The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, start-ups and general business topics.
Delaware’s reign as the nation’s number one place to incorporate is no secret, but what remains a secret to so many is the reason why it is number one.
Actually, Delaware’s “corporate crown” can be credited in large part to a court system whose roots reach back to feudal England.
In its infancy the Court of Chancery was set up by the King of England to hear matters where no law was in existence to settle some disputes.
Thus the King’s Chancellor was to hear the case and consider the fairness of the matter. This type of court does not exist in other legal systems and only three U.S. States have such a court.
A court of equity differs from a court of law; matters before the Court of Chancery are heard as bench trials meaning that they are tried before a judge, alone. Without juries, judges are left to make rulings considering all issues of fact and law.
For more than 200 years, the Delaware Court of Chancery has exercised exclusive jurisdiction over all matters and causes in equity in the State of Delaware.
The Court is comprised of one chancellor and four vice chancellors, all of whom are nominated by the Governor and confirmed for 12 year terms by the Senate. The five chancellors must all be well versed in law and must be Delaware citizens. The Delaware Court of Chancery has jurisdiction over a number of matters including commercial proceedings, real property, guardianship, and civil matters.
The majority of the litigation heard in today’s Delaware Court of Chancery consists of corporate, trust and estate matters. The most notable power of the Court is its ability to issue injunctions and temporary restraining orders, and is most frequently exercised in corporate differences over mergers or acquisitions.
A typical merger dispute will see a plaintiff seek temporary relief to preserve the status quo until a trial can occur. If the need should arise, the Court of Chancery may order issues of fact to be tried by a jury in the Supreme Court of Delaware.
With more than 200 years of judicial precedent, the Delaware Court of Chancery is hailed as the nation’s leading forum for settling corporate disputes, and is one of the most important reasons why Delaware is the most favorable environment for the world’s commercial affairs.
The state of Delaware is known for providing the best protection to members of a Delaware LLC and directors of a Delaware corporation. Business owners from all over the world form Delaware LLCs and corporations for this reason.
When a Delaware company is formed, the business is domestic to Delaware and foreign to every other state. If you are operating in the state of West Virginia with a Delaware corporation or LLC, your business is foreign to West Virginia.
The process by which West Virginia gives your Delaware company permission to operate there is called Foreign Qualification. Each state’s requirements when it comes to Foreign Qualification are different.
If you do not file for Foreign Qualification in West Virginia, your business will not be operating in compliance, which means you may be putting your company at risk.
To register as a foreign business entity in West Virginia, you will need to pay the West Virginia Secretary of State a fee as well as complete the West Virginia application for Certificate of Authority.
West Virginia also requires you to provide a Delaware Certificate of Good Standing. A Certificate of Good Standing is a document that Delaware uses to verify that you have maintained a Registered Agent in Delaware and are up to date with annual Delaware Franchise Tax.
Here at Harvard Business Services, Inc. we have a Foreign Qualification department to assist business owners with this necessary process. We will prepare the documents, obtain the Good Standing Certificate from Delaware, and email the documents to the client for signature.
A member or manager is required to sign the application for an LLC, and a director is required to sign the form for a corporation. We will file the application directly with the West Virginia Secretary of State.
On the application, West Virginia will ask for your company’s Registered Agent in West Virginia.
The Registered Agent’s job is to receive any legal documents or service of process for your company and forward it to your company’s contact person.
We can take care of Registered Agent service in West Virginia for your company.
The typical turnaround time for Foreign Qualification approval is often five business days. You will then be sent your company’s Certificate of Authority.
If you have a questions about operating a Delaware LLC or corporation in West Virginia, please feel free to contact us at 1-800-345-2677, Ext. 6130.
Since the holidays are approaching, we have decided to extend our historic discount through the end of the year. This means that all business entity formation packages are discounted $100 throughout November and December of 2016.
All LLC, corporation and Limited Partnership formation packages will be discounted $100 starting November 1, 2016 at 12:01 AM ET and ending on December 31, 2016 at 11:59 PM ET.
To apply your discount, simply enter “SAVINGS” on our online order form.
All of our packages are all-inclusive pricing and include the following:
You can view and compare all our business formation packages on Our Services page.
We are ready to assist you if you have any questions. You can call our toll free number (1-800-345-2677), live chat from our homepage, email or Skype (Delawareinc).
One of the benefits of incorporating a company in the state of Delaware is the flexibility of the corporate structure.
Regardless of the reason you may need to amend your company stock, if you own a Delaware company, you possess the ability to quickly and easily make changes to your business entity’s charter in order to meet your needs.
You can increase or decrease the number of shares your Delaware company has authorized; you can also add or remove classes of stock and/or modify the par value of the stock.
For example, let’s say you and your business partner decide to start a new company. Since it’s just you two as owners, the ownership will be split 50/50, evenly. In order to keep things simple, your company initially authorizes 2,000 shares of common stock, and each partner receives 1,000 shares.
Now fast forward a couple of years to when your business is rapidly expanding. You both want to bring in additional people to be part of your company’s internal organization, so you’ll need to find a way to increase the number of your company’s authorized shares.
Perhaps you need to add another class of stock, such as preferred shares, so that the original owners will own the class of preferred stock while the new people can buy shares of common stock in the company.
On the flip side, if you had originally formed a company with 2,500,000 authorized shares because you were expecting numerous investors but, due to unexpected circumstances, your company didn’t flourish as you’d hoped it would.
