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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.

How to Incorporate Your App Development Business
By Michael Bell Monday, September 22, 2014

HAppsere at Harvard Business Services, we are always ready to help answer any and all inquiries about our field. We recently came across a great question: "As an LLC, do we need to file a DBA for each web app/service we create? Or is it possible to brand each app service separately, but invoice and receive payment under the name of the parent company?"

For app developers, the latest trend is to file a Delaware LLC and then develop apps for Apple and Android smart phones. They do this for a number of reasons.

As an LLC, you gain instant credibility. You will find it easier to get your app into app stores as an LLC because you will have a company bank account and all the legal documentation. App stores are more likely to view you as a serious developer when "LLC" is appended to your business name.

To answer the above question, you can develop as many apps as you want under one LLC and name them all differently. This requires you to have only one account with each app store and consolidates all your payments into one account. However, you can give each app its own name and graphics.

Ready to form an LLC for your app? Here's how to incorporate your app development business: Simply visit our easy-to-use online order form and fill it out. That's it! If you have any questions, please call (1-800-345-2677), email, or live chat with us!

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Using Cost Structure Analysis to Maximize Profit
By Gregg Schoenberg Tuesday, September 16, 2014

cost structure analysisIt is advisable for small business owners to pay close attention to what happens to their profitability when they change either the amount of goods produced or the prices charged.  

 

A cost structure analysis is a good way to do just that. It helps you take an in-depth look at how a firm’s cost structure affects its optimal quantity of goods to produce.

 

Throughout our discussion, we’ll be referring to the chart below, and there will be some very simple math involved.

 

 

But if you stick with us, you’ll be rewarded with a powerful tool to help you gauge the quantity your business should be producing in order to maximize your profit.

 

Sample Cost Structure of Tasty Pizza Corp.

Employees Quantity Produced(Q) Fixed Costs (FC) Variable Costs (VC) Total Costs (TC) Marginal Costs (MC) MarginalRevenues(MR)

0

0

$1000

$0

$1,000

$10.00

1

100

$1000

$800

$1,800

$8.00

$10.00

2

280

$1000

$1600

$2,600

$4.44

$10.00

3

440

$1000

$2400

$3,400

$5.00

$10.00

4

580

$1000

$3200

$4,200

$5.71

$10.00

5

700

$1000

$4000

$5,000

$6.67

$10.00

6

800

$1000

$4800

$5,800

$8.00

$10.00

7

880

$1000

$5600

$6,600

$10.00

$10.00

8

940

$1000

$6400

$7,400

$13.33

$10.00

 

Let’s begin by defining the two types of costs that make up the cost structure of all businesses: fixed costs and variable costs. Our first, very simple, equation to remember is that Fixed Costs + Variable Costs = Total Costs (FC + VC = TC).

 

Fixed costs are those that must be paid regardless of how much your company is producing. In fact, they still must be paid even if you are producing nothing at all.  Rent is a fairly obvious example of a fixed cost.

 

Variable costs, as the name implies, vary according to how much you are producing. A very important variable cost is labor –if you want to make more stuff you will need to hire more workers– thus your labor costs will increase as your output rises.

 

Now let’s take a look at the table above to see how both fixed and variable costs affect the fictional Tasty Pizza Corporation’s (TPC) decision on how many workers to hire and thus how many pizzas it can bake. 

 

For the purposes of this example, we’ll assume that TPC’s variable costs increase by $800 each time it hires a new employee and that it is able to sell its pizzas for $10 each.

 

how to maximize profit

 

 

If TPC doesn’t hire any workers then it won’t be able to make any pizzas, so in order to cover its fixed costs it needs to bring some employees onboard. 

 

The key questions of course are how many pizzas it should produce and how many employees it should hire. 

 

In order to help us answer this question we need to examine a very important economic concept: marginal cost.

 

Marginal cost is defined as the cost to produce one additional unit of output, in our case one additional pizza. Mathematically speaking Marginal Cost = Change in Total Costs divided by Change in Quantity Produced (MC = Change in TC/Change in Q).

