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TL;DR: Staying on top of corporate housekeeping and corporate compliance is essential to protect your personal assets, maintain limited liability, reduce legal risk and ensure your startup is ready for financing or acquisition.
Why Corporate Housekeeping and Compliance Matter:
Whether you’re a first-time founder or a seasoned entrepreneur, maintaining good corporate maintenance is required to keep your company operating smoothly. Keeping up with corporate formalities supports:
- Limited liability protection – avoid piercing the corporate veil
- Risk management – reduce exposure to lawsuits and fines
- Smooth transactions – investors and acquirers will look under the hood
Key Housekeeping Tasks:
- Annual Meetings: Elect directors and appoint officers
- Regular Approvals: Approve financing, equity and debt issuances, M&A transactions, and other key corporate matters
- Written Consents: Save time and costs vs. in-person meetings
- State Taxes & Filings: Stay compliant in all states where your business operates
What does Housekeeping Mean in Business?
In the context of business, corporate housekeeping refers to the ongoing legal and administrative tasks that keep your corporation in good standing. This includes activities like documenting board and stockholder actions, maintaining records, filing required reports and complying with corporate governance rules.
Corporate compliance and housekeeping are critical to preserving your company’s limited liability protection, which is the legal shield that separates your business obligations from your personal assets. If your company fails to follow basic corporate formalities, such as maintaining proper records, holding required board and stockholder meetings, or keeping finances separate, a court may decide to “pierce the corporate veil.” This means that creditors or litigants could hold you personally liable for the company’s debts or liabilities. Staying on top of corporate housekeeping helps demonstrate that your company is a distinct legal entity, reducing the risk of personal exposure.
What Is Corporate Compliance, and Why Is It Important?
Corporate housekeeping and corporate compliance go hand-in-hand. Corporate compliance involves making sure your business operates within the law and meets the regulatory, governance and standards relevant to its business operations. It’s the process of doing what you should be doing to avoid what you don’t want: liability, penalties, delays and disqualified deals. Corporate housekeeping helps to support the corporate compliance process.
Together, corporate housekeeping and corporate compliance reinforce your company’s:
- Governance: Ensuring the company operates within the bounds of the law, its own charter and other governing documents
- Accountability: Providing transparency for stakeholders and regulatory bodies.
- Risk Management: Minimizing exposure to legal, financial and reputational risks.
Essential Corporate Housekeeping Tasks for Startups
Here’s what should be on your company’s radar to keep your corporate house in order:
Annual Meetings
At a minimum, your company will need to hold an Annual Meeting of Stockholders to elect the Board of Directors and an Annual Meeting of Directors to appoint the corporate officers (i.e., Chief Executive Officer, Chief Financial Officer and Corporate Secretary). These annual meetings can also be used to approve any other corporate matters (see below) that the Board of Directors and the stockholders may need to approve at that time.
For startups with a manageable group of stockholders, we recommend handling the annual meetings via Written Consent, which will be faster, cheaper and easier for the company and its stakeholders.
Alternatively, if the annual meetings are held in person, then the company must meet the formal meeting notice and quorum requirements for each meeting (located in the Bylaws) and prepare written minutes of the meeting proceedings – which involves more formalities, more work and more cost.
Regular Meetings
Depending on the activities of your corporation, the board of directors and stockholders may need to approve certain key corporate matters throughout the year. The Board typically will need to approve the following types of matters:
- Equity and debt financing transactions
- Issuance of securities (debt or equity)
- Creation of a stock option plan
- Grant of each stock option
- Appointment of officers
- Major contracts
- Amendment of key corporate documents (e.g., Articles of Incorporation or Certificate of Incorporation, Bylaws)
- Mergers and acquisitions transactions involving the company
Similarly, you may need to seek Stockholder approval for:
- Certain financing transactions
- Formation of a stock option plan
- Amendment of key corporate documents (e.g, Articles of Incorporation or Certificate of Incorporation, Bylaws)
- Mergers and acquisitions transactions involving the company
Pro Tip: If possible, you should try to handle these corporate approvals via written consents to save time and money.
State Franchise Taxes
As a corporation, your company will need to pay franchise taxes to the state of its incorporation each year. Also, if your company is qualified to do business as a foreign corporation in states other than its state of incorporation, then it will need to pay similar franchise taxes to those states, unless otherwise exempt.
For example, if your company is a Delaware corporation that is qualified to do business in California as a foreign corporation, then your company will need to pay annual franchise taxes to Delaware as well as California. In California, the current minimum annual franchise tax is $800.
Failure to file your annual franchise tax reports or otherwise pay required franchise taxes will result in a suspension of your corporation’s legal status in the applicable state and possible penalties, fees and interest. These late filing fees can rack up fast!
State Filings
Many states require that your company report certain corporate information on an annual basis to the applicable Secretary of State.
For example, the California Secretary of State requires that each California corporation (or foreign corporation qualified to do business in California) prepare and file an annual Statement of Information to update basic corporate information. This filing requires corporations to report the name and address for each of the three principal corporate officers (i.e., Chief Executive Officer, Chief Financial Officer and Corporate Secretary) and, if the corporation is a California corporation, each director.
Failing to file a required annual report will result in suspension of the corporation’s good standing in the applicable state, as well as possible late filing fees, interest and penalties.
Keep it Clean to Avoid Cleaning Up a Mess Later
Delaying corporate maintenance can lead to expensive legal cleanup, especially when you’re trying to close a financing or selling your company. Missing consents, outdated records and non-compliance are all red flags to investors and acquirers.
The corporate cleanup process can be very costly if you have not done a good job with the corporate housekeeping, and is certainly more expensive than proper blocking and tackling as you go.
Stay on top of the corporate maintenance and recordkeeping, so that your company is ready to move ahead quickly when the right deal presents itself.
Need Help? We’ve Got You Covered
We help startups stay on top of their corporate compliance, maintain good standing and prepare for the next big step—whether that’s raising capital or selling the company.
Learn how our team can help.
Your turn:
Has your startup stayed on top of its corporate formalities? Or did you have to scramble to clean up your corporate records before a deal? Share your experience—we’ve seen it all!
Clients Also Ask Us:
What happens if a company fails to follow corporate formalities?
If a company fails to follow corporate formalities like documenting board approvals or keeping financials separate, it risks “piercing the corporate veil.” This could result in personal liability for the founders, officers or directors, undermining the limited liability protection of the corporation.
How do startups maintain corporate compliance?
Startups maintain corporate compliance by holding required board and stockholder meetings, documenting key decisions with written consents or minutes, paying state franchise taxes and filing annual reports. Regular corporate maintenance helps avoid legal issues and keeps the business ready for funding or exit.
Do Delaware corporations need to file anything in California?
Yes. If a Delaware corporation is doing business in California, then it must register as a foreign corporation in California, file an annual Statement of Information with the California Secretary of State and pay California franchise taxes, in addition to meeting Delaware’s corporate compliance requirements.
