The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, start-ups and general business topics.
It’s no secret that the most expeditious way to fulfill your professional dreams is to start a company and become your own boss.
There is no better way to achieve wealth. There is no better way to provide for your family.
There is no better way to gain freedom from a life of unfulfilling labor.
In fact, starting your own company is the best way to fulfill all the aspirations you possess.
I’m not saying it’s easy, but it’s easier now, in 2017, than it’s ever been before. It’s easier to form a company, easier to raise money to grow your company and easier to find qualified people to work for your startup. It’s also easier to create a winning idea for your startup.
Easier to form a company:
Never before have so many company formation services existed in order to help you set up your company, at a minimum cost. More than 50 companies can help you get started. The cost of starting a Delaware company, one that is completely drafted for you—including filing fees—can be less than $200.
Easier to raise money:
Never before have so many angel investor groups been looking for new companies in which to invest. These groups, starting with the New York Angels more than ten years ago, have sprouted up around the country and invested millions of dollars in startups.
Once you get beyond the angel stage, a huge pool of venture capital funds are ready to invest billions in young companies.
Crowdfunding is another new form of fundraising that has improved the chances of entrepreneurship, making it available to all.
Easier to find qualified people:
Millions of people out there are looking for jobs today. Whether you want service workers, high tech engineers, laborers, writers or healthcare professionals, the pool of available workers has never been larger.
Easier to come up with a winning idea:
Disruption is the name of the game today. Take any product that already exists and make it better with the addition of a microchip, a long-lasting lithium battery and a connection to the internet.
That’s it. In the next ten years, every product sold today will be re-made, and will work differently, by improvements in technology, some of which are available at a minimal cost.
Pick your product, redesign it and go for it.
Get ready to become completely engrossed in your product. Get ready to research every aspect of your product until you achieve the breakthrough that will set you apart from the pack.
Get ready to analyze your vision 24/7/365 and refine it continually by finding the true path of least resistance.
But your new compny will be fun! It will be rewarding! And it will be fulfilling!
So give this some thought: where do you want to be next year at this time? Still wishing you’d already started your company? Or well on your way to fulfilling your dreams?
More and more creative people--whether idea-generators or developers--are trying to sell their app ideas to Apple.
We fully encourage and support this entrepreneurial spirt, so we researched the necessary steps you'll need to take in order to become an authorized iOS app developer.
The first step required by Apple is that you enroll in their program for $99 a year. Once you have enrolled, you can submit your application.
Apple states that it will first review the application and, once it has reviewed your application, you will be informed as to what to provide in order for Apple to approve your company as an App Developer.
However, I wanted to know exactly what Apple requires so I asked an array of questions. Here is what I found out:
As many business owners know, one of the major benefits of incorporating in Delaware is the ability to file a new company without listing director, officer or member information on the public record.
Why does this matter? Often, many clients who form an app startup are looking to bring in Venture Capitalists or Angel Investors to help fund their business.
If your startup is looking to do that, or at least wants the option, then a Delaware company makes it very easy to distribute ownership percentages (in an LLC) and shares of stock (in a corporation) while still maintaining all confidentiality and liability protection.
The Delaware Court of Chancery has been voted number one for having the strongest corporate law structure for past 13 years. What does this mean for you?
It helps to put up the biggest wall between one’s business life and one’s personal life, so if a lawsuit were presented against your company, it would make it very hard for a litigant to come after you personally.
This, along with many other benefits, helps makes the state of Delaware the number one choice for over 65% of Fortune 500 companies.
Your Delaware company does have to actually operate in the state of Delaware. So how do you show the physical address for a business that is incorporated in Delaware but operates elsewhere?
Typically, business owners file for Foreign Qualification for corporations and LLCs, also known as Certificate of Authority.
Foreign Qualification can help show you are a domestic business entity to Delaware and a foreign entity to the state in which the business is physically conducting business.
We offer a unique Foreign Qualification service to assist you in preparing and filing for Certificate of Authority in the state in which you are physically conducting business.
