a shareholder structure that allows you to grant equity to employees? Because that is exactly the structure most pre-VC and bootstrapped startups want. * Third, the US doesn't have the UK's system of rules requiring qualified directors; for instance, a bankruptcy in the US can't prevent you from being a principal in a company. * Fourth, isn't it more expensive to incorporate in the UK than it is in the US? It costs under $100 to get a liability shield to do business under in the US. What's the equivalent UK cost? * Fifth, and finally, aren't the laws in the US simply more business-friendly than in the UK? UK employees need to be given reasonable notice or compensation prior to termination; the UK is also not an "at-will" employment regime, making it harder to fire and thus harder to hire employees. The UK is, from what I've read, the best of the business regulatory regimes in Europe, and the rules don't look onerous; they only look marginally more annoying than those of Delaware. However, I think that by looking at the weird choice made by one blogger (a full-on C-Corp), you might have gotten a distorted idea of what the regs in the US actually are.

nkassis 16y ago

I don't think incorporating was a mistake, I incorporated a c-corp last year and read that getting 5K shares was the maximum while remaining at a minimum franchise tax. From my understanding, the initial amount of shares is not a big deal as this can be changed later (emitting new shares, blah blah blah). I created the corp as an experiment and will see how it goes.

ovi256 16y ago
Consider it cost of learning. OTOH, you could have went to a lawyer who may have or may have not already known of the franchise increase. You would have paid an amount in the same ballpark as your c-corp taxes for this consultation.

BerislavLopac 16y ago

Oh, come on guys, if you think these are troubles related to incorporating a business, you should really try to do it in Croatia. For starters, all companies need to be registered at the Court of Commerce, and each new company needs to have a name approved by a judge. Second, you're legally bound to have a name either in Croatian, Latin or Ancient Greek (or presumably another "dead" language, if you can prove it); and even if you do, a judge has to OK it (a friend of mine has recently been through about 30 names and still hasn't been approved; the whole process of approving a name can take days). Then you have to physically go (yourself, or your lawyer) to 3 or 4 offices to file various registration papers; all in all it can take a better part of the month to incorporate. And to top it all, even if your company does nothing, has no income or expenses, it has some monthly dues to the state from day one, simply because it exists.

nikcub 16y ago
Why don't you open in Bosnia or Montenegro? Both are very liberal and have western banks. I have used businesses + accounts in both as offshore vehicles. You can get a business registration, bank account and merchant account with gateway in Montenegro for a few hundred dollars and in a couple of days. Heck, with a few thousand dollars you can register your own bank in Montenegro.
- BerislavLopac 15y ago
  Nik, if the solution is to open a company in another country, I'd rather do it in the UK, which is even more sophisticated than the ones you mention, and is only a couple hours' flight away. Actually, I did it already. ;)
meinhimmel 16y ago
It's not a competition though. This guy has been through a rough experience dealing with starting a company, and he has decided to share it with us. Not to be rude, but I'm unsure exactly where your story fits into that.
- deleted 16y ago

nikcub 16y ago

the company is bankrupt and can't pay its taxes. File ch11. I don't know why you think you have to pay this, it isn't money you owe (the whole point of setting up the business, isn't it?)

originalgeek 16y ago
This is a good object lesson in why you shouldn't take legal advice from someone posting on the web. The dude was wrong once, and perhaps twice if you are correct. Not to argue with your point, I just want to avoid playing armchair lawyer.
- nikcub 16y ago
  I had a Delaware C corp go bust and my advice from a highly-paid startup lawyer was to file bankruptcy and let it go. It was eventually struck off the registry and I never heard anything again, and have even registered other corps since. The only time you wouldn't is if you have taken an investment and want to provide a tax writeoff to investors, or if there are assets to divide. Then it needs to be disolved properly. (Edit: to add here, if you have been negligent or criminal the creditors will usually be granted a court order to chase up debt with the directors personally. This is rare. In this case you have franchise fees that were run up in the course of doing business. The one thing to learn here that should have been in the original article is that Delaware's main source of revenue is franchise tax, which is calculated on the number of shares issues, so keep that number very low (ie. 3 founders = 3 shares). That is a pretty big thing to miss, IMO.)

