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The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, start-ups and general business topics.

Delaware Certificate of Incorporation
By Brett Melson Tuesday, May 3, 2016

delaware certificate of incorporationA Delaware Certificate of Incorporation is the foundation upon which a Delaware corporation is built. Until you receive the approved Certificate of Incorporation back from the Delaware Division of Corporations, you do not yet have a valid Delaware company. The state of Delaware requires very little information to be made public in order to form a corporation; the Certificate of Incorporation only requires a few pieces of information.

The Information You'll Need to File a Delaware Certificate of Incorporation:

  • The name of the Delaware company
  •  The address of the Delaware Registered Office and the name and address of the Delaware Registered Agent
  • The purpose of the company (typically this is drafted broadly and unspecifically to include any lawful activity)
  • The number of shares of stock and par value
  •  The name and mailing address of the incorporator

In Delaware, your officers/Directors and shareholders are not usually listed on the Certificate of Incorporation. The preparation, execution and filing of the Delaware Certificate of Incorporation is handled by an incorporator. An incorporator is an individual or company that forms a corporation on behalf of the corporation's Board of Directors by filing the Certificate of Incorporation with the Delaware Division of Corporations. The incorporator then names the initial Directors of the corporation until the successors are elected (and qualified internally) within the company. The powers of the incorporator are then terminated, and the incorporator shall no longer be considered a part of the corporation.

Harvard Business Services, Inc. is the incorporator, on behalf of all our clients, for the companies we file. The Delaware Certificate of Incorporation is signed by Richard H. Bell, II, as president of Harvard Business Services, Inc. The powers of the incorporator are limited to executing the filing of the document with the Division of Corporations. Once the document is filed, the incorporator releases the company to the initial Directors.

No information about the officers or Directors is required to be filed publicly in Delaware in the formation process. It is a nice feature of Delaware; this way, should an officer or Director change, the company is not obliged to file amendments with the Division of Corporations to update that information.  Instead, the change is recorded internally, which allows the business owners to focus on the operation of the corporation rather than tedious paperwork. All Delaware corporations are required to file an annual report each year on or before March 1, naming the Directors and officers.

Harvard Business Services, Inc. is here to assist you if you have any questions or concerns about the company formation process and/or the Delaware Certificate of Incorporation.  To file a new company Delaware LLC or corporation now, visit our easy-to-use order form. You can also call us anytime between the hours of 9 AM and 5 PM, Monday through Friday, at 1-800-345-2677. 

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Keep your Delaware LLC or Corporation in Compliance
By Devin Scott Monday, May 2, 2016

keep your Delaware LLC or corporation in compliance

How to Keep your Delaware LLC or Corporation in Compliance

Once a business is incorporated in Delaware, there are generally two annual fees that business owners who operate their companies outside of Delaware need to pay in order to remain in compliance. These are the annual Franchise Tax Fee and the annual Registered Agent Fee.

For companies that operate in Delaware in a brick-and-mortar business, home business or online business, there are additional requirements to maintain compliance, such as business licenses or permits.

 

Delaware Franchise Tax:

Franchise Tax is an annual fee paid to the Division of Corporations for the privilege of owning a business incorporated in Delaware. For an LLC or LP, the cost of your Franchise Tax is currently $300 per year, which is a flat-rate unrelated to the company’s income. The LLC/LP Franchise Tax is due each year on or before June 1. If you don’t pay by the due date, you will be charged a late fee as well as interest; in addition, your Delaware company will lose its Good Standing status until the Franchise Tax Fee, late fee and interest are paid in full.

For a minimum stock corporation, (companies with 5,000 shares of stock, or less) your Franchise Tax is currently $225 a year, which is a flat-rate unrelated to the company’s income.

For a maximum stock corporation, (companies with more than 5,000 shares) your Franchise Tax will be at least $300 and can increase based on a number of factors. If your Delaware corporation Franchise Tax Fee is not paid on or before March 1 of each year, you will be charged a late fee as well as interest, and your Delaware corporation will lose its Good Standing status until the Franchise Tax Fee, late fee and interest are paid in full.

