The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, start-ups and general business topics.
India currently represents about 18% of the world’s population with an estimated 1.3 billion people. The latest projection models now predict that India will become the world’s most populous country in less than a decade, surpassing the population of China in approximately 2022, six years sooner than the previous estimate of 2028. India’s population is expected to grow to 1.4 billion people in 2022, then to just over 1.5 billion people in 2030, and it should reach upwards of 1.7 billion people by the year 2050. As India’s population booms, so, too, does their economy. China’s economic tidal wave is finally starting to subside, after roughly 30 years of an average growth of 10% per year. India now boasts the world’s fastest growing economy. The Reserve Bank of India recently cut the interest rate for the fourth time this year, down from 7.25% to 6.75%, which should further help stimulate economic growth (The Washington Post).
Entrepreneurs in India are chomping at the bit to break into U.S. markets. Here at Harvard Business Services, Inc., we are setting up more companies on a daily basis for clients based in India than ever before. As of today, clients from India comprise roughly 4% of our business, and this percentage is expected to surge in the very near future.
Clients from India are establishing Delaware LLCs and corporations for a variety of different types of business endeavors. The scope ranges from import/export ventures, selling finished product, SEO services, Information Technology consulting, web design, technical support, staffing agencies and so on. Many of our Indian clients aspire to become vendors for Amazon or other online wholesalers while others want to develop and sell mobile applications for Android or Apple devices.
While many of our clients from India seek to form a Delaware LLC or corporation as the first step toward obtaining a Visa and permanently relocating to the United States, others plan to offer their products or services remotely, from India, either by phone, Skype or online. Whatever their desired results may be, more and more of our clients from India are creating Delaware companies for the sole purpose of opening a United States bank account or merchant account.
While Harvard Business Services, Inc. cannot assist our international clients with opening bank accounts or merchant accounts, we can help provide many of the necessary tools and documentation. Many banks have common requirements, such as the approved Certificate of Formation or Certificate of Incorporation, Certificate of Good Standing, Certified Copy, Mail Forwarding Address, and last but definitely not least, the Federal Tax ID Number (also known as EIN).
Almost every bank and Merchant Account Provider in the United States requires a Federal Tax ID Number in order to establish a new account. However—don’t worry; we can assist you in obtaining the Federal Tax ID Number from the Internal Revenue Service for international clients who do not possess a United States address or Social Security number. To utilize our service and apply for the Federal Tax ID Number, we will need the name and address of the responsible party as well as the principle activity of your business. We will then prepare and email you a completed SS4 application and consent form for your signature. Once you return it, we will contact the IRS and apply for your EIN. Typically, the process takes between 7-14 business days if you don’t have either a U.S. address or Social Security number. Once we obtain your EIN, we will email it to you for your records. In addition, the IRS will send you the official confirmation letter directly.
According to the business news website The American Bazaar, India-based companies are responsible for creating 91,000 jobs and $15 billion in investments across the United States. 84.5% of the Indian companies plan to make additional investments in the United States. Indian businesses are here to stay, and are changing the landscape of American commerce.
If you have any questions about forming your new Delaware corporation or LLC, please call one of our top-notch customer services representatives today. I can be reached by phone at (302) 644-6265 or via email at firstname.lastname@example.org.
Citations: Katz, Andrew. “India Will Have the World’s Largest Population Earlier than Expected, U.N. Says.” The Washington Post. The Washington Post, 30 July 2015. Web.
“Indian Companies Invested $15 Billion, Created 91,000 Jobs in the United States.” The American Bazaar. The American Bazaar, 14 July 2015. Web
For nearly 400 years, the common law trust has been utilized by lawyers, primarily for the benefit of extremely wealthy people who have cultivated a realm of trusts in order to pass ownership of assets from generation to generation with the least amount of taxation and the greatest degree of security in the process.
The Delaware Statutory Trust (DST), however, is a statutory entity, created by filing a Certificate of Trust with the Delaware Division of Corporations, and governed by Chapter 38, Part V, Title 12 of the annotated Delaware Code (See 12 §§ 3801 through 3862).
Delaware is one of the few states in America to have a statutory trust law. Most states still rely upon common law trusts.
Common law trusts, though often still used, have many outdated rules, which can create uncertainty about a number of legal aspects of the trust. Delaware has undertaken the task of modernizing the common law and creating an effective and judicially secure form of entity.