arn 16y ago

You really should update your original "How I Incorporated My Startup" article http://heyhamza.com/33994010 http://heyhamza.com/33994010 to admit you got in over your head. It really changes the whole lesson of the first article. I see you've added disclaimers, but you need to also link back to the potential $89,000 mistake.

resdirector 16y ago

Wow. Incorporating in Australia is a breeze by comparison. AFAIK, a four page form and ~$400. With an annual fee of $212.

deleted 16y ago
[deleted]

alain94040 16y ago

This is the poster child for using http://foundrs.com http://foundrs.com : virtually incorporate with your co-founders, see how far it goes, when it gets serious convert into a real corporation. Benefits: no corporate taxes, no accountant to pay. Vesting is automatic (4 years, monthly, just like founder stocks in a Silicon Valley startup). And it's legally binding (thank you copyright law, for once you were useful).

rprasad 16y ago
Stock is treated as taxable compensation once/as it vests, whether or not the entity is incorporated. Even worse, because the entity is not incorporated, the IRS could treat the stock as a partnership interest. Partnership tax accounting is a goddamn nightmare. You could find yourself on the hook for thousands of back taxes plus fines if your "virtual corporation" is successful. And that doesn't even include potential state tax liabilities or self-employment taxes.

forensic 16y ago

Someone never learned what "limited liability" means. The whole point of a corporation is that you aren't personally liable for its debts! You just paid $400 for no reason!

grellas 16y ago

Corporations are not particularly hard or expensive to start, maintain, or dissolve - but you need to be at a stage of life where a thousand dollars here or there is not a major burden. If you are not yet at that stage, that is a different story and there is no doubt that forming or dissolving an entity such as this will normally set you back a thousand or two on either side. In that case, you should tread cautiously unless you can raise some funds (even if it friends-and-family money) to be able to handle such costs without too much pain. As a lawyer, I would have to say that you should do it by the book and dissolve the entity. I have, however, had a variety of clients over the years who left a Delaware corporation to die without dissolving it and they have not had trailing personal liabilities as a result of the accrued corporate franchise taxes (of course, it is a different matter if the corporation earned a net profit and has an obligation to file income taxes - in that case, failure to file can cause serious problems for the corporation and for its management). The $89K tax bill is typical of any Delaware corporation that has large numbers of authorized shares, even with a low par value. This often proves a shock to unsuspecting founders who file a do-it-yourself entity without understanding the issues. However, in almost all cases involving an early stage startup, you can deal with this easily by using the alternative valuation method tied to value of assets in the company. Use of the alternative method usually reduces the franchise tax to a very low level. It is easy to find out how to use the alternative method (forms and instructions are available online through the Delaware Secretary of State). It seems that you needed to set up the entity in order to try to manage the issues with your co-founder and so the choice to set up a corporation was not really a mistake. The choice to set it up in Delaware for a simple situation can be a mistake, in my judgment, but I am probably in the minority among startup lawyers on this issue in believing that a home-state incorporation in the interests of keeping things simple can be and often is the best choice for founders (see http://grellas.com/faq_business_startup_002.html http://grellas.com/faq_business_startup_002.html). It is no disgrace for a Silicon Valley startup to incorporate in California, even for a public company (no less than Apple itself is a California corporation). Had you done a home-state incorporation, you would have avoided the hassles with the $89K tax bill, as most states besides Delaware states have a fixed, low amount that you pay every year as a minimum franchise tax (in California, $800). Incorporation is definitely not for everyone. When and if to incorporate can be tricky questions. I also have outlined a few of the factors to guide that decision as well (http://grellas.com/faq_business_startup_007.html http://grellas.com/faq_business_startup_007.html). There are a good number of early-stage startups that really can't easily afford professional fees and so the answer is not to use a lawyer in all cases to incorporate. But, even if you can't afford a lawyer, it is always worth consulting with one for strategic advice on incorporating before you do so. Such a first consultation is dirt cheap in most cases, and sometimes free. The modest amount paid is well worth it just to be alerted to the main issues and pitfalls involved in setting up an entity. Thus, while it was probably not a mistake in itself to set up your corporation, it likely was a big mistake to do so without some guidance of this type (I had made this comment in connection with your original piece as well - http://news.ycombinator.com/item?id=1924719 http://news.ycombinator.com/item?id=1924719). Sorry to hear about the business failure. I know the HN community often stresses what a valuable learning experience this can be but there is no denying that it is a very painful affair by any measure.