 

It is also important to understand the concept of marginal revenue, which is simply the amount of additional revenue generated by selling one additional unit (in our example marginal revenue is always $10 as each pizza sold brings in that amount).

 

In order to see how marginal costs function let’s take a look at what happens as TPC adds employees. With no employees TPC has $1000 in fixed costs but can’t produce any pizza.  Upon hiring its first employee, total costs increase by $800 and the number of pizzas produced jumps by 100, so the marginal cost per pizza is $8. 

 

Upon adding a second worker TPC can produce another 180 pizzas at a marginal cost of $4.44 each. As more workers are added beyond that, however, TPC’s marginal cost starts to increase. 

 

This makes sense because the first few employees are able to make good use of the company’s equipment to efficiently increase output, but as more workers join, the additional quantity of pizzas that they are able to produce is limited by other factors (if you hire one-hundred workers but still have only one pizza oven, all those extra workers aren’t going to be able to produce many more pizzas).

 

 

So how is a business owner to determine the ideal quantity of goods to produce? By remembering the following: profits are maximized when marginal revenue equals marginal cost (MR = MC).  In our example that takes place when TPC is producing 880 pizzas with 7 employees. 

 

harvard business services, inc.

 

If TPC produces any more pizzas, the marginal costs of those pies will be greater than the $10 in marginal revenue that the company can generate from selling them.

 

 

 

What holds true for Tasty Pizza Corp. holds true for all businesses: profits are maximized when MR = MC. This is a very important rule to remember when starting or expanding your business and demonstrates how crucial it is to accurately track all of your fixed and variable costs. 

 

 

While your business will likely be more complex than what we have drawn up in our example, a thorough job of accounting and bookkeeping can help you to produce a similar analysis of your firm’s cost structure and help you determine how much to produce and how many people to hire.

 

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Doing Business in Illinois with a Delaware LLC
By Devin Scott Monday, September 15, 2014

Doing business in Illinois with a Delaware LLC is very common. Since Delaware is known for having a favorable corporate law structure, it is often the most popular domestic choice for filing an LLC. If your Delaware LLC will operate or have a physical presence in Illinois, you will need to register as a foreign entity in the state. Here's how the process works.

Illinois will require an Application for Admission to Transact Business form, a certificate of good standing from Delaware, and a filing fee. Two copies of the application, the good standing certificate, and filing fee must be submitted at the same time to ensure the filing is not delayed. The time frame to receive the approved documents can vary and will often take more than a month. Please be aware that the application cannot be filed online. Once approved, a stamped copy of the application form will be returned to you by mail.

Keep in mind that the certificate of good standing must be no more than 60 days old or the application will be rejected. Illinois does require that you have a registered agent in that state, however clients will often act as their own registered agent if they have a physical address in that state. If you would prefer not to act as your own registered agent, Harvard Business Services Inc. offers registered agent service in every state. A member or manager of the LLC will need to sign the application, but the signature does not have to be an original.

Publication of the application is not necessary unless specifically required by the county where your registered agent resides.

Once registered in Illinois, the state will require you to file an annual report. This report is due the day before the first day of your anniversary month. For example, if your filing date is May 5, you will need to file your annual report to Illinois by April 30. The cost of this report is $250.

In addition to the Illinois annual report, a Delaware LLC must also pay the annual Delaware Franchise Tax and Delaware Registered Agent Fee to remain in good standing.

If you would like our assistance in handling the entire foreign qualification, we would be happy to help! Harvard Business Services will prepare the application, obtain the certificate of good standing, pay the state fee, and even walk it in to ensure it is approved in a timely fashion. Often we get the documents approved and returned to our clients in seven to 10 days.

For assistance in registering your Delaware LLC to operate in Illinois, please call 1-800-345-2677 x6130 or email devin@delawareinc.com.

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10 Tips for Family Business Succession Planning
By Elena Volkova Monday, September 8, 2014

Family business succession planning can be one of the most emotional and difficult business deals you may ever take on.

What makes a family business unique is also what makes these business transitions the hardest. Business owners are less likely to wear their "business hat" and more likely to wear the hat of "dad" or "aunt," when family is involved.