The Statutory Trust Act, similar to the Delaware LLC law, relies on the legal principle of freedom of contract (See 12 § 3823(b)). This grants the power to determine the rights and responsibilities of the various parties to the drafters of the governing instrument, usually referred to as the trust agreement (See 12 §3801(f)). The trust agreement is the private, governing document of the entity.
Delaware does not require the trust agreement to be filed (unlike several other states), and therefore the parties to the statutory trust and their relative duties and responsibilities can remain the secret of the parties involved (See 12 §3810).
The trust agreement is a definitive document, and Delaware law provides that the Delaware Court of Chancery will enforce its terms upon the trustees and beneficial owners (See 12 §3804).
The trust agreement is a contract and therefore enforceable. It may create various classes or groups of trustees and/or beneficial owners (See 12 §3806), and it determines the nature of distributions of the trust's assets for the benefit of the beneficial owners (See 12 §3805).
Trustees may have very broad powers or very limited powers, per the trust agreement, and they may delegate their duties and authority to officers, committees, agents or others named in the trust agreement (See 12 §3806).
There is no requirement for the trust agreement to be drafted in English, and no requirement to submit the document to any authority in Delaware for approval.
There is no restriction as to the specific location in which the trust agreement must be kept, and no specific format or phraseology that must be taken into account. In fact, the drafters possess complete authority to devise the relationship of the trustee and the beneficial owners however they desire.
For example, the voting rights of the trustee or the beneficial owners may be expanded, limited or eliminated with respect to any matter relating to the trust, such as investment decisions or distribution decisions (See 12 §3806).
This provides greater flexibility than common law trusts and most alternative forms of business organizations, which often have mandatory provisions on such matters as voting rights and dividend distribution.
The Delaware Statutory Trust Act (DSTA) states the trust is a separate legal entity and no creditor of a beneficial owner has any right to obtain possession of any of the property belonging to the trust (See 12 §3805(b)).
The DSTA also states that a beneficial owner has no specific interest in the property of the trust (see 12 §3805(c), and the beneficial owner may not terminate the trust except in accordance with the private trust agreement (See 12 §3803).
Thus, other beneficial owners of the trust are protected against any beneficial owner filing for bankruptcy or divorce, or undergoing any major life change.
Beneficial owners can have the same limitations on personal liability for the entity as shareholders of a Delaware corporation (See 12 §3803); that is, beneficial owners may participate in management, or effectively control the statutory trust by directing the trustees, without taking on any personal liability (See 12 §3806(a)).
Beneficial owners may transfer their interests to others, unless prohibited or limited by the trust agreement. Transferability will be permitted by the courts unless specifically limited in the trust agreement (See 12 §3805(d)).
Generally, the entity has two types of participants—trustees and beneficial owners. The trustee holds the legal title to the assets of the trust but is obligated to follow the terms of the trust agreement in managing these assets.
The beneficial owners hold equitable ownership and they, too, are governed by the terms of the trust agreement as to their ability to manage, control or utilize the assets.
Trustees and beneficial owners cannot be held liable for their good faith reliance on provisions of the trust agreement (See 12 §3802). At least one trustee must be a resident of Delaware, which can be satisfied by naming a Delaware trust company or by forming a Delaware corporation to act as the trustee (See 12 §3807).
Under the United States' Internal Revenue Code, a business trust may be treated as a grantor trust, a partnership or an association, just as a corporation, depending on the wording of the trust agreement.
With check-the-box regulations in place, it is possible for a statutory trust to elect which type of tax structure under which it wishes to operate. Further, non-resident alien beneficiaries of self-settled trusts are not required to pay any income tax to or file any tax returns with the United States. See 26 CFR Section 1.6012-1(b)(2).
A Delaware statutory trust may qualify as a REMIC (Real Estate Management Investment Contract), a REIT (Real Estate Investment Trust), or a Regulated Investment Company, such as a mutual fund, under the IRC and receive preferential tax treatment.
Mutual funds set up using a Delaware statutory trust may not be required to hold annual shareholder meetings or allow shareholder votes on any matters.
Delaware statutory trusts are often utilized for financing commercial airliners. The trust holds the title to the plane, which is managed administratively by a Delaware trust company. The airline is the beneficial owner, which uses and maintains the plane while paying a lender, who makes a return on the investment.
