You may feel once you have filed the paperwork with the state and obtained a tax identification number (EIN) that your company is formed. This is not true; you have only completed the beginning of the process.
If your entity is a limited liability company, you will need an operating agreement; this is true even if you are the only member. If you have formed a corporation, you will need to adopt bylaws, issue stock and elect officers and directors. If the shareholders want to be an “s” corporation or a flow through entity for tax purposes, you will need to file an IRS Form 2553 within 75 days of the earliest of the following dates, (i) the date that the corporation first had shareholders, (ii) the date the corporation first had assets, (iii) the date the corporation began doing business.
Once those things have been completed, you think you are done, but maybe not yet. If you are a limited liability company you want to make sure that your operating agreement deals with a death of a member or what happens if one member wants to leave. Additionally the agreement should establish how new members will be integrated and how the company will handle disputes. These same issues must be addressed if you have decided to form a corporation and there is more than one shareholder with a shareholder agreement.
In both cases the mechanisms to deal with these issues may be very similar. The parties that have formed the company or corporation may wish to obtain insurance to deal with the potential death of one of the members/ shareholders. The entity must also provide for the departure of one of the members/shareholder, voluntary or not. The entity may elect to have the option of purchasing the departing person’s equity interest, or the parties may decide that the right of the company to purchase is automatic and that the departing member/shareholder is required to sell their equity interest back to the company. There are almost as many ways to determine the purchase price and payment terms as there are companies. The usual method allows for the payment of some of the purchase price immediately with the balance paid over time pursuant to a promissory note. You may also want to provide the right of set-off for damages if there is a termination for cause and the company suffers a loss as the result thereof.
Another important issue to deal with is what happens if the company is approached by a potential purchaser. Do you want to protect all the members/shareholders by allowing them to “tag along”, that is join the majority holder of the equity interests if they want to sell their interests, or conversely do you want to make every member/shareholder sell their equity interests and thus “drag along” the minority equity holders in the event of a proposed sale? Usually these rights mirror each other and you would be well-advised to incorporate these decisions into the operating/shareholder agreement.
If you formed your company in New Hampshire you need to be aware of two taxes that are levied at the company level. The Business Profits Tax is an 8.5% tax that is assessed on income from conducting business activity in the state. If you operate in more than one state the tax is apportioned. Every business that has been formed for profit is subject to the tax; however, if your company generates less than $50,000 of gross revenue in a tax year then the company is not required to file a return. The return must be filed, if applicable, by the 15th day of the third month following the end of the limited liability company or corporation’s tax year (usually this means March 15th). There may be a need to make estimated payments; you should always check with your accountant. The Business Enterprise Tax is a 0.75% tax assessed on the enterprise value tax base, which is the sum of all compensation paid or accrued, interest paid or accrued and dividends paid by the company. Companies with more than $150,000 of gross receipts or an enterprise value tax base of more than $75,000 are required to file a return. The return must be filed at the same time as the Business Profits Return. You should talk with your accountant to determine if there is a need to make estimated payments.
You still may not be done All you have right now is an operating company, but depending upon your business, there may be zoning issues and insurance requirements. You may need terms and conditions of sale and/purchase. Employee and employment agreements will be needed once you start operating the business and hiring employees.
It is important to get your company started right. It is crucial that you develop a relationship with an attorney at the beginning of the process who can take you through all the steps of your company’s growth. The attorneys at Hamblett & Kerrigan have the training and experience to handle a wide range of issues affecting business start ups, transactions and operations and can help your new business get off to a successful start.
Paul D. Creme is an attorney with Hamblett & Kerrigan PA. His practice is focused on business and corporate law. Of particular interest are the areas of software and emerging technologies. You can reach Attorney Creme at [email protected].