You still want to keep the company, but on a much smaller scale; thus, you need to reduce the stock structure of the company in order to accommodate its current status.
Further to this example, a company with 2,500,000 authorized shares will receive a large Franchise Tax notice from the state of Delaware. The state uses one of two methods to calculate annual Franchise Tax Fees, and the first method, the Authorized Shares Method, is how the state always sends the notices.
Typically, you can file your company’s annual report via the Assumed Par Value Capital Method (aka the Alternative Method), and pay a significantly lower amount than via the first method. You can ascertain how much your company’s Franchise Tax fees will be via each method using our Franchise Tax calculator.
If you and your new team don’t want to bother with the calculations each year to try and pay a lower amount of Franchise Tax, you may determine it is in the best interest of the company to simply reduce the number of authorized shares, which will result in Delaware imposing a flat Franchise Tax Fee on your company each year.
In order to make stock amendments, you should first hold an internal company meeting and have any changes approved by the company’s appropriate authorities.
Next, file a Certificate of Amendment with the Delaware Secretary of State’s office. This Certificate indicates that an authorized officer of your company has authorized a change of the stock structure.
The new details of the number of authorized shares, classes of stock and/or par value should be listed on the Certificate. The document must be signed by an Authorized Officer of the company.
When the Certificate is filed with the Delaware Secretary of State, your stock amendment will officially become effective.
The important thing to remember is that, as the owner of a Delaware company, you are not limited in how many stock amendments can be filed for your business entity. You have the option to adjust the structure of your business as it develops and evolves.
An LLC Operating Agreement expresses the fundamental understanding among its members of the how the company will operate as well as the members’ respective rights and obligations, including such issues as voting, ownership and management rights.
The Operating Agreement is to an LLC what the bylaws (and shareholders agreement) is to a corporation. The most important question that should be addressed in an Operating Agreement is: What is the relationship involved?
An Operating Agreement between two equal partners, both of whom will be involved in the day-to-day operations of the LLC, will look very different from that of a company with one founder providing sweat equity or an LLC with multiple financial backers.
Classes of Interests
For various business, legal or tax reasons, LLCs may issue classes of LLC interests. Different classes may have differing rights with regard to any aspect of an LLC’s business or operations, including economic rights, voting rights and rights to distributions from the company.
Economic Rights & Distributions
The Operating Agreement may set forth how economic profits and losses are allocated among the members and how and when distributions will be made. The amount and timing of distributions can be set at management's discretion, required at established times or triggered by certain events. LLC Operating Agreements sometimes include both required and discretionary distributions.
The Operating Agreement may set forth how the LLC is managed. An LLC can be managed by one or more members; by a board of persons (composed of members and/or non-members); or by one or more appointed managers. Generally, management is responsible for strategic decisions and the day-to-day running of the business, subject to any predefined limitations.
Management-related provisions commonly found in an LLC Operating Agreement include:
Parties in an LLC Operating Agreement can waive or otherwise modify the traditional fiduciary duties of care and loyalty that may otherwise be imposed by default, as opposed to in a corporation. The practical effect of fiduciary duties is the subject of a significant body of case law, and language in an LLC Operating Agreement can be a primary determinant of the outcome of litigation among members of the LLC.
Raising Additional Capital & Admitting Additional Members
An LLC may require additional working capital in the future. The procedures for raising supplemental funds (either from existing members or by accepting new investors) are generally spelled out in the Operating Agreement.
Transfer of Interest or Withdrawal from LLC
An LLC Operating Agreement often describes when, and under what conditions, a member may transfer his/her interest in the LLC, including for estate planning purposes. Similarly, the Operating Agreement may set forth the process and permitted circumstances under which a member may withdraw from the LLC prior to its dissolution; however, such a withdrawal, if permitted, is frequently subject to significant conditions and limitations.
Often, a permitted transfer or withdrawal will trigger a right of first refusal, permitting the other members to acquire the interest at issue on such terms as are set forth in the Operating Agreement.
An LLC Operating Agreement often states the events or votes which will trigger the winding up and dissolution of the company, and typically details how any LLC assets will be distributed after the discharge of all its liabilities
Since the LLC Operating Agreement is the governing document in regard to how the LLC is owned, operated and maintained, it is a good idea to make sure it covers all matters that could come up throughout the life of the company.
As the LLC grows and adapts, so, too, can the LLC Operating Agreement. It can be changed or modified to suit the LLC’s growing or changing needs. Since the LLC Operating Agreement is not on file with the state of Delaware and therefore not part of the public record, it can be internally changed or altered at any time during the life of the LLC.
THE ABOVE ARTICLE IS NOT LEGAL ADVICE AND SHOULD NOT BE CONSTRUED AS LEGAL ADVICE. IT IS A GENERAL DESCRIPTION OF SEVERAL, BUT NOT ALL, ITEMS TO CONSIDER WHEN ASSESSING YOUR COMPANY’S OPERATING AGREEMENT. IT IS NOT AN ATTEMPT TO LIST ALL CONSIDERATIONS THAT MIGHT BE ADVISABLE BY AN ATTORNEY FAMILIAR WITH DELAWARE LLC LAW. IF YOU REQUIRE LEGAL ADVICE WE RECOMMEND THAT YOU ENGAGE THE SERVICES OF A LICENSED ATTORNEY.