[ESTABLISHING A BUSINESS ENTITY IN THE UNITED STATES] 530
not a requirement of minimum capitalization for corporate purposes other than such as is reasonably necessary and appropriate to carry out the business of the enterprise in light of its expected liabilities (i.e., the entity cannot be significantly undercapitalized without risk of piercing the corporate veil). Disallowed interest deductions on debt generally can be carried forward subject to applicable limitations. The United States also has anti-base erosion and anti-hybrid rules that may limit the benefit of interest deductions in some cases. b. Operational Issues i. Annual Reports and Filings, Qualifications to Do Business After forming a corporation, it is important to file annual reports, which for Delaware includes paying an annual franchise tax fee. A Delaware corporation's annual report must state the names and physical addresses of all the directors and officers and the physical address of the corporation's principal place of business. Annual reports in Delaware are due on or before June 30. Note that the franchise tax is calculated based on either authorized capital or on an “alternative basis” which requires the submission of certain U.S. tax schedules and considers the corporation’s gross assets, total authorized stock, and total issued stock. The authorized capital method results in higher tax when a large number of shares are authorized. Depending on specifics, filing under the alternative method may or may not ameliorate that result. For this reason, careful thought should be given at the outset to the number of shares authorized. Failure to file an annual report and pay franchise taxes can lead to the dissolution of a corporation. It is possible to reinstate a dissolved corporation, but penalties will apply, and, in the meantime, stockholders of the corporation may be exposed to liabilities.
There are similar requirements to pay annual franchise taxes for other forms of business entities, but not necessarily to file an annual report. In Delaware, for instance, an LLC pays its annual franchise tax without having to file an annual report. Accordingly, there is no public record in the State of Delaware as to the names or addresses of an LLC’s members or managers. And the same franchise tax applies to all Delaware LLCs, regardless of size. Businesses are also required to file to qualify to do business in each state in which they do business, and each state has a different statute defining “doing business” for these purposes. Usually, having property (including leased property, such as an office) or employees in a state will result in a filing requirement, among other things. For tax purposes, federal United States income tax returns must be filed annually for corporations; entities taxed on a flow through basis also must file annual information returns. Quarterly estimated tax payments are also required. Once a business qualifies to do business in a state, it will likely need to file tax returns in that state as well. Income earned in the United States will be apportioned among the different states in which a corporation does business. ii. Additional Investments and Offerings After an entity is formed, it often requires additional investment, which, as noted above, may come in the form of debt or equity. If additional equity investment is needed, it is often necessary to amend the charter to authorize additional shares of stock. In many cases, investment from new investors comes in the form of new series or classes of stock, most often, new classes of preferred stock (these classes are usually labelled with new letters, so there will be Series A Preferred, Series B Preferred, etc.). These new series of stock may
ILN Corporate Group – Establishing a Business Entity Series
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