And then, you lot formed a new business entity – congratulations! Voting, management, distribution, liquidation, and other rights are established in the operating understanding, corporate bylaws, partnership agreement, or whatever other type of governing documents exist for your entity. Those types of documents generally deal with assistants and governance matters from a high-level procedural standpoint, things like:

  • How exercise you provide notice of meetings?
  • How are votes taken?
  • What per centum vote is required to corroborate actions (ordinary vs. boggling)?

Your founder/governance documents will rarely go into the weeds on specific compliance requirements and annual filings. Well-nigh LLC Operating Agreements say something similar, "The Manager shall set, or cause to exist prepared federal, state, and local revenue enhancement filings, too as apply for all required licenses and permits …" If you need to know when those filings are due or what those licenses are (FYI, in Texas many industries are licensed through the Texas Department of Licensing and Regulation (TDLR)), you're on your own, which is likely why y'all found your way to this article.

In this commodity, we'll look at annual compliance and filing requirements for limited liability companies (LLCs) and corporations in both Texas and Delaware (ii states where I'm licensed as a business organization lawyer and two states where a lot of entities are formed – Delaware because information technology's the hub of corporate law in the U.S. and Texas because information technology'south so darn large, growing, and business favorable). Along the way, we will touch on other culling entities, such equally partnerships – general, express, and others.

We will also explore some all-time practices for managing and governing your new entity to get the most out of it and to avoid risks of the entity not providing you lot the legal protection you await information technology to provide.

If you lot are still trying to decide what type of entity to course, the information in this article may be helpful, although the post-obit article volition requite you a quick, more tailored overview for deciding between an LLC and a corporation read four Things to Know When Deciding Betwixt an LLC or Corporation.

What is Corporate Governance?

Forming a business is an heady fourth dimension for whatever entrepreneur, although the actual day to day operations of a business can be confusing and often a whole lot less exciting. Fifty-fifty more than mundane than some aspects of operations are matters involving corporate governance.

Corporate governance is the term for maintaining and operating your business in a manner that complies with legal obligations, including obtaining the advisable votes and documenting meetings and decisions of the governing bodies (e.g., shareholders and directors for corporations, members and managers for LLCs, partners (full general and limited) for the various types of partnerships).

The requirements for corporate governance vary from entity blazon to entity type and from state to state (BTW, it'due south mutual to use the term "corporate governance" fifty-fifty when referring to an entity other than a corporation, east.g., an LLC, public benefit corporation, limited partnership, etc.)

Generally speaking, corporations require greater attention – more meetings or actions by written consent (an action by written consent is a fancy term for decisions taken in writing via resolutions rather than in an actual meeting) compared to express liability companies and partnerships. This is true in Texas, Delaware, California, Florida, and every other country I've seen, and it is one reason why business attorneys suggest limited liability companies as the correct fit for some startups, especially businesses that aren't intending to abound into large businesses. LLCs don't fit every startup's profile and needs, although for relatively small, lifestyle-type businesses, they can be perfect, partly because they can be formed in a way that minimizes the required ongoing maintenance and administration, making the coming together and record-keeping requirements much more relaxed compared to corporations.

Corporate Formalities

Observing corporate formalities is important, even for 1-person entities (sole stockholder corporations or sole member LLCs). Failing to pay attention to formalities tin create tension among owners and shareholders (assuming a multi-owner business), cause challenges if you lot want to sell the business when the buyer gets into due diligence, delay or even deter new investors from putting in capital, and possibly create liability for owners equally to third parties. For all these reasons, though it's non heady, it is important for all business organization owners to observe corporate formalities if they operate their business organisation out of an entity.

And, keep in heed that corporate governance isn't just about reducing gamble. It'south also about managing important relationships well. If yous're the CEO of a minor corporation that raised some outside equity uppercase, communicating with your investors on a regular basis is good business concern – the almanac shareholder coming together requirement ensures that you lot formally update them at least one time per year (you should practise information technology more oft than that – informally, at least). Nosotros recommend shifting your heed sight from thinking of these practices every bit a necessary evil to great business concern direction.

Why Every Business Entity Needs a Founder/Partner Agreement

With limited liability companies, the primal agreement amidst the owners is called an Operating Agreement, Visitor Agreement, or an LLC Agreement, although the name doesn't actually affair – they all draw the same, determinative document for an LLC. With a corporation, it'southward the Bylaws or Stockholders Agreement. With partnerships (limited partnerships, express liability partnerships or general partnerships), it's called a Partnership Understanding (or Limited Partnership Agreement, etc.). To keep things simple, we just refer to all these types of agreements as "founder or partner agreements."

A thorough founder/partner agreement lays out the rules for operating and governing the entity – how the owners make certain decisions, when they hold meetings and how they conduct those meetings, how the owners vote, the percentage requirement for a vote to activity, and with respect to like company deportment.

