Succeeding in Your Business: So you think you formed a company
Cliff Ennico
“I’ve been in business with a friend for three years now — at least I thought I was in business with him. We set up a limited liability company (LLC) for this business three years ago and hired an attorney, who sent us a whole bunch of legal documents. We signed everything in the places he indicated and kept them in a safe place. Our accountant has filed tax returns for the LLC each of the last three years. Now we’re applying for a bank loan and the bank is telling us that the LLC was never formed, even though we showed him all our paperwork. Did our attorney commit malpractice?”
In order to form an LLC, you are required to file a document (called “Articles of Organization” in most states) with your state secretary of state’s office. This document probably was included in the attorney’s LLC package, and you signed it along with the rest. But either the attorney neglected to tell you it had to be filed with the secretary of state’s office or, more likely, you neglected to read the attorney’s cover letter in which he instructed you to sign everything but then return the documents to him for processing.
In the former situation, you might have a case for malpractice against this attorney. In the latter situation, you clearly don’t, although the attorney should have followed up with you by phone or email to remind you to return the signed documents to him.
What you need to do now is file the Articles of Organization with your state secretary of state’s office and seek a waiver of any penalties your state imposes for filing it three years late. The fact that you have been paying all state and local taxes for the past three years will help you a great deal, and they probably will be lenient. If your attorney did make a mistake here by not telling you the Articles needed to be filed, any penalties should come out of his pocket.
“We are setting up a joint venture with another company for an Internet business. The other company is listed on its website as a Delaware corporation, but our attorney says he can’t find any information, either in Delaware or in our own state, to show that the other company is actually incorporated. Complicating the picture is the fact that this company will be outsourcing some of the website development work to an affiliated company overseas. Are we dealing with a ‘fly by night’ operation here?”
What this company clearly INTENDED to do was to set up a U.S.-based corporation to act as a sales office for its overseas operations. This generally is a wise thing for foreign companies to do as it limits their legal liability as well as their tax exposure here in the U.S. Delaware is a logical, and very popular, choice for this type of company.
There are a number of possible explanations for your attorney’s inability to find this company on Delaware’s corporations database (http://corp.delaware.gov/onlinestatus.shtml).
He may not have searched under the exactly correct name. These databases can be very sensitive if, for example, the company name has the word “and” in it, and you type the ampersand instead in the search dialog box, the name will show up as not being registered.
The company may have used one of the many “form your own corporation in Delaware for just $50” web-based services to incorporate in Delaware and then not followed up on the paperwork.
The company may have been incorporated in Delaware several years ago but then failed to file its annual “franchise tax” there (this is an annual tax for the privilege of incorporating a business). If you fail to do this for a couple of years in a row, Delaware dissolves your corporation so it won’t show up on the corporations register.
Clearly, this company will need to speak to its own attorney to find out what happened here. Your attorney can’t help them as it would be a conflict of interest for him.
What is more disturbing (at least to me) is that you can’t find the company listed on your own state’s corporations register. Whenever any corporation or LLC has a place of business in another state, it is required to pay taxes in that state and register with that state’s secretary of state’s office as a “foreign” corporation or LLC. Clearly, this company hasn’t done that and could be exposed to significant legal penalties and fines for failing to do so. (See my answer to the previous question.)
The mere fact that it is entering into a joint venture with your company may well give it a legal nexus in your state, and if it hasn’t already registered there, it will need to do so now. You should insist that this be done before you sign the joint venture agreement.
Cliff Ennico (crennico@gmail.com) is a syndicated columnist, author and former host of the PBS television series “Money Hunt.”
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