This type of arrangement is sometimes called a leveraged lease; this way, none of the three possess responsibility for the plane itself, should an accident occur. This type of entity illustrates how much flexibility is permitted while still protecting the parties under a statute which respects their trust agreement and the good faith management decisions of the parties involved.
Picture this: you have gone into business with your best friend. No matter how close you are, how long you have known each other and how perfectly you have put together your business plan, you must consider a business partnership a marriage. Every spouse, and every business partner, begins the relationship with the expectation of a long and fruitful relationship, yet this can be a somewhat naïve assumption. Therefore it is best for all parties involved if you are prepared for the possibility of an irreconcilable breakup. In the case of a marriage, this preparation is called a prenuptial agreement; in the case of a business venture, the preparation is called a buy-sell agreement or, a bit more caustically, a shotgun clause.
If you are forming a corporation with your best friend, your buy-sell agreement would typically be included in the Shareholders Agreement or the corporate bylaws; if you are forming an LLC with your best buddy, the buy-sell agreement is usually found in the LLC Operating Agreement. While the buy-sell agreement can be customized for more than two partners, the typical agreement is between two parties. Essentially, a buy-sell agreement allows for one of the partners to offer to buy the other partner’s share of the business for a specific price. This price is set by the partner executing the clause. The other partner has the opportunity to either accept the cash offer or buy the other partner out for the exact amount. The period of time in which the transaction is to be completed is stipulated in the buy-sell agreement ahead of time. The response time is typically short, somewhere in the neighborhood of 20 to 40 days. If you and your friend cannot effectively communicate in order to split the business fairly and hostilities are mounting on a daily basis, then at this point it may be best to end the business (and, unfortunately and inevitably, personal) relationship as soon as possible.
This is obviously not an ideal situation. However, if all avenues of disagreement resolution have been exhausted, the buy-sell agreement exists so that one of the partners can execute it in order to avoid the financial (not to mention emotional) distress of potentially acrimonious actions. Once the falling-out occurs, the hope is that by dividing your mutual business quickly and equitably, the business itself will not be adversely affected.
Let’s look at a specific (but hypothetical) example: two close friends open a restaurant together, each agreeing to invest $50,000 of their own money. After they form an LLC, the friends (and now business partners) are able to secure a small business loan for an additional $100,000. In their LLC’s Operating Agreement, they stipulate the equity contribution and the fact that all profits shall be shared evenly. They also include a shotgun clause in the Operating Agreement, stipulating a 30-day response time should this clause ever need to be executed by one of the partners. Their restaurant does well at the beginning; however, business eventually flattens out. Minor disagreements that were easily resolved when their business was successful are now more difficult to resolve. Each partner still believes the restaurant will succeed—they tell themselves it is seasonal, or perhaps there are other economic factors are affecting sales. Stress levels rise as table reservations wane. Bills are piling up but business is dipping even lower. The partners, once best friends, reach the point where they rarely speak to one another. Tensions continue to escalate and the business begins to suffer. The solution is clear: the former friends and current business partners need to split up; just like in an unsuccessful marriage, their problems have become too big and invasive to tackle. Unfortunately, there are no corporate marriage counselors to assist in the reconciliation process. Finally, one of the partners offers to buy the other partner out for $60,000, per the buy-sell agreement. Although this seems like a fair price, both partners feel the true value of the investment is worth far more. However, once the shotgun clause has been triggered, there is no going back.
The danger of the shotgun clause is that everyone’s personal financial situations are not identical and, due to the short response time of the buy-sell agreement, one partner may possess a distinct advantage. Let’s add to our hypothetical situation: the partner executing the shotgun clause knows that the other partner has just extended himself financially by purchasing a new home, and thus cannot match the offer. This leaves the surviving partner with 100% equity in the business as well as the small business loan debt. Since it is typically difficult to secure financing for the purpose of responding to a buy-sell agreement, the surviving partner would be in serious financial trouble.
There are two lessons here: it is best to always carefully consider all the terms and ramifications of your buy-sell agreement, which can make your Shareholders Agreement or Operating Agreement infinitely more important (far too often this is an afterthought not given the attention it deserves). If you choose to include a shotgun clause, keep the Latin phrase Praemonitus, Praemunitus in mind: it means “forewarned is forearmed.” As for the second lesson? As Mario Puzo, author of the The Godfather series succinctly put it, “Friendship and money: oil and water.”
