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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.

LLC Operating Agreement: Family Business
By Brett Melson Tuesday, November 3, 2015

 

How an LLC Operating Agreeement Works for a Family Business

 

A Delaware LLC can be very flexible when it comes to preserving ownership in the family business you've worked so hard to create.

 

In fact, an LLC has the potential to preserve ownership for future decades. 

 

llc operating agreement for a family business

In an LLC, the members are free to organize the LLC in whatever manner they choose.

 

Members possess near-total freedom to define the relationship among the members and the terms governing the operation of the entity.

 

The fundamental terms of an LLC’s ownership, operation and management are set forth in its LLC Operating Agreement.

 

Click here if you would like to view a multi-member LLC Operating Agreement template

 

The LLC Operating Agreement not only governs terms such as sharing of income and liabilities, it also sets forth the terms governing the liquidation of the entity and the replacement of members

 

An LLC does not have a fixed life term, thus it can remain in existence even after the death of one or more members. A carefully drafted LLC Operating Agreement can help to ensure a smooth transition of control after the death of a key member, making the LLC an excellent option for preserving ownership in a family business.

 

The LLC Operating Agreement allows control over the LLC and its assets, allowing both to be passed along to surviving family members.

 

Here is how an LLC Operating Agreement works:

 

  • The initial members, who are often the founder(s), form and file the LLC and appoint themselves as Class A members within the LLC's Operating Agreement. These Class A members possess all rights and responsibilities for managing the assets/ownership of the LLC.

 

  • The Class B members are tyipcally the offspring of the founders; these family members initially have no responsibility or rights in the LLC.  When all the Class A members have passed, these Class B members become the Class A members, which then grants them all the rights and privileges associated with Class A member status.

 

  • The Class C members are a dormant class. Class C members possess no responsibility or rights in the LLC until the passing of both the Class A and Class B members. New classes of member interests can be established at any time, so the Class B or Class C members can, when they ultimately obtain control over the LLC, create additional classes to continue the chain of ownership and control over the LLC for future generations.

 

It is important to remember that an LLC Operating Agreement is not filed or otherwise disclosed to the state of Delaware or the Delaware Division of Corporations, nor is it part of any public record

 

Thus, you can maintain the confidentiality of family affairs in perpetuity if you'd like.

using llc operating agreement for family business

This is just one way to structure a Delaware LLC in order to pass a family business from one generation to another.

 

Please remember to consult with your estate tax advisor when you set up an LLC for succession planning.

 

If you'd like to form an LLC or you have questions about an LLC Operating Agreement, please feel free to contact us by phone at 800-345-2677 or by email.
 

 

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2015 Year-End Savings | Harvard Business Services, Inc.
By Michael Bell Sunday, November 1, 2015

Year End Discount

With the holidays upon us and a new year just around the corner, Harvard Business Services, Inc. wants you to know that now is the time to form your own company. We are offering a year-end discount on all formation packages, and this year’s discount is unlike any previous year. From November 1, 2015 through December 31, 2015, we will be offering $50 off all Delaware formation packages.

The discount will be available starting November 1, 2015 at 12:00 AM ET and will expire December 31, 2015 at 11:59 PM ET. To apply your discount, simply enter the word “Harvard” when filling out our online order form.

All of our packages are all inclusive pricing and include the following:

  • Name check and clearance
  • Certificate of Formation/Incorporation
  • Preparation of Articles
  • All Delaware filing fees
  • Same day electronic filing
  • Registered Agent fee, 12 months
  • Email of approved documents
  • Free shipping & handling
  • Free lifetime customer support
  • And much more!

To view and compare all our formation packages, visit Our Services page.

Why not end 2015 and start 2016 on a high note by starting your own business? Harvard Business Services, Inc. offers free lifetime customer support and is ready to assist you via phone, live chat, Skype or email.

 

 

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How to Run a Shareholder Meeting
By Jeremy Reed Tuesday, October 27, 2015

how to run a shareholder meeting

New business owners who form a corporation often wonder how to run their shareholder meetings.

 

Here are answers to common questions about shareholder meetings.

 

Do I have to hold an initial shareholder meeting?

 

Yes. Delaware law requires that every corporation must hold an initial shareholder meeting. The main business of the initial meeting is to elect a Board of Directors and approve the bylaws.

 

Do I have to hold annual shareholder meetings?