 

Registered Agent Fee:

The second compliance requirement for Delaware is the Registered Agent Fee. The Delaware Registered Agent’s job is to forward service of process and serve as a liaison between your company and the state of Delaware. When Harvard Business Services, Inc. receives correspondence from the Delaware Secretary of State for your company, we will send it to the Communications Contact for your company. We will also monitor your Franchise Tax status and remind you when it’s time to pay it. Failure to pay your Registered Agent fees on time may result in penalties and/or loss of your Good Standing Status.

If you have any questions or concerns about how to keep your Delaware LLC or corporation in compliance, please feel free to call Harvard Business Services, Inc. at 1-800-345-CORP.

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Anatomy of an S Corporation [INFOGRAPHIC]
By Veselin Ganev, Meri Weiss Tuesday, April 26, 2016

Anatomy of an S Corporation [INFOGRAPHIC]

You can read more about S corporations on our What Is a Delaware S Corporation? page.

 

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Non-Profit Corporation vs Public Benefit Corporation
By Rick Bell, Devin Scott, Meri Weiss Monday, April 25, 2016

 

Non-Profit Corporation vs Public Benefit Corporation

Non-Profit Corporation vs Public Benefit Corporation

 

The chief difference between a non-profit corporation and a Public Benefit Corporation (PBC)— sometimes called a B Corporation—is the ownership factor. There are no owners or shareholders in a non-profit company. A PBC, however, does have shareholders who own the company.

A traditional non-profit—or not-for-profit—company aims to serve a public benefit without making a profit, as defined by the IRS. If a non-profit company decides to stop doing business and dissolve, it must distribute its assets among other non-profits. The non-profit company isn’t really owned by anyone because there aren’t any shareholders.

However, a PBC is a specific type of Delaware General Corporation—it is owned by shareholders who expect the company to make a profit, and return some of that money to them as dividends.

The Certificate of Incorporation of a PBC commits the company to spending some of its profits or resources (or both) in support of a specific public benefit. If a PBC decides to stop doing business and dissolves, the shareholders receive the proceeds of the sales of assets, after liabilities are paid. The shareholders of a PBC actually own the company as well as its assets.

There are other significant differences between the two entities. Personal gain is prohibited in a non-profit corporation, except as the benefits of membership imply; in fact, the express purpose of a non-profit corporation’s existence is to serve a public benefit without making a profit.

In a public benefit corporation, however, profit is the point—as is returning money to the shareholders. However, a public benefit corporation also possesses a greater specific purpose and a desire for the corporation to help make the world a better place.

Many C corporations and S Corporations already commit some of their profits to charitable events and endeavors, without the legal distinction being a public benefit corporation. The difference is that these generous companies contribute charitable donations voluntarily, and their financial commitment can change from year to year, whereas with a PBC, the company is committed to dedicating resources, funds or both toward its chosen public benefit, and shareholders cannot extinguish or water-down the commitment from year to year.

 

Formation Differences:

Creating a non-profit corporation is a two-step process. First, the organization should form a Delaware Non-Stock company.

When preparing your Certificate of Incorporation, you must create a mission statement acceptable to the IRS. It should state the altruistic purpose to which the corporation is dedicated. For example, a non-profit can pledge to benefit one specific group of people; fund research for a particular disease; build a public dog park; or support a religious, charitable, scientific, public safety, artistic, literary or educational institution or mission.

The second step to forming a non-profit corporation is to submit the proper application to the IRS—within 15 months of entity formation—to request non-profit status. This is accomplished by submitting IRS Form 1023.

In order to qualify for non-profit status with the IRS, your Delaware Certificate of Incorporation must include a proper and appropriate mission statement that declares your mission and identifies the IRS subsection under which you intend to apply. A non-profit company must devote all its resources to the fulfillment of its mission.