The default business laws of a state establish the way things piece of work if there is no founder or partner understanding. In Texas, business concern attorneys spend a lot of fourth dimension in the Texas Business Organizations Code (the TBOC). When it comes to Delaware, the Delaware General Corporation Law (DGCL) reigns supreme. These codes and, to some extent case law, ascertain the rights, roles, and requirements among managers, directors, and owners of entities. But, oftentimes (almost always when it comes to an LLC), the involved parties tin choose to override the default statutory rules. The Operating Understanding in an LLC is "the deal," which is why y'all may hear lawyers say that "LLCs are creatures of contract." Less pretentiously, that just means that the members and managers of an LLC are gratuitous to determine exactly how their LLC should be administered.

Even if the governing constabulary where your entity is domiciled doesn't crave a written founder or partner agreement (Texas, for instance, doesn't require a written Operating Understanding for an LLC), from a best practices standpoint, having one is a must, especially if there are multiple owners.

For LLCs, an Operating Agreement defines fellow member roles (and managing director roles if the LLC is director-managed), establishes voting requirements and procedures, lays out how allocations (of income or loss) and distributions (of cash or belongings) are performed, and specifies operational and tax-related procedures.

While Texas does not require its LLCs to have an Operating Understanding, Delaware does. The Operating Agreement can be implied, written, or oral, and isn't filed with the Delaware Secretary of State – it's a private, internal certificate.

Corporations generally rely on corporate Bylaws that regulate the entity and its operations. The corporate Bylaws sets out rules for the Corporation's carry. Both Texas and Delaware crave every corporation to have Bylaws. You do not need to publicly file the Bylaws in either state, only you must create, retain, and follow them. Oftentimes, we'll prepare a Stockholders Understanding or Voting Agreement, which are contracts that accost things that don't necessarily fit neatly into Bylaws, e.g., a buy-sell agreement among simply certain stockholders.

There is no legal requirement in either Texas or Delaware for a full general, express partnership, or limited liability partnership to take a written partnership understanding. In fact, when it comes to a general partnership, all that is needed to form one is the thing every offset-year law student learns every bit the footing of a contract – a coming together of the minds, an intent to form a partnership. Still, information technology's always risky to operate a partnership without a written understanding that spells out the terms of the partnership. I have my own unique take on reasons to create a partnership understanding The About Important Reason to Create a Business Contract or any other business contract that I advise yous read.

Regular and Special Meetings of Shareholders and Boards in Corporations

Corporations formed in Delaware and Texas demand to hold at to the lowest degree i stockholders understanding per yr (every xiii months in Delaware, actually). This applies to all corporations, including small family-run businesses (although not to "shut corporations," which are a special blazon of corporation created by statute in some states). Not doing and then may give an opportunistic plaintiff's lawyer a claim that the corporation isn't observing required formalities and that the veil of the corporation should exist "pierced" to allow creditors to sue the shareholders/owners in their personal capacities. This doesn't happen often, although the statement to do it is made fairly regularly in litigation and you lot want to be certain not to take trouble defending a claim for veil piercing.

The annual meeting of a corporation is for the purpose of electing directors and transacting any other proper business. Officers and directors who are active in the corporation may view the need to hold a formal stockholders' coming together as a formality and a hassle. If that's what y'all're inclined to think, keep in mind that stockholders who are kept informed and believe that company management is existence transparent and respectful (investors are due a certain amount of attending for putting in the capital letter and taking a risk, although many owners even so neglect to maintain acceptable investor relations) are likely to be less litigious – part of what drives many lawsuits is that the plaintiff merely feels wronged. In this way, almanac or other regular meetings are good governance and risk mitigation generally, which makes them a best practice even when they are not technically required.

Additionally, though non required, there should be regular meetings of the board of directors, equally well (at least annually, although that may not exist sufficient depending on the context and specific entity. We generally recommend quarterly corporate lath meetings for private companies). You should keep notes and turn the notes into minutes for each meeting, which should be made available for inspection by shareholders and directors.

Member and Director Meetings in Limited Liability Companies

Unlike corporations, neither Texas nor Delaware law require LLCs to hold almanac meetings or maintain minutes of meetings if they are held – this holds true for members and managers (FYI, LLCs don't always have managers). The Delaware LLC Human action defers to the LLC Agreement, which may require meetings or may be silent, in which example technically none are required.

Even though at that place is no statutory mandate for meetings, LLCs with multiple owners should hold regular meetings (member and/or manager), prefer resolutions, and tape minutes. All major decisions of the entity should be memorialized, either through resolutions or unanimous written consent in lieu of meetings, and kept in a corporate record book. Doing this creates a record of conversations, which tin exist helpful when someone misremembers a chat or challenges a company action.

