The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, start-ups and general business topics.
You’ve set up your new Delaware corporation, obtained the EIN (also known as a Federal Tax ID Number), opened the bank account, elected the Board of Directors and appointed the officers—what’s next?
Often, the most exciting time for a new Delaware corporation is when the day arrives to issue stock certificates.
Whether you’re looking to raise capital, go public or attract investors, traditionally, ownership of the corporation is displayed by issued shares of stock.
When you file your Delaware corporation with us, we provide the tools necessary to help with the issuance of shares. A Deluxe Corporate Kit is Included in our Standard package; the Corporate Kit includes customized stock certificates, a stock transfer ledger and a handheld corporate seal.
Each stock certificate is individually numbered and includes a space for the number of shares, the name of the new shareholder, the signature line for the president and corporate secretary authorizing the shares and the designated area in which to place the corporate seal. This information can be handwritten, or input as a PDF, then printed directly on the stock certificate.
The stock transfer ledger will help with the documentation of the transaction, including the name of the shareholder, the address, the time and date of the sale, the certificate number, the number of shares issued, the issuer of the shares and the amount paid.
Keeping up-to-date records on both the issued shares and the shareholders is invaluable when it’s time to file the annual report for the Delaware Franchise Tax. It can also help settle any disagreements, should any disputes arise in the future.
The handheld corporate seal, which is the official signature of the corporation, includes the company name, the year and the state of Delaware. We now also include a digital corporate seal for all our clients as an alternative, which is a point-and-click version of the traditional handheld style, allowing for it to be on multiple computers in different locations.
If you have questions about stock certificates for your new Delaware corporation, contact any of our friendly customer service representatives today via phone (1-800-345-2677), email or live chat.
We’ve formed and filed Delaware LLCs and corporations since 1981, but we’re always interested to learn how other experts approach our industry. Some business owners, for example, choose to consult an attorney or accountant before incorporating a company. Curious to know what these experts typically advise, we asked several accountants and attorneys the question, "When would you recommend that your client use a Delaware corporation or LLC instead of their home state?" Here are some of the answers we received:
“Delaware LLCs offer legal advantages that other states don't. If the entity is multinational, we do recommend Delaware as the state of formation over others (like CA or NY which are popular but impose minimum taxes even if there's no activity or even losses).”
— Belfint, Lyons & Shuman, P.A., http://www.belfint.com/
“We tend to recommend a Delaware incorporation when minority interest can cause management issues for owner managers as Delaware has some of the best law on takeovers.”
— David Banerjee, CPA, http://www.davebanerjee.com/
“We generally recommend Delaware if the person has an online company or a company with no brick and mortar office/store in their home state. Having what the IRS refers to as ‘permanent establishment’ in a state will likely make you taxable in that state, so setting up a Delaware company has a minimal effect on the taxes. However, if the company is online, Delaware being a no tax jurisdiction can essentially prevent personal income tax owed. We also recommend Nevada and Wyoming for this strategy, however Delaware has the most case law which would be of help in outlining precedent if there was eventual litigation.”
— Vincenzo Villamena, CPA, Online Taxman, www.onlinetaxman.com
“…If [a] client anticipates a need for a speedy judicial process. Delaware courts are corporate-friendly and have a well-developed body of corporate case law.”
—Chris Wojcicki, attorney and CPA http://www.wojco.com/
“Incorporating in Delaware makes sense if the client will be seeking venture capital from larger [venture capital] firms who require DE organization, or, perhaps too, if the client has extreme dramatic growth trajectory that is known in advance of entity formation (not mere projections).”
—Barry Wormser, attorney, www.wormserlegal.com
“Lawyers typically choose Delaware entities for a number of reasons. The first reason is that Delaware has a rich and well developed body of law with respect to business entities. Accordingly, if, during the life of the entity, an issue pops-up, it is more likely that you will find guidance in Delaware on how to handle the issue. Second, it provides a great compromise for people from different jurisdictions forming a company together. It is perceived as a "neutral" jurisdiction in many circumstances. Finally, if the company's plan is to go public within 5 years or so, it is my understanding that most venture capital and other investors prefer to work with a Delaware corporation as a vehicle for investment or public offering.” —Kurt E. Anderson, Esq., http://www.ghclaw.com
This information is not be construed as legal or accounting advice. If you have more questions and how they apply to your business, please feel free to reach out to any of the listed experts for more information.