This can help your business comply with all local and state compliance issues and often help illustrate the information Apple is looking for, such as a physical address to certify you as an Authorized App Developer.
Be sure to read all of Apple's relevant information and how it applies to your specific app idea.
For any additional questions on how we can help you become an authorized iOS app developer, please email us at firstname.lastname@example.org or contact our Sales Department at 800-345-2677, Ext. 6900.
The cannabis industry is one of the nation's fastest growing industries and is generating enormous interest from entrepreneurs, investors and, of course, regulators and tax authorities.
Twenty-eight states and the District of Columbia have legalized medical marijuana, with fourteen states authorizing the sale and use of medical marijuana just within the last five years.
Despite the impediments the industry faces from practical and regulatory obstacles, the legal cannabis market is presently valued at $2.7 billion dollars annually; in Colorado alone, cannabis sales reached $1 billion within the first ten months of 2016.
Since Delaware is known as the Incorporation Capital of the world, we have also seen a large number of startup companies that are operating in the medicinal or recreational marijuana industry.
The easiest part of opening a business in the cannabis industry is the formation of the company. While Delaware allows the formation of companies in the marijuana industry, it will not allow the use of the word “marijuana” or any similar terms in a company’s formation documents.
Stocks associated with corporations in the industry that are listed on the publicly traded markets have seen tremendous gains in the last year. However, despite the growth and potential of the cannabis industry, there are a number of difficulties for those operating in the space, primarily due to the treatment of cannabis under federal law.
Marijuana remains illegal under federal law. It is a Schedule 1 controlled substance. Even in the jurisdictions that have legalized medical and/or recreational use of marijuana at the state level, the cultivation, sale and possession of marijuana remains a violation of federal law.
Per a Supreme Court precedent, federal law criminalizing the use of marijuana trumps any state laws that legalize its use.
The Obama administration has adopted a policy allowing states to implement marijuana legalization laws; under this administration, federal agencies have not sought to prosecute those operating in accordance with applicable state laws.
Since marijuana remains illegal under federal law, most federally chartered banks and financial services companies will not open accounts for, or process transactions with, businesses operating in the cannabis industry.
Proceeds from the production and sale of cannabis products are currently considered drug proceeds under federal law; as a result, banks that deal with cannabis companies risk potential seizures and/or enforcement activities by federal agencies.
Although some smaller banks are willing to assume a greater risk in dealing with cannabis companies, most large banks simply find the emerging cannabis industry too risky from a regulatory perspective. As a result, many cannabis companies cannot open or maintain bank accounts or process credit card transactions.
Due to these banking complications, cannabis companies cannot use traditional banks or other financial services, so they often operate as cash businesses and thus have difficulty documenting the source and movement of funds for tax filings.
Holding significant cash not only raises security issues (robberies of cannabis companies are a very real problem), but it also brings intense scrutiny from the IRS, state tax agencies and the Treasury Department, which polices money laundering.
Cannabis companies are a frequent target of IRS audits, state tax agency investigations and Treasury Department inquiries.
In addition to the operational difficulties related to the inability to access banking and financial services, cannabis companies are often unable to obtain bank loans or even mortgages on properties that will be used in the operation of a cannabis business.
Other market participants, such as commercial landlords and insurers, are also hesitant to do business with cannabis companies. Many commercial leases contain provisions that prohibit use of a leased property for activities that are illegal under federal law.
As a result of these issues, cannabis companies generally pay far higher rates of interest on lending from alternative capital providers; pay higher rents from landlords willing to lease these businesses space; and are forced to forego insurance that any business would otherwise obtain.
Even if the federal government were to soften its stance toward cannabis, it is likely that the Food and Drug Administration will move to regulate cannabis. Such FDA regulation, among many other potential sources of regulation, could prove to be highly burdensome.
Thus legalization may not cure the marijuana industry's regulatory woes and may, in fact, increase them. However, there is a growing number of enterprising startups that are trying to solve these problems, such as Tokken, which aims to help marijuana dispensaries manage their huge influx of cash.