Which means sometimes, the business depends more on trust, care, and family dynamics than on solid legal structures.

And that's lovely, but if you don't have the same legal structures in place that other businesses have, your trusting and caring family business may eventually hit some speed bumps that may not only hamper your business success, but could also ruffle your family ties.

One area where I often see ruffled family ties and suffering businesses is when it's time for family business succession planning and the transition itself.

To plan properly for this type of transition, it's important to start early. By planning ahead, you can map out responsibilities, maintenance, customer and vendor relationships, and internal relationships, too.

Even if you aren’t planning on letting go of the reins just yet, you want to make sure you have something in place should the unexpected occur, or should you change your mind.

To help make this transition (current, or projected) easier, I have outlined my top 10 suggestions to help you streamline the process.

1. Think realistically about your expectations and goals.

As a business owner, you have put more sweat, blood and tears into your business than anyone else. Owning a business is like having a baby and watching it grow, but at a certain point, you might want to (or need to) let your business move on without you.

Ask yourself:

  • How long do you want to continue running your business?
  • What will happen to the business if the unexpected happens?
  • Who would I want to take over my business should I no longer want to, or be able to, run it myself?

Once you have a better handle on these questions, you will want to have a buy-sell agreement drafted by an attorney, which addresses ownership and control.

**If your business isn’t organized as a corporate entity, you will want to make sure to do so. This will make it easier to have formal structures in place and to plan for transitions.

2. Have honest conversations with those who you feel would be good for the role, and those who express an interest.

Just because you think that one of your next generation family members would or would not be a good match to run your business, does not necessarily mean that they are also game for your plans. Make sure to have candid conversations with those who show an interest, and those who you feel would be the right fit for your business.

And even though you're speaking to a family member or someone who has worked with you for years, be careful not to assume that they have the same vision for the future of your business as you. Include in these discussions the need for commitment and your long-term business goals, to gauge whether everyone is on the same page.

**One more important step to these conversations: Have all potential and interested parties sign a non-disclosure/confidentiality agreement, even family members, to protect any trade secrets.

3. Think carefully and critically about whom you will pass your business on to.

Make sure you weigh all the odds when deciding who will take over the family business. You want to make sure that the person who you select truly understands what it takes to run a business.

Before making a decision, you may want to consider whether they. . .

  • Love the business model
  • Are capable of being a boss
  • Understand the need for potentially working long hours
  • Are comfortable with managing relationships

. . . and more.

**Have an operating agreement drafted, which documents the scope of the transition. You should include all key issues in this agreement, including who will manage the business, when and how distributions will be made to the owner(s), and how disputes will be resolved, to name a few.

4. Be a teacher.

You will want to teach your successor family member the ins and outs of your business – and sooner rather than later.

Introduce them to your customers, employees, and vendors so that everyone has a chance to get to know one another before the transition occurs. Gradually allow the next generation to start managing those relationships and easing their way into their new role.

Additionally, make sure that the next generation is aware of their fiduciary responsibilities as owners. It is important to speak with an attorney about what fiduciary duties business owners must adhere to and how to document and handle any abuses of such duties.

5. Learn to let go.

After you have trained the next generation for a year or so, allow yourself time away from the business, whether it is a vacation, time home with family, or practicing a hobby you were too busy to enjoy before.

Make sure that you have delegated duties and responsibilities to the next generation and then give them some time to implement your teachings on their own. Refrain from checking in until you return. This will give you an opportunity to evaluate whether your successor family member is able to do the job without having you around.

Once you feel comfortable that the next generation is ready to take over the business, continue to include outside professionals, such as attorneys, accountants, bookkeepers and financial advisors, in the decision-making process. Make sure to introduce the next generation to your trusted outside professionals, so that they can reach out to them if you are not available.

6. Include the next generation in decision-making and implementation.

Ask the next generation for their input, especially when you feel stuck. This will allow for fresh ideas and new energy to seep into your business, and also gives the next generation a larger stake in the company.

If the next generation is asked for input, they will feel more connected and valued, and will in turn become more invested in the company, too.