To form a public benefit corporation, file a Certificate of Incorporation in the state of Delaware for a General Corporation with a public benefit clause in it. No subsequent filing with the IRS is necessary.

The Certificate of Incorporation of a Delaware Public Benefit Corporation must clearly state that the entity is a public benefit corporation, and it must also list the company’s benevolent objectives. However, unlike the non-profit company, the PBC may be first and foremost engaged in a profitable enterprise of a very different nature from its mission, such as making food products, engaging in real estate investments or any other for-profit enterprise.

For example, when the crowdfunding platform Kickstarter converted to a Public Benefit Corporation, it released this statement on its website:

“When we became a Benefit Corporation, we amended our corporate charter to lay out specific goals and commitments to arts and culture, making our values core to our operations, fighting inequality, and helping creative projects come to life.”

 

Fundraising Differences:

Non-profit companies raise money through donations and fundraising activities. If approved by the IRS as a 501c company, the individual donors may deduct their contributions from their ordinary income on their federal tax returns, but they cannot profit from or receive anything of value for their contributions.

Delaware PBCs can raise money by selling stock privately or publically, and by issuing any kind of debt instrument available to General Corporations. Investors in Delaware PBCs can receive stock and make a return on their investments through dividends as well as through equity appreciation.

 

Reporting on Progress:

Non-profit companies are not required to report progress to their members but they often do so in order to raise money from donors and members.

Delaware Public Benefit Corporations are obligated to complete a biennial report to shareholders, which outlines the corporation’s progress toward its public benefit purpose. However, they are not compelled to share the required biennial report publicly. Not every state offers a Public Benefit Company, and none are as private as Delaware’s (in this respect).

 

Federal Taxation Differences:

A non-profit company is tax exempt under Federal Income Tax Law. Since it has no profit, it pays no taxes. It is required to file a tax form each year (IRS Form 990), which is public record and includes information about the company’s finances and Board of Directors.

By contrast, a PBC pays taxes on its profits, like any other U.S. corporation. It files and pays taxes to the IRS each year using Form 1120. The company’s previously filed tax returns are protected under federal privacy laws.

 

Delaware Franchise Tax Differences:

A non-profit company pays only $25 annually in Delaware, and files an annual report; this report is an informational form that lists the names and addresses of the Board of Directors and officers but does not include any financial information.

A Delaware PBC is a Delaware corporation, which means it must pay annual Franchise Tax to the state of Delaware based on the number of shares it issues.

 

Structure:

Non-profit corporations are, structurally, non-stock corporations, which means non-profit corporations do not have any shareholders. They are managed by a Board of Directors, sometimes called a Board of Trustees. The Board may elect its own successors (called a perpetual Board) or they may be elected by the members, depending on the structure outlined in the corporate bylaws

There can be different classes of members in a non-profit corporation, including voting and non-voting members. The types of members, as well as the qualifications for membership, are also defined in the corporation’s bylaws. Members and Directors are not shareholders, and thus do not have any interest in the company’s assets or income.

Delaware PBCs are simply Delaware General Corporations with a charter commitment to dedicate themselves to a stated public benefit, thus they are structured according to the Delaware General Corporation Law (DGCL). The have three tiers of power, the shareholders, the Directors and the officers. The shareholders own the company and are the investors. They elect the members of the Board of Directors at an annual meeting, and the Directors are then responsible for the policy and direction of the company as well as for hiring the officers.

The officers (President, Vice President, Secretary and Treasurer and optionally any other titles the Board of Directors dictates, such CEO, CFO, COO) are charged with handling the day-to-day business of the company. Absent a contract, the officers work at the pleasure of the Board of Directors.

 

Stock Certificates:

Another difference between non-profit corporations and public benefit corporations is that the stock certificates of the latter must be clearly marked with the words “Public Benefit Corporation.” A non-profit company has no shareholders and therefore no stock certificates.