ericb 16y ago

Has anyone stopped to consider what the real risk of being sued (and losing) is for your average startup website? Is incorporation premature optimization?

georgieporgie 16y ago
Simple incorporation is really quite low cost, and very quick. CA is the worst I know of, with its $800 minimum franchise tax. I just (re) incorporated in Oregon. I think it cost $150 (was $50 until 2009), and took about two days. IMO it's well worth it for legal protection from losing personal assets.
- ericb 16y ago
  What are you paying your accountant each year? Is there a minimum corporate tax in Oregon? In MA I think it is 400 minimum a year.
  - georgieporgie 16y ago
    I don't have an accountant. I'll get one once I'm making money so consistently that it's not worth my time to do it myself. :-) The minimum corporate tax in OR is $150. In 2009, they raised it from $50, and (I think) increased the tax rates across the board. The biggest change is that they now tax on gross receipts which means you can't deduct expenses.

fourply 16y ago

This article should be entitled, "Why failing to hire an attorney was my worst mistake." It's easy to think that some googling and reading statutes will get you where you need to be, but there are very real pitfalls and tax traps out there that attorneys are far better equipped to help you avoid. If you're not serious enough about your new business to pay for professional advice - you're not serious enough to start it.

lawnchair_larry 16y ago
It is odd that you have conflated seriousness with access to capital.

mjs00 16y ago

Regarding the amount owed, from my lawyer when I did this two years ago: Please note that there are two methods to determine the tax – the authorized share method and the assumed par value capital method (both methods are detailed on the website). DO NOT sure the authorized share method as this will calculate a tax balance of over $75,000.00. Do use the assumed par value capital method as this will calculate the balance at roughly the $75.00-125.00 range.

ecaradec 16y ago

I'm surprised that nobody is horrified by how deceiving this is. Its definitly a way for delaware to make money. May be it's just the way law is, you can't use your own judgement on if something is fair or not. Bringing it back to a computer metaphor would be : Of course you should have done backup, everybody knows that ! You now need to pay 89000$ whether or not you need your data on that drive. You should have consulted an enginineer before buying a computer of course ! See... small mistake, disproportionous response. At least think that you did nothing wrong, it's just that the law is unfair.

16s 16y ago

When someone sues you, you'll better understand why having a corp, LLC, etc. is important.