**Make sure to keep written records of any new ideas, decisions and implementations, and incorporate them, as necessary, in your operating agreement.

7. Think about the business' long-term financial plans.

If you are in a position to do so, set aside financial resources for the business. This will provide a nest egg for the next generation – and will also put your mind at ease should your business take an unexpected turn.

**Have an estate plan for your business drafted, which might include setting up a trust or other vehicle for your business.

8. Walk away – gradually.

Just because you have started the transition to the next generation, does not mean that you must immediately move on from your position as business owner. In fact, it makes most sense for you to walk away gradually, easing yourself out slowly so that the transition is smoother.

You want to make sure that your customers, employees and vendors feel comfortable with the next generation before you leave, and so slowly hand over those relationships to your successor family member.

9. Make yourself available.

Make yourself available, not only to the next generation, but to your customers, employees and vendors, just in case there are questions or concerns that you might be best able to deal with. You don’t want anyone to feel like they have been left in the dark.

10. Get your legal house in order.

Aside from the emotional and practical side of handing over a family business, you want to make sure that all of your legal documents are properly drafted and executed.

Speaking with a financial advisor and a business attorney will help you make sure you have the proper legal structures in place for a smooth transition.

Moving on is never easy, but planning for the future makes the transition so much easier. Even if you aren’t planning to pass on your business anytime soon, thinking about how and when you will pass on your family business to the next generation is powerful for all family-owned businesses.

For more information, please contact Elena Volkova of Roizin & Volkova Law Group, a corporate and trusts and estates law firm that focuses on business succession planning for family-owned businesses.

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The Delaware Public Benefit Corporation
By Brett Melson Tuesday, September 2, 2014

A new state law in the state of Delaware allows companies to incorporate or reincorporate themselves as Public Benefit Corporations, rather than the traditional General Corporation. The Delaware Public Benefit Corporations, or PBC’s, enable business leaders to consider public interest and societal impact in addition to profit when making business decisions.

“We’ve all heard about corporations wanting to ‘do well’ while also ‘doing good.’  With this new law, Delaware corporations have the ability to build those dual purposes into their governing documents,” said Governor Jack Markell.  Markell says there’s not only a market need for these businesses, but also a societal need.  He noted the amount of investment funds for socially responsible investing has jumped by more than 20% over the past few years.

Businesses forming a PBC will be formed in the same manner as any other corporation formed under the Delaware General Corporation Law. The coporate ending can be one of the following:

  • Public Benefit Corporation
  • PBC 
  • P.B.C.
  • Association 
  • Company 
  • Corporation 
  • Club 
  • Foundation 
  • Fund 
  • Incorporated
  • Institute
  • Limited
  • Society
  • Union 
  • Syndicate
  • or abbreviations thereof, with or without punctuation, or words that are recognized corporate endings in other countries.

Also, they must identify at least one public benefit supported, such as an educational, environmental, or cultural cause. PBC are then required to outline their efforts to that cause every two years in a statement to stockholders.  Because of Delaware’s unique role in corporate America, the new law allowing creation of PBCs is a welcome addition to the state’s long-standing leadership in the development of corporate law worldwide.  Delaware is home to more than 60% of the country’s publicly traded companies and 61% of the Fortune 500 companies.

“For Delaware to take this step sends a very strong signal to the business community throughout the country, and frankly, throughout the world that this kind of company is recognized by the premier jurisdiction for corporate law in America as something that is a good thing,” remarked Delaware’s Secretary of State Jeffery Bullock.  Allowing PBCs in the state will have a ripple effect internationally.

With benefit corporations, investors and consumers have another tool to identify purpose-driven companies which meet higher standards of transparency and accountability.  Investors increasingly look to use their investments both to make money and to make a difference.  A growing number of consumers show a preference for making purchasing decisions based upon their sense of a company’s social and environmental responsibility.

Companies wanting to form, convert, or merge into a Public Benefit Corporation can do so via our easy-to-use order form (simply select "Public Benefit Corporation" under "Company Type") or over the phone at 800.345.2677.

 

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