Have you heard about the Delaware quarterly Franchise Tax? Any Delaware corporation with a Franchise Tax liability for the previous year of $5,000 or more must pay quarterly installments based on the prior year’s assessment.
Corporations responsible for the quarterly Franchise Tax must pay the first installment, which is 40 percent of the assessment, by June 1. The second and third installments are 20 percent of the assessment and are due Sept. 1 and Dec. 1 respectively. The remainder of the tax is due no later than March 1 following the close of the calendar year.
For example, let’s say a corporation paid $10,000 for the 2014 Franchise Tax. The first quarter amount due would be $4,000 by June 1, 2015. The second and third quarter amounts would be $2,000 each, due by Sept. 1 and Dec. 1, 2015.
The corporation would then file the 2015 annual Franchise Tax report by March 1, 2016. The quarterly payments made throughout the year would be applied towards the balance due.
If at any time during the year the corporation needed to obtain a Certificate of Good Standing, the outstanding quarterly Franchise Tax amounts would have to be paid first. The state of Delaware will not issue a Certificate of Good Standing to any entity that has a quarterly Franchise Tax balance.
Currently, the state of Delaware does not accept online quarterly Franchise Tax payments. You need to contact your Registered Agent for support or work directly with the state of Delaware.
We will gladly assist a corporation in filing quarterly Franchise Tax payments to ensure that an entity is in a good standing status. Give us a call at 1-800-345-2677, Ext. 6904 or send us an email at firstname.lastname@example.org with any questions you may have regarding the Franchise Tax fees for your Delaware corporation.
This saves you the time of having to put a document in the mail, and then waiting for the state to receive it. However, what do you do if you are on the road and have to sign and send a document?
You may not have access to a computer, printer, or fax machine.
Solution: the conformed signature.
The state of Delaware does, indeed, accept conformed signatures. A conformed signature looks like this:
/s/ John Doe.
Just type /s/ before your name on the signature line, and it will be acceptable by us as well as the Secretary of State of Delaware. This can help save you time, as it avoids the need to print out a document, sign it and then fax it back.
You can also save time by using the conformed signature from their smartphone while on the go. Most smartphones will allow you to check your email, open the attached document, and type in your conformed signature in seconds.
This way you can send that document back to the appropriate party without having to print it out.
Services that often require a signature, such as name amendments and stock amendments, can now be initiated more efficiently by using a conformed signature. There are other states that also accept the conformed signature for certain services.
Please call 1-800-345-2677 to find out if the service you require qualifies for the conformed signature.
Keep in mind that the IRS does not accept the conformed signature, so all SS4 forms and tax returns will still need to be printed, signed and sent in.
As a Delaware Registered Agent, our mailing address cannot be used as your company's physical address.
We can file your business entity with the state of Delaware; however, we need a mailing address on file so we will know where to send correspondence we may receive on behalf of your company from the Delaware Secretary of State.
We also need a physical address, if different than your mailing address, in case we receive service of process for your company.
Obtaining and having an address for your company’s contact person is mandated by Delaware law. Your information is not provided for public record.
When applying for an EIN, the IRS will ask for the physical location of the business. Again, do not use our address for this application. The IRS does not want third party addresses when asking for a company's physical location; it would like to know where the business is physically located.
This can be an address anywhere in the world. If the business is an internet business, the IRS still requires a physical location of your business. The IRS also gives an option of adding a separate mailing address, i.e., P.O. Box, if necessary.
For many start-ups, it is not uncommon for a physical business address to be a home address, whether temporarily or permanently. More often than not, leasing or purchasing office space is not in the budget, or even necessary, to begin.
Remember, the state and federal governements define a physical address as the address where a person or organization can be found.
Alhough we cannot provide a physical location for your company, we can provide a physical mailing address. Once you have set up your business entity, you have the option of signing up for our mail forwarding service.
This will not change the physical location of your business, but it does allow you to use your company name along with our mailing address in order for us to receive your mail (at our address) and resend it to the address of your choice.
We offer both domestic and international mail forwarding services.