It is unclear how state and federal laws and policies will evolve, although many people feel complete legalization is inevitable.
Until then, participants may see the cannabis industry as a tremendous opportunity and a new gold rush (or green rush), but they will need to overcome a number of practical and regulatory obstacles and deal with significant operational headaches until cannabis has become more widely accepted by government agencies, traditional financial services institutions and the market as a whole.
The 1099-MISC form reports total payments to the IRS, from either an individual or an entity, to an independent contractor that has provided services throughout the year that total more than $600.
Any person or company that makes payments throughout the year to an independent contractor is mandated by the IRS to report these payments on a 1099-MISC form to both the recipient and the IRS.
Examples of types of payments may include:
One common use of the 1099-MISC form is for freelancers to report the earnings from their independent contractor work. (Its function is similar to a W-2 for an employee). The 1099 should include the freelancer’s personal information, including name, address and Social Security number or EIN.
Equally common is utilizing a 1099-MISC for household help. This would include a person who cleans your home or office and is paid more than $600 during the course of the year to do so but is not on the payroll.
Even the person who mows your lawn or cleans your pool is supposed to receive a 1099-MISC form if you pay them more than $600 during the calendar year.
However, if your service payments are made by check to corporations, or entities with Employee Identification Numbers rather than individuals, you do not need to send a 1099-MISC.
Companies that receive payments for their services are required to keep track of these payments and count them as income for tax purposes.
If you are in doubt as to whether or not to send a 1099 form, you should send the individual an IRS W-9 form, which is a request for an individual’s SSN or EIN number.
If they report their income as a corporation, you do not need to report payments to them on a 1099 form.
The 1099 form also classifies the type of payments received, based on the work completed. Employers should send the 1099 form out by January 31, to both the individual and the IRS.
The minimum amount for which a 1099 form must be sent from an employer is $600 annually; every employer or individual that has paid $600 or more during the course of a tax year to an independent contractor is obligated to send a 1099 form by January 31 after the year’s books are closed.
Recently, the IRS has been looking more closely at taxpayers’ responsibilities to send W-9 forms and 1099 forms to independent contractors, so make sure you comply. The penalties can add up and be expensive.
Rocco Beatrice is a CPA, MBA, MST with Estate Street Partners, a team of lawyers, accountants and business strategists that, combined with our actuarial partners, have helped more than 5,000 doctors, 1099 employees and business owners work with their own CPA’s in order to take advantage of these tax-altering pension, Super 401(k) and 401(h) plans over our 30+ years in business.
The most exciting changes that came along with the Pension Protection Act are also, shockingly, one of the least discussed sections of the Internal Revenue Code: the changes to the 401(h).
Section 401(h) of the IRC provides for specific accounts to be created for the purpose of paying for medical-related expenses during retirement.
Similar to the 401(k), the IRS classifies the 401(h) as a cafeteria plan, which means it is intended to be managed by employers for the benefit of employees. Unlike the 401(k), however, the 401(h) is not a plan that is perfect for everyone.
The amazing fact is that 98% of the most qualified individuals for these plans never take advantage of them, primarily because they, nor their CPA, have never heard of them.
The cost to implement and maintain these plans is far outweighed by the benefits these plans offer, which can potentially lead to some of the best ROI in the IRS tax code. Ask your CPA about a 401(h).
How the 401(h) Plan Works
In essence, the 401(h) is a medical expense account attached to a Cash Balance Plan account that aims to alleviate the financial burden of health conditions, accidents and hospitalizations that individuals and their dependents may come across in their retirement.
As with other plans, a 401(h) account must be separately funded and managed. As the plan is being funded, the contributions made are tax deductible.
The money is allowed to grow capital gains, tax-free. When funds are later withdrawn in retirement, the money that comes out of a 401(h) plan is also tax free.
In other words:
1. 401(h) plans can be funded with tax-deductible money.
