How to maintain a valid LLC status?
I want to establish a LLC as a software company. However I am not confident that the LLC will make profits out of the product soon. Knowing that for a company, IRS requires it to be profitable for 3 out of 5 years.
A lot of software company have history of not profitable for years (for example, Amazon). How can I maintain the valid status? Does accepting crowdfunding donation count as profit? Or, can I simply not reporting loss or reporting less loss?
It is critical that you understand the legal requirements for maintaining necessary business records, and filing any necessary documentation for corporations (either a “C” Corporation or a “S” Corporation). For example, be sure that you stay current on the issuance of any stock certificates, recording of all stock transfers, your initial and annual corporate minutes concerning any meetings of shareholders and minutes concerning any meetings of the Board of Directors, as well as keep your bylaws updated with any necessary revisions or changes. And, of course, be sure that you file your annual registration with the Missouri Secretary of State to avoid any administrative dissolution of your business’ corporate structure.
If you formed an LLC, which in “today’s business climate” I recommend over forming a corporation, you will still have some paperwork. Granted, you will not have as much paperwork as that required for a corporation. Once you’ve filed the necessary paperwork with the Secretary of State’s Office, you must have an Operating Agreement, and though an LLC is not required to maintain records regarding membership shares, be sure to record all membership interest transfers and hold annual meetings of members and also of managers, (if the LLC is manager-managed).
Also, make sure that you comply with all “Foreign State” requirements for doing business in states other than the state in which you are incorporated or in which you formed your LLC. All states require a business entity (whether a corporation or LLC) to register as a “foreign business” if you’re going to do business in that state.
If your business entity, corporation or LLC is sued, you want to make sure that all the “paperwork” is up-to-date. This is critical to maintaining the corporate or business protections associated with formation of a corporation or LLC. If you cannot show that you have met all of the state’s requirements for keeping your corporation or LLC protections, a court may hold that your company has been acting as a sole proprietorship or partnership. This is called “Piercing the Corporate Veil,” which is an absolute disaster because you’ve now lost the limited liability protections associated with formation of a corporation and LLC, which potentially exposes your personal assets.
It is my recommendation, that you have a lawyer or your CPA go over with you all of the requirements, on an annual basis, to ensure that you maintain the integrity of your corporation or LLC and the associated protections that come along with formation of such a business entity. This will ensure that someone suing your organization cannot “Pierce the Corporate Veil.”