Unfortunately, companies sometimes run their course and no longer yield any profit for their owners.
When that happens, you need to take care of a few important steps.
What Will You Need to Close a Company?
When your company was originally filed, a Certificate of Formation/Certificate of Incorporation was submitted in order to create the new entity. When it is time to close a company, a document is filed with the Delaware Division of Corporations; this document is called a Certificate of Dissolution for corporations, and a Certificate of Cancellation for LLCs.
How can we help you close your company?
We can make the process of closing your company as simple as possible. All you need to do is call us at 800-345-2677 or email us and we'll take it from there. We can prepare and file all the necessary documentation for you.
Before we can proceed with the filing of the documents, however, all your company's Franchise Taxes must be paid, including the current year. We can prepare a Certificate of Dissolution or Certificate of Cancellation for your signature and forward it to you via fax or email.
It must be signed by the authorized person of the LLC or an appropriate officer of the corporation. Once signed, simply return it to us by fax or email, and we will file the certificate with the state of Delaware within 24 hours.
The state typically takes 3 to 5 business days to return the receipt of filing. As soon as the approved document is available, we will forward it to you for your records. We strongly suggest clients speak with their accountant/tax professional before proceeding with a dissolution or cancellation of a company. Once the filing is approved, it is difficult to undo.
If your company has a bank account, you should close the account before filing the Certificate of Dissolution/Cancellation. If you have filed taxes with the IRS, you will need to file a closing tax return after filing the Certificate of Dissolution/Cancellation, and attach a certified copy of the certificate to your final tax return.
Please call us at 800-345-2677 or email us for more information on how to close a company.
The “Close” in Close Corporation should be thought of as an abbreviation for “Closely Held Corporation.”
Close Corporations are often operated by a single person or a small, tight-knit group, such as a family, and cannot have more than 30 shareholders.
The Delaware Close Corporation is an often-misunderstood entity type. Some people refer to it as a “Closed” Corporation, which is not accurate.
Other people refer to it as a C Corporation, which it can be, but a General Corporation can also be a C Corporation.
A General Corporation can have as many shareholders as it sees fit. With a Close Corporation, there are restrictions on the sale or transfer of stock. The sale or transfer of stock in a Close Corporation can be restricted by the Right of First Refusal clause.
Let’s look at an example in order to clarify.
Johnny, Larry and Sally form a Close Corporation. They authorize 3,000 shares and distribute them amongst themselves, equally.
After some time, Larry decides he wants to leave the company; in addition, he would like to sell his 1,000 shares to his friend Tony, who agrees to purchase them.
The Right of First Refusal clause can explicitly state that Larry cannot sell his shares to Tony unless Johnny and Sally agree they do not want the shares; they must also be in agreement that Tony is permitted to purchase the shares.
If either circumstance is not agreed upon by Johnny and Sally, then Tony cannot be issued the shares.
These types of situational agreements illustrate why it is typical for family-run businesses to form a Close Corporation. A General Corporation does not include a Right of First Refusal clause.
In this same example, had it been a General Corporation the three friends had formed, Johnny and Sally would not have had a say in whether or not Tony could purchase the shares from Larry.
If it were a General Corporation, Larry could have split up his shares and sold them to 1,000 different investors if he had wanted to do so.
Typically, most peoplewho are looking to raise funds and attract investors will choose the General Corporation as their business entity type.
However, when it comes to small, tight-knit groups, families or single-person businesses, the Close Corporation can often be the logical, strategic choice.
The Close Corporation, like the General Corporation, can elect to file for Subchapter S tax status by filing IRS Form 2553 in a timely manner (and if it has met all the other qualifications).
The individual shareholders must be United States residents. This filing allows the Close Corporation to enjoy pass-through taxation, similar to that of an LLC.
When it comes to Delaware Franchise Taxes, General and Close Corporations are taxed in the same manner.
Minimum stock General and Close Corporations pay $225 for the Franchise Tax and Report, while maximum stock General or Close Corporations pay a minimum of $400 for the Franchise Tax and Report, but this amount can increase based on the issued shares as well as the company’s gross assets.
Feel free to read more detailed information on Delaware Close Corporations here.
If you have additional questions on forming a Close Corporation, General Corporation, LLC or any other type of Delaware business entity, please call Harvard Business Services, Inc. at 1-800-345-2677 or email email@example.com.