2. Funds deposited into 401(h) plans are allowed to grow without the burden of taxation.
3. Funds withdrawn by 401(h) account beneficiaries once they retire are not taxed.
To some extent, 401(h) plans are similar to voluntary employee beneficiary associations, which are better known as 501(c) plans, in the sense that they are designed to provide retirees financial cushions for health expenses and life insurance. In fact, 501(c) plans can be combined with 401(h) plans.
Unlike the Roth Individual Retirement Arrangement or certain insurance-based instruments such as annuities, a 401(h) plan can actually provide a fully tax-free solution for retirement.
A business owner who takes Cash Balance Plan account and deposits them into a 401(h) account is essentially shielding those funds from taxation forever. This is one of the very few IRC provisions that provide a completely tax-free environment, and it is an opportunity that is certainly worth exploring by individuals who are interested in asset protection and wealth preservation strategies.
The Rationale of 401(h) Plans
Even after the insurance reform of the Affordable Care Act, healthcare inflation has not stopped. In 2014, the inflation rate of medical care in the United States increased by a little more than 3.5 percent, which is about 400 percent higher than the consumer price index.
By the end of this decade, retirees can expect that the costs of their medical expenses could climb between five and seven percent annually.
AARP cites Fidelity Investments which estimates “that a 65-year-old couple retiring [in 2013] will need $240,000 to cover future medical costs. That doesn't include the high cost of long-term care. Nor does it take into account additional costs you may incur if you decide to take — or are forced into — early retirement before your Medicare kicks in.” Doctors who celebrate their 55th birthdays today can expect their medical care costs to be nearly $465K when they retire with their spouses in the next 10 years.
Supplemental insurance policies combined with Medicare plans are not sufficient to cover all medical expenses that business-owners and other professionals are bound to face during their retirements.
Most often, retirees dip into their savings or tap into their taxable retirement income to pay for out-of-pocket medical expenses. These are the situations that 401(h) plans seek to alleviate.
When a business-owner who decides to participate in a 401(h) plan for the benefit of his staff, he or she must establish the contributions amounts, which must be reasonable, under Treasury Regulation 1.401-14(c)(3).
This is related to the aforementioned estimate of healthcare costs and their inflation; in other words, a 401(h) plan can accumulate up to $460K in contributions that can be grown through investments and later withdrawn without any taxation.
Furthermore, the IRC can be amended in the future to allow greater contribution limits to match the rising inflation of medical expenses.
Another advantage of 401(h) plans is that the list of qualified benefits is very extensive. A few treatments that are typically excluded from health insurance policies are allowed by 401(h) plans.
Some of these include:
The Practicality of 401(h) Funds401(h) plans give business-owners the ability to fund part of their retirement with deductible money so they can later enjoy tax-free distributions to cover a broad range of medically-related expenses.
This is money that can truly come out 100 percent tax-free when business-owners, 1099 employees and doctor-owners retire.
Let's say Dr. Elsa Parks, a 55-year old general practitioner, runs a family medicine practice that employs two medical assistants and a licensed practical nurse. She is married and has an average income of $700,000 per year.
Living in California, she pays federal income taxes at 39.6% and state income tax at a rate of 11%, for a total of 50.1%. This does not include FICA or self-employment taxes.
As a small business owner, Dr. Parks can use the existing corporate structure of her practice to establish a Cash Balance Plan and medical expense account under section 401(h) of the IRC.
Even if Dr. Parks worked only as a self-employed on-call physician, she could actually get some advice on how to form a business entity in her state for the purpose of setting up a Cash Balance Plan and 401(h).
Being 55 years old, married and having income of $700,000 per year gives her the ability to fund her Cash Balance and 401(h) by up to $670,000 per year. She has chosen to contribute $600,000 to her Cash Balance and 401(h) plan. Effectively, she has reduced her quarterly income tax check by $64,500.
The bottom line of 401(h) plans is that Americans are living longer and seeing their healthcare costs rise every year.
With so many retirement plans subject to taxable distributions, the 401(h) is one of the tops option for business owners, 1099 employees and doctors who would like to cover their out-of-pocket medical expenses without the burden of taxation.