What Are the Ongoing Legal Obligations of a Corporation?
When you start a new business, it's crucial to understand your legal obligations. This is especially true for corporations, a type of business entity that offers liability protection but comes with specific responsibilities.
Depending on the business form and the regulations of the state, certain legal formalities must be followed in order to maintain the legal status of a corporation. Small business owners must navigate various legal areas, from taxes to bookkeeping and beyond.
This guide simplifies these complex topics, so you can focus on growing your business while staying compliant with laws.
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Paying Corporate Taxes
Corporations face several tax responsibilities. First, after incorporation, you should obtain an employer identification number (EIN) from the Internal Revenue Service (IRS). This number is like a social security number for your business. Corporations must pay federal tax, employment tax, and often state income tax.
For entrepreneurs, understanding tax laws is critical. The IRS website is a valuable resource for information on income tax and employment tax. Remember, failing to comply with tax obligations can lead to serious consequences.
Issuing Stocks and Abiding By Securities Law
Issue shares of stock as mandated by the articles of incorporation and securities laws. If your corporation plans to offer stocks, you must comply with securities laws. This means filing the right documents with the Securities and Exchange Commission (SEC). It's important to keep investors informed about your business operations. This includes sharing financial statements and other key details about your company. Failure to follow these rules can result in penalties and legal issues.
Maintaining Corporate Records
Establish and maintain corporate books and records, including accounting ledgers, shareholder records, and corporate minute books. Accurate bookkeeping is essential for any corporation. This includes recording all financial transactions, managing invoices, and tracking expenses. Good bookkeeping helps in preparing accurate financial statements, which are necessary for tax filings and shareholder meetings. Also, it's crucial for assessing the financial health of your business.
Holding Your First Board Meeting
You will need to call and conduct an initial meeting of the board of directors or shareholders as required in the articles of incorporation. This will help set the tone and establish the direction of the new corporation. This meeting is where you'll create bylaws or operating agreements. These documents outline how your corporation will run. You'll decide on business bank accounts, how to handle business needs, and appoint officers. It's a key step in setting up the structure of your startup.
Having Successive Board Meetings
Regular board meetings are a must for corporations. These meetings ensure that all major decisions are made formally. They also help in keeping track of the business's progress and any changes in the business structure. Meeting minutes should be recorded for future reference and regulatory legal compliance. Hold future meetings at least as often as required by applicable business laws.
Creating, Writing, and Following the Bylaws
All decisions and internal procedures should conform to the outline set forth by the bylaws you create and write. The articles of incorporation are your corporation's founding documents. They outline your business name, purpose, and structure. You must operate within the guidelines set by these bylaws. This means respecting the roles and powers of each shareholder and director. Adhering to these rules helps maintain your corporation's legal standing.
Recording the Meeting Minutes
Recording meeting minutes is a legal requirement for corporations. Minutes typically include the names of the board members and anyone else present at the meeting, with a record of reports by the officers, actions taken, and other important information. These minutes should detail the discussions and decisions made in every board and shareholder meeting. They serve as a legal record and can be important in legal disputes or audits.
Registering Your Business with the State
Maintain your annual registration with the state government, as required by law. Every corporation must register with their state's Secretary of State. This process includes filing the articles of incorporation and paying filing fees. Registration gives your corporation legal entity status. It also involves choosing your business type, like a C corporation or a limited liability company (LLC).
Obtaining Business Licenses and Maintaining Professional Standards
Depending on your type of business, you might need specific business licenses. Check with your local government and the Small Business Administration (SBA) for requirements. Also, corporations must follow professional standards and employment laws. This includes labor laws, healthcare requirements, and workers' compensation for employees.
Protecting Intellectual Property
Protecting your corporation's intellectual property (IP) is crucial. IP involves inventions, trademarks, business names, and unique products or services. It's the backbone of many businesses, especially for startups and entrepreneurs. To safeguard your IP, you should file for patents, trademarks, or copyrights through the appropriate legal channels. This ensures that other businesses can't use your unique ideas without permission.
Failure to Follow Legal Procedures of a Corporation
In many situations, a failure to honor these and other corporate obligations can result in personal liability for directors, officers, or shareholders for business obligations and debts. Because of these harsh consequences and the specific legal requirements that vary depending on the business's location and form, businesses should seek professional legal assistance. In many states, this suspension or revocation of corporate status is referred to as a loss of good standing.
Generally speaking, a company that fails to follow the legal corporate procedures may face the following consequences:
- Personal liability for the acts of the company
- Inability to file a civil lawsuit
- Tax liens (nonpayment of tax obligations)
- Difficulty securing capital investments or loans
- Fines and other penalties
See FindLaw's Incorporation and Legal Structures section for additional articles and resources.
Get Help Complying With Your Corporation's Legal Requirements
Organizing your business as a corporation provides many advantages over other legal structures, mainly having to do with taxes and protection from personal liability. Once you incorporate, it's important that you follow certain procedures in order to maintain these protections.
Corporate officers are often busy running their business, so it makes sense to hire a business organization attorney when identifying and complying with the legal procedures of a corporation.
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