No Matter What, Attach to the Requirements in Your Governing Documents

As we discussed in the beginning of this article, your governing documents might already crave that you concur a certain number of meetings, so read those carefully. If you lot don't have any of these documents, get in touch with united states and nosotros'll help you determine what y'all demand.

If you don't want to take our advice to agree regular meetings and your governing documents require them, amend your governing documents. Information technology's 1 thing to intentionally cull to not employ best practices; it'south another to create a pattern and tape of not doing what your governing documents say you must do.

If y'all haven't formed your entity, give your attorneys plenty of input into what you lot consider to be an adequate amount of governance and record keeping. We conspicuously believe more is better, although we aren't fans of committing to procedures on paper that yous won't honor in the real earth. Be sure your attorney understands what you are committed to doing and what you aren't committed to doing. If you lot're operating your business every bit an LLC with i other member and neither of you wants to e'er concord a coming together, exist certain your Operating Agreement doesn't require meetings.

What Types of Things Should Yous Put in your Board and Other Meeting Minutes?

Though yous can, you exercise not need your corporate lawyer to attend private company lath, stockholder, member/director or other meetings to accept minutes. Minutes don't need to exist written formally with a lot of flowery legalese.

Here are some things nosotros'd typically include in any meeting minutes:

  • The type of meeting (lath vs. shareholder; regular (planned) vs. special vs. organizational, which is the outset meeting of a new entity)
  • The legal proper noun and abode (state where the entity is formed/kept) of the entity
  • The date of the meeting and the start and cease times
  • The attendees, including their titles/human relationship to the company
  • The location of the meeting
  • The business of the meeting, including any formal vote or action taken and how each person voted (or, you can just say that an action was approved by unanimous vote if no one voted confronting it)

The Secretarial assistant or Chairman of the Board (or Chairman of the meeting if neither of the other 2 attends) typically signs the minutes, although information technology's a good idea to have all the board members practise and so in the instance of a board of directors meeting.

While Texas requires its corporations to keep regular meeting minutes, Delaware does not. These minutes do not need to exist filed with the state, but they should be kept with your corporate records.

What Records Practice You Need to Go along for Diverse Business Entities?

Maintaining accurate and consummate records is always a best practice. And, some tape-keeping is required by law. If yous neglect to maintain accurate records, you may expose yourself to unwanted time to come conflict and liability.

Delaware is one of the few states that does non statutorily require the keeping of specific books and records. Nonetheless, that doesn't mean you don't demand to keep any books and records. Stockholders take a right nether Section 220 of the DGCL to review books and records, which at the very least would generally mean a stockholder ledger (list of stockholders).

Texas police requires that every entity keep books and records of accounts, a current record of the name and mailing address of each owner of the entity, and sure other books and records as required by the applicable department of the Texas Business Organizations Code.

Texas law requires that LLCs maintain a copy of the post-obit at the company's chief place of business organization:

  • a current listing of the percentage or other interest in the LLC owned by each member
  • a copy of LLC federal, state, and local tax information or income revenue enhancement returns for each of the six preceding tax years
  • a copy of its document of formation (including any amendments), a copy of its company/operating understanding (including any amendments)
  • an executed copy of any powers of chaser
  • a copy of any document that establishes a class or group of members, and
  • unless independent in a written company agreement, a written argument of the amount of cash contribution and a description and statement of the agreed value of any other contribution made or agreed to be made by each member

The records must be retained in a written form or in some other form capable of beingness converted to a written form in a reasonable time (electronic records).

Miscellaneous Best Practices for Corporate Governance

While not necessarily required by Texas or Delaware statutes, consider the following actions best practices for administering a concern entity:

  • Maintain accurate, up-to-date stock/equity ledgers. At that place should exist a stock ledger detailing the original issuance of shares and each transfer thereafter. A list of both electric current and past shareholders, including names and mailing addresses, outlining the number and class of shares held by each shareholder needs to be maintained on an ongoing basis.
  • Maintain separate business banking company accounts. Your business organisation should have a divide bank account, and yous should avoid any commingling of personal and business concern funds. Employ business expense accounts and business reimbursement protocol for all coin spent on behalf of the concern.
  • Operate nether the business name. You should always conduct business concern in the name of the entity, so that it is clear that the members, managers, directors, or officers are acting on behalf of the entity and not in their individual (personal) capacities.
  • Keep up with taxes and licensing requirements. Of form, you need to pay all applicable federal, state, and local tax returns and pay taxes when due, equally well as obtain all necessary permits and licenses. Failure to practice either of these things can result in major consequences.
  • Adequate Capitalization. Your concern should be capitalized adequately and maintain advisable operating capital. That'due south important for business success, although in this context, we're talking well-nigh it considering capitalization is a cistron courts consider when determining if it's advisable to pierce the veil of an entity. Proper capitalization begins when you course the entity – you should put coin into the new concern bank account. What constitutes adequate capitalization depends on what your business does. If you operate a ane-person marketing firm, information technology doesn't need to exist much. On the other hand, if you lot're manufacturing products, handling chancy materials, or doing anything else that exposes people to serious risk (even if you take all necessary steps to mitigate that risk and insure confronting), courts will expect y'all to be more well-capitalized.
  • Proper and Sufficient Insurance.       Ane main reason that business owners course entities is to protect themselves from personal liability. Following applicative requirements and the all-time practices we set out in this article will help ensure the liability protection feature of your entity holds up. However, don't forget virtually insurance. When something goes wrong, specially when information technology goes very wrong (e.g., someone is seriously injured or dies), an aggressive plaintiff's chaser who finds that the entity they are suing has few (or no) assets, will bend over backwards to detect a reason to sue the officers and owners. It's possible, of course, that they cannot justify a merits against people personally and do non try. Often, though, they will come up up with some claim to name officers and directors individually. If y'all're named in a lawsuit, information technology can have time and coin to get you out of the lawsuit even if the claims lack merit. Insurance helps hither. What the plaintiff'southward attorneys are looking for is some pockets with coin. Of course, your insurance visitor won't exist interested in cutting a cheque for a weak merits, although information technology may handle the defense, then you don't have to pay out of pocket and it will divert attention from the owners personally.
  • Exist careful of giving inadvertent personal guarantees. Don't sign a business contract in your personal name unless you intend to personally guarantee the agreement. You may need to personally guarantee a loan or commercial part lease, although most vendors/suppliers will let you sign in your chapters every bit an officeholder, manager or other formal position with your company (not personally). When you lot sign in your company capacity, your title volition be listed under or next to your name, whereas when you lot sign personally, the signature line will look something like this:

By: __________________________
Name: Maverick Mitchell, individually

Compare the personal signature line (lawyers telephone call it a signature block) to the following company signature block:

Height GUN, LLC

By: ________________________
Proper noun: Maverick Mitchell
Title: Manager

Besides not wanting to betrayal yourself personally, if you personally guarantee lots of company debts, courts may consider y'all to be acting equally an alter ego of your entity. This is 1 more gene that could lead to the entity losing its split entity condition (which is what protects owners from personal liability). You may feel that you need to exercise what you lot need to practise to go the credit you need to grow, and we practise non consider this (also many personal guarantees) to exist a huge gamble. All the same, it is one more than affair to consider, and one style to mitigate risk is to always formally document a company action (minutes documenting an activity in a meeting or an action by written consent) approving of the personal guarantee(s) for the specified purpose.

  • Be clear and intentional about your authorized signatories. Adopt a resolution that authorizes specific people to sign contracts that bind your visitor, and so enforce the rules by letting only authorized signatories sign documents.

Registering to Do Business in Other States

Once your concern has a sure amount of contact and activity in a state other than where the entity is domiciled (the country under whose laws the entity exists), you lot will need to file to practice business organization in that land. This is normally called registering as a foreign entity. The word "foreign" is confusing, although, in this context, it simply means an entity that was not course/organized in that particular state. In Texas, registering as a foreign entity requires a one-fourth dimension $750 fee. FYI, you will need a registered agent in any state where you need to annals every bit a foreign entity.

Tax and Other Filing Requirements

As an owner of a business organization entity, it is critical to know and sympathize the steps necessary to maintain "good standing" within your state of formation. Good continuing is the status your entity holds by existence in compliance with the maintenance requirements within your land. If you fail to keep your entity in compliance, the country could accuse penalties or even administratively crave the dissolution of the entity.

There are many ongoing requirements that y'all must comply with, includingannual government reports/returns and fees, notice of a name change, find of a change of primary office address, notices of change of registered part, and others. The chart below outlines some of the ongoing maintenance requirements for Texas and Delaware entities.

chart maintenance requirements texas delaware

Speaking with a Concern Lawyer

If you want to speak to a corporate/business lawyer, accomplish out to us. We accept offices in Austin and Houston, although we help entrepreneurs and business owners all over Texas and the United states. We look forrad to connecting with you.

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Author: Brett Cenkus

Brett Cenkus is a business attorney with xviii+ years feel based in Austin, Texas. He has worked with a diversity of businesses and has clients throughout Texas every bit well as many applied science clients throughout the United States. Brett is a Harvard Law graduate with a sharply seasoned mind and an entrepreneurial centre. As a founder of half dozen companies himself, he is especially passionate about helping startups succeed. In 2016 Brett was named the winner in the Individual category for RecognizeGood'south Ethics in Business & Community Award. He offers businesses solutions that are in sync with their civilization, goals and values. Yous can learn more near Brett by visiting the Almost page on this website.