 

Yes, again. Delaware law requires every corporation to hold an annual shareholders meeting at least once every 13 months. Generally, the date of the annual meeting is contained in the bylaws of the corporation. A meeting must be held, regardless of the number of shareholders in the corporation.  

 

What should I discuss at a shareholder meeting?

 

During the meeting, any number of topics can be discussed. It is imperative that, at the very least, the election of the Board of Directors is accomplished.

 

In order to have a legal meeting you must have a quorum of shareholders present. A quorum is defined as a representative of more than half of all shares outstanding.

 

There are many other items that can be included on the agenda for an annual shareholder meeting. The election of officers can be submitted by the Directors at shareholders’ meetings.

what to discuss at a shareholder meeting

The appointment of a corporate attorneys and/or accountant is also a typical agenda item.

 

Dividend distribution can be debated, but dividends must be proposed by the Board of Directors and then approved by the shareholders. You can also discuss capital improvements and debt obligations.

 

Shareholders can play a role in what is discussed at the annual meetings by writing the Board of Directors beforehand with their suggestions. Shareholders should remember that it is their right to elect the Board of Directors. Then the Board of Directors sets the direction of the company.

 

When should I hold a shareholder meeting?

 

An annual shareholder meeting is typically scheduled just after the end of the fiscal year. This allows for the previous year’s financial performance to be fully assessed and discussed.

 

The timing also allows for any newly elected officer and director information to be collected and made available for the Delaware annual report filing, which must be submitted by the March 1 deadline.

 

What else am I required to do at a shareholder meeting?

 

Minutes of every shareholder meeting must be recorded by the corporate secretary, which should include where and when the meeting is held, who is in attendance at the meeting and any significant actions that are voted on or taken at the meeting.

 

The meeting minutes should be approved by a majority vote of the shareholders present at the next meeting and maintained in the corporate record book and available for review when necessary.

 

We are available to help with any questions you may have about a Delaware corporation; however, we are not attorneys and cannot give legal advice. If you need legal advice, please contact a lawyer familiar with Delaware corporate law.

 

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Change Your Company’s Number of Authorized Shares
By Devin Scott Monday, October 26, 2015

change your company's number of authorized shares

One of the questions you’ll be asked when incorporating a Delaware company will be, “How many authorized shares would you like?”

 

This question is important because authorized share information is listed on your Certificate of Incorporation and filed with the state of Delaware.

 

The answer to this question will affect your annual Franchise Tax as well as your ability to receive investment funds by selling shares of stock. Most companies, when starting out, will keep the number of authorized shares and par value very low.

 

The most common amount we see is 1500 shares at .01 par value. This allows the company to pay the minimum annual Franchise Tax, and it is beneficial to start-up companies that may not have a lot of income and therefore need to minimize expenses.

 

As the company grows, it is typical for a company to amend the number of authorized shares.

 

Let’s look at a specific scenario:

 

Bob forms a corporation in order to start an online retail site for a new type of salt that makes any food healthy. He would like the company to be called Bob’s Healthy Seasoning, Inc. Bob has limited funds and is the company’s sole employee.

 

He is concerned about the cost of his annual Franchise Tax so he chooses a low number of authorized shares, which allows him to pay the minimum Franchise Tax.

 

He chooses 5000 authorized shares because it is the most shares he can authorize yet still pay the minimum Franchise Tax. Three years later, Bob has an office and 10 employees, and he has issued some of the shares to different investors in order to gain capital.

 

His business is growing, and Bob needs more capital. He decides he needs to authorize more shares in order to attract more investors and obtain more capital so he can upgrade his computer system, buy larger office space and hire more employees.

 

change number of authorized shares

 

He contacts his Registered Agent and requests to amend the number of authorized shares from 5000 shares, which will allow for more investors. Bob creates a separate class of 1,000,000 shares. Now he can use these additional shares, even though they are of a different class with different voting rights, to raise additional funds.

 

He also decides to change his company name, as it now not only creates seasonings but also sauces, dressings and juices.

 

Bob files a name change amendment, renaming his business Bob’s Healthy Everything, Inc. Now his company has a new name and a new amount of authorized shares, but it is the same company.

 

This scenario is very common in business. Take Facebook, Inc. for example. When Facebook, Inc. was formed in 2004, the company started out with 100,000 authorized shares and its original name was The Facebook, Inc.