 

Actual Examples:

Some examples of successful non-profit corporations are the Museum of Modern Art; Human Rights Campaign; Sierra Club; Humane Society of the United States; the Boy Scouts and Girl Scouts; Smithsonian Institute; Ted Talks; World Wildlife Fund; PBS; Best Friends Animal Society; ACLU; and the Susan G. Komen Breast Cancer Foundation. On a smaller, more local level, home owners associations and little leagues can also be non-profit organizations.

Examples of successful public benefit corporations (in addition to Kickstarter) are Method, the organic soap and cleanser company; King Arthur Flour; and Plum Organics, one of the largest manufacturers of organic baby food in the world.

 

Disclaimer: The above is meant as an introduction to some of the major differences between a 5015c non-profit corporation and a Delaware public benefit corporation. Be sure to consult your lawyer and accountant for details which may specifically address your situation.

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4 Common and Avoidable Start-Up Mistakes
By Andrew Millman Tuesday, April 19, 2016

4 common and avoidable start-up mistakes

4 Common and Avoidable Start-Up Mistakes

In the business world, just as in life, we all make mistakes from time to time. Unfortunately, there are several common mistakes made by new start-ups that can be both time-consuming and costly. However, these mistakes can be avoided if you’re well informed.

State of Incorporation:

A crucial mistake made by many start-ups occurs when choosing the best state in which to incorporate. Traditionally, the state of Delaware is considered the gold standard and the most attractive state to potential investors. Delaware is the most popular state for start-ups to incorporate in, and for venture capital investors, it is the only state to consider.

The primary benefit to incorporating in the state of Delaware is that Delaware offers the strongest and most current corporate law structure, which means that Delaware provides the greatest asset protection of all 50 states. Essentially, Delaware erects an impenetrable wall between your personal assets and your new company. If you don’t incorporate your start-up in Delaware, you could—possibly—be putting your company’s assets at risk.

In some cases, this common and avoidable start-up mistake can be addressed by converting the business entity to another state. However, many states do not allow entities to convert from one state to another, and you’re then stuck with a company formed in the wrong state.

If you decide to start all over again and form your company in Delaware, you’ll have to spend more money in order to dissolve the corporation and form another one in Delaware, where you should have incorporated your start-up in the first place. This error can be avoided by carefully mapping out and choosing the optimal state of incorporation for your start-up.

Type of Entity:

Another common but avoidable mistake amongst new start-ups is choosing the correct type of business entity. Generally, most new start-ups who plan to raise capital will establish a C corporation, with an eye toward the future—bringing investors aboard, raising capital and going public. In many cases, when fundraising is the plan, an LLC or non-profit corporation is less than ideal for a start-up, for a variety of reasons.

However, for private businesses or for holding real estate or other assets the LLC is the entity of choice.

New business owners should thoroughly educate themselves or contact an attorney or tax professional to discuss details about which type of business entity would be best for their start-up.   

Number of Authorized Shares:

Did your new corporation authorize the correct number of shares? It is important that your start-up has the proper number of authorized shares to issue.  If your company has too many authorized shares you’ll pay higher franchise taxes. However, having too few shares can be an even bigger problem and will require filing an amendment to the Certificate of Incorporation to obtain more shares, which is also expensive. 

Company Name:  

Although it may seem like a foregone conclusion, the company name can often be the biggest blunder for start-ups. Before you file your Certificate of Incorporation you should ask yourself—and answer—these questions:

  • Is the matching domain name available for your website?
  • Is the company name available in the state in which you plan on incorporating?
  • Is the company name available in the state in which the company will operate? 
  • Are there any existing trademarks upon which you could be accidentally infringing? 

It’s a good idea to wait until you have investigated any and all potential problems with your company name before you file your startup documents.

Entrepreneurs that spend the time to lay out their business plans and research their target markets possess a much greater chance of success. A bit of due diligence goes a long way in preventing wasted time, wasted money and wasted opportunities.

We are happy to answer any questions you may have about incorporating your new start-up in Delaware. Feel free to call us at 1-800-345-2677, Ext 6133 or email us.

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