dgallagher 16y ago

I made a similar mistake myself, forming an LLC in Massachusetts. I did IT consulting for the SoHo and home market. It was around $550/year to keep the LLC in business ($500 plus filing fees), ~$50 to register with the town you're based for four years, and something like $250 to dissolve the LLC with the state. Every state has different fees; some are quite high, and others very low, pending on the type of business created. I did it mainly to limit liability, among other reasons. However a little while after forming, I spoke to a lawyer and he said that it basically doesn't limit you from being sued personally. You "can" attempt to deflect personal lawsuits with the LCC (easiest if you keep its finances/files/bank-account separated from your personal stuff, which I did), but it's no guarantee. He basically advised me that forming the LLC was a waist of money in my situation, and I would have been better off simply as a sole-proprietor (e.g. DBA - doing-business-as). From the IRS's perspective, I was treated as a sole-proprietor for tax purposes (they don't recognize LLC's for single individuals). Of course by then, it was too late to easily dissolve the LLC and "switch" it to a DBA, so it was money wasted. What annoyed me the most is the same problem Hamza had in the article. You have to pay money to dissolve a business! Really? REALLY?!? Obviously the business failed, or is being abandoned, because it didn't make enough money. Charging a "death tax" on a business seems pretty harsh. I understand if there's a filing fee of $20 or $30, but anything higher than that is ridiculous. Delaware wanting $1,600 from Hamza is downright insane. Perhaps there's more work involved dissolving a C-Corp than an LLC, but still, $1,600 is ridiculous. Charging a business death-tax reduces seed capital needed to form a new business. Second, it reflects badly on the state, reducing the likelihood of incorporating in it again. Lastly, why not ignore paying the fee altogether, declare bankruptcy, and waste the time/money of the court system dealing with it all? I'm not sure about the legal implementations of that, but it might be a valid option if the C-Corp has no assets left. AFAIK you cannot ask shareholders to pay for it since they're legally shielded from the debts of a C-Corp.

rprasad 16y ago
What your lawyer meant was that its very easy to "pierce the veil" of the business entity (your LLC) to go after the owner when the business is owned and operated by a single person. In such instances, it is very difficult to show that the business has a separate identity from the owner. This is especially true for consulting, where the consultant is the business. On the other hand, it is very difficult to pierce the veil of a business entity with more than one owner (unless the second owner is a spouse or family member of the first).

jasonkolb 16y ago

Unless he signed and recorded something saying otherwise he is not personally responsible for the debt of anyone else, including the Corp, and the state is trying to levy a tax on ignorance.

TheBaron 16y ago

I've been here with several things in life. While winging it has been the source of some "winning" in my life, it has also been the source of many losses. I'm more of a creative mind/sales guy. I'm an okay web designer, with very minimal programming skills. I tried to develop a tech driven start up and handle everything on my own including the programming. I worked so long & hard trying to take care of things I wasn't skilled enough to do that I was too exhausted to maximize on my talents. So, I would say focusing on your strengths is a key to success. Marcus Buckingham has nice insights on strengths. Check him out. -Cheers

kirpekar 16y ago

I hope you filed Form 1120 also

georgieporgie 16y ago

To anyone thinking about incorporating: unless you have a very good reason for doing so -- by which I mean solid legal and accounting advice, and money to pay associated costs -- do not bother incorporating outside your home state. As others have said, DE has a great, business-optimized court system. But if you don't live in DE, you're instantly at a huge legal disadvantage if anything comes up. Meanwhile, you'll be stuck paying: * annual corporate filing fees (WY), minimum franchise taxes (DE), licensing fees (NV), income taxes (many states), etc. in the state in which you've incorporated. * foreign corporation fees/taxes and income taxes in your state of residence. * foreign corporation fees/taxes and income taxes in any other state where you do conduct significant business beyond sales. * registered agent fees in the state in which you've incorporated. * possibly mail forwarding fees, depending on what you're trying to do. (I incorporated in Wyoming last year, then realized how dumb that was, dissolved the corporation, and re-incorporated in my home state this year)

nerd_in_rage 16y ago

for a corp with no assets, i would've refused to pay and not bothered with the annual reports. after a number of years that stuff just goes off the books. you might get some nasty letters. yawn.

mynewcompany 15y ago

1) This is why we tell our clients, right on our online order form that increasing shares will increase the cost. If they still insist on increasing the # of shares, we'll call and explain to them that you can file a low # of shares now and file "Articles of Amendment" to change it to a higher # later when you are better capitalized. Besides, most VC's are going to amend your original articles of incorporation anyway to create multiple classes of stock, etc. so it's really not worth it to authorize too many shares. Finally, I've posted this link to our site before: http://www.mynewcompany.com/annual-report.htm http://www.mynewcompany.com/annual-report.htm Bookmark it, and then you can check a) when and if you have an annual fee due for your company/state and b) what the filing fee is.