 

Since 2004, Facebook has made approximately 18 amendments to its Articles of Incorporation. Some of those amendments include changing the number of authorized shares and changing the name from The Facebook to Facebook.

 

Changes like these, especially increasing the amount of authorized shares, are not uncommon.

 

Facebook now has 5,000,000,000 common class A shares; 4,141,000,000 common class B shares; and 100,000,000 preferred shares. Quite an increase for a company that started with 100,000 authorized shares.

 

These are just two examples of how companies grow and need to make changes to their Articles of Incorporation. Goals are achieved, the market changes, customer interest changes and investor demand changes are all reasons why companies have to adapt.

 

Whether your company needs a small change, such as a name change or an increase in authorized shares, or a major change, such as a merger, amendments can be made to your company’s original Certificate of Incorporation.

 

 

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Dangers of Being Your Own Registered Agent
By Amy Fountain Tuesday, October 20, 2015

being your own registered agentIf you are forming a Delaware company and also happen to live in Delaware, then you may find yourself in a unique situation. Every company (no matter what type of business entity) formed in Delaware is required to have a Registered Agent in this state. Therefore, if you have a Delaware address, then you or the business entity could perhaps act as the Registered Agent for the new company. Sound like a good plan? Well, not so fast. 

The Delaware Secretary of State has a list of requirements for Registered Agents in the state of Delaware. First and foremost, the Registered Agent must maintain a physical address in this state; thus, a Delaware post office box is not an option if you want to qualify as your own Registered Agent.

Furthermore, the Registered Office location must be staffed and open for business at reasonable times (generally considered 9 AM to 5 PM, Monday through Friday) in order to accept any potential service of process served upon the entity it represents. Thus you couldn’t (hypothetically) rent empty office space in order to act as your company's Registered Agent. The Secretary of State takes the matter seriously and actually visits Registered Agent offices to investigate the validity of their existence. On several occasions, the Secretary of State has imposed sanctions on fictitious offices it has discovered. In addition to the likely sanctions, you need to consider the cost factor of renting office space versus just paying an annual fee to a Registered Agent. The latter is much more cost-efficient.

Let’s say you are a Delaware homeowner and want to act as a Registered Agent for your new entity. When you form the company, you list your home address as the Registered Agent office. Since the initial corporate documents are public record, your home address is now available to anyone who performs a search of Delaware companies. Now you have potentially opened yourself to mass market mailings, spammers, sales people and telemarketers. 

Every year, the Secretary of State sends one, and only one, written notice to the Registered Agent regarding the entity’s annual Franchise Tax fees.  It is mailed approximately three months before the due date. How easy is it to misplace or forget about that single piece of paper? If the payment is not received on time, the state will levy a late penalty, plus interest. If you contact the office and tell them you cannot find your original notice, the state representatives will not make any reductions or waivers on the outstanding fees. You will still owe your Franchise Tax, the late penalty and the interest.

What if you are acting as your own Registered Agent and need to update your address with the Secretary of State? You would need to file a certificate with the state office and pay a filing fee upwards of $50. You have to deal with the hassle of filing paperwork with the state and sending more money, simply because you moved and need to update your address. This is the biggest complaint from people who act as their own Registered Agent; think about how many times an office's address can change over the lifetime of a business. Each time, you will have to undertake a significant amount of additional work and pay extra money to let the state of Delaware know so it is aware of your current mailing address, on top of the other numerous burdens involved with moving.

Instead of going through all these hassles, you can enlist the services of a reputable and established Registered Office in the state of Delaware, such as Harvard Business Services, Inc.  We have standard business office hours and a Mail Center staffed with several personnel to accept any service of process that may arrive for an entity.  Also, your entity’s documentation will list our Registered Agent address on file with the state of Delaware rather than your home address and personal details.

We realize that one written notice in regards to an important annual bill, such as the Franchise Tax, is simply not enough for most people.  Therefore, we send multiple reminders via email and regular mail in order to ensure that our clients have ample time to make payment arrangements. What happens when your entity is registered with Harvard Business Services, Inc. and you need to make an address change? Not a problem. Simply contact our office and provide us with the new details so all future notices and correspondence are sent to the proper address. 

The reality is that it can be less of a hardship to form a company with a Registered Agent as opposed to trying to act as your own agent. 

 

 

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