Your Company And Taxes | Richard Horning

Ah, your little company and taxes and your Delaware corporation. Because you don't have an office in Delaware other than the statutory office, every company has to have a statutory agent in the states in which they do business or are registered to do business. So when you form your Delaware corporation, you either have to have a person who lives in Delaware who's your agent there, which very few people have, or you use a company whose business it is to be your agent in Delaware. And they basically charge you $90 a year to be your agent. And so if the government wants to send you notices, they go to the agent, agent sends it to you, and it's supposedly official notice to you when the agent gets it. So what's your obligation to state of Delaware in terms of taxes. Delaware has a franchise tax that's based primarily on the number of authorized shares. If the number of authorized shares is 5,000 or less, the franchise tax is $175 plus a $50 processing fee to process the filing of the annual report. If your company is a wholly owned subsidiary of your parent company in your home country, in other words, the parent company owns 100% of this company, you don't need a lot of authorized shares. The parent company only has to own one share. It votes that one share to elect the board of directors. The board of directors then elects the officers. Every year there might be an annual meeting where you have a drink and say it's been the annual meeting and the one share votes to vote the board again. Again, you don't need a lot of shares, so why have 10 million? However, you know, when you get into the situation where you're involving investors and others, you run into the problem of the law of large numbers. And the law of large numbers works like this. I've— we form a company. The 3 of us form a company. Each of you gets 1,000 shares. I have 1,000, you have 1,000, you have 1,000. So we're still under the 5,000 limit, $175. Now we're going to go to this gentleman over here and say, look, we're going to give you stock options for 1,000 shares, which represents 25% of the company. So he goes to his colleagues and he says, I've got a stock option for 25% of the company. And his colleagues say, well, how many shares is that? 1,000. Really? Only 1,000 shares? Most people who have 25% of the company end up with 2.5 million shares. So you have this problem of, Even 2.5 million out of 10 million is still 25%. When people talk about it, this is where the law of large numbers comes in. It's a psychology problem, particularly when you're talking about people who are going not to get 25%, but like 2%. Well, 2% of 4,000 shares is not very many, right? 40 shares or whatever. So I have owned 2% of the company. What is that, 40 shares? What kind of a stock option is that? Usually you get $400,000. So when you— now you update the certificate of incorporation in Delaware to authorize 10 million shares, and now the Secretary of State says, aha, now the tax is based upon your 10 million shares, and we'd like $1,800. Annually. Annually. And less. There's an alternative calculation that's based upon issued shares and real assets. You can get it down probably to $250. But if you don't need lots of shares because it's a wholly owned subsidiary, don't be tempted with the 10 million. Stick with 500— 5,000. Know that you have to do the alternative calculation when you're a young company. get above $5,000. Every state will have its own tax system, so your Delaware corporation says, well, we're going to have our office above Citibank on 3rd Street in downtown San Mateo. California Secretary of State says, great, you need to qualify in California. You're a foreign corporation. You're— you could have been a Finnish company, you could have been an Indian company, or a Delaware company. It's still a foreign corporation for California purposes. So you need to qualify. So what's that about? It's $200 and a piece of paper that gets sent to Sacramento. Again, we have a little problem of efficiency in Sacramento. It's a piece of paper. That has the name and a signature and a check or credit card for $200. You'd think there'd be a stamp machine up there. Put it— here's the check. When the check clears, put it through the stamp machine and send it back. It sits there. Oh, it's lunch break. Oh, it's the end of the day. Oh, I think I should go home. Well, we'll leave it till tomorrow. So it's 4 or 5 days to get the stamp back. So anyway, now California says, okay, you're here. You gotta file a tax return with the state of California. Tax is based upon net income. Startups don't have net income, they have zero income, but California has an $800 minimum tax. You have to file a federal tax return with the federal government, the Internal Revenue Service. There's no minimum with the Internal Revenue Service, same net income, so you don't pay any tax, but you still have to file the paperwork. And that again, you need to plan for this kind of activity. It doesn't happen overnight. You need somebody to help you. Not lawyers, but accountants. And you can find people who do this for a living. Everything's outsourced. And then we'll get to one more point and then I'll shut up. Hiring people. This little company is gonna hire some local people. How do we deal with the payroll? How do we deal with a very practical problem that everybody who you hire is interested in? What about my health insurance? You don't want to be without health insurance in the United States. Forget about Obamacare. That's one vehicle. It's not going to be repealed. Don't worry about that. You heard it here first. Hopefully it'll prove to be true. I think it's going to be true. But you need health insurance. So how do we manage this process? You outsource it. You outsource it to a company like TriNet. TriNet is a professional employer organization. The people that we hire, when we hire you, say, come to work for us, the 3 of us, say, we're gonna give you stock options. We want you to be the chief marketing officer or whatever. We're going to put you on the payroll of this company called TriNet. And every 2 weeks you'll get a check from TriNet. They'll take out the taxes. They'll see that the tax money goes to the right place. They'll pay the insurance company for the premium for your healthcare insurance. They'll manage the whole process. So you have a dual relationship. You're employed by TriNet. For purposes of your payroll, you're employed by our little company. For purposes of intellectual property ownership, we own it, not TriNet. For purposes of your stock options, they're issued by our little company, not by TriNet. TriNet manages this whole process. TriNet has competitors. You outsource this problem. You don't want to be messing around with payroll. You don't want to be messing around with benefit programs. Outsource the whole thing. So now you've got your company, it has a tax ID, it has a bank account, it has an outsourcing relationship with— for the new employees, you've solved your visa problem and you're ready to go. Very— that isn't, you know, I was supposed to talk about startup law. Very little about law in this other than forming the company. All the rest—