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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.

LA Dodgers File for Bankruptcy in Delaware Court
By Devin Scott Wednesday, October 19, 2011

The Los Angeles Dodgers LLC, a company formed in Delaware in 2003, recently filed for bankruptcy. The LA Dodgers were purchased by Frank McCourt in 2004 for $430 million. McCourt’s family had previously been associated with real estate and construction in the Boston area. Before buying the Los Angeles Dodgers, McCourt bid to buy his hometown Boston Red Sox, but did not win the bid. Instead the Red Xox were sold in 2002 to John W. Henry, Tom Werner, and Red Sox President Larry Lucchino.

The purchase of the Los Angeles Dodgers by Frank McCourt was made using equity from some of McCourt’s previous real estate deals. Frank McCourt made many additions and improvements over the years and, according to Forbes, the franchise was worth $727 million in 2010. To finance these improvements, it seems the Dodgers raised ticket prices each year and pulled cash from other assets. The Dodgers' financial problems seem to have worsened last year, due to declining attendance and about $22 million in deferred compensation and revenue sharing.

McCourt blames Major League Baseball for not approving a TV deal with Fox Sports that was reportedly worth up to $3 billion. McCourt claims he has tried for almost a year to get Baseball Commissioner Bud Selig to approve the deal.

The Dodgers are the eleventh franchise to file for bankruptcy out of the four major sports leagues in North America. Only one team out the eleven has ever gone on to win a championship. This team, the Pittsburgh Penguins, have filed for bankruptcy twice. Some experts have said that once you file for bankruptcy once, you should then draft great players and file for bankruptcy again.

Delaware, a state known for its strong corporate law structure, is often the state in which companies not only incorporate but also, from time to time, file for bankruptcy (in Federal Court).  While bankruptcy is often an unfortunate situation, companies believe that Delaware will offer them better prootection than in any other federal district court. The Dodgers hope this bankruptcy will buy the team the time it needs to get back on track, secure another TV deal and return to business as usual.

 

 

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Baseball and Delaware Law
By Michael Bell Tuesday, October 18, 2011

How often do your two favorite subjects come together? Very rarely do mine: baseball and Delaware law. You may know what I am referring to when I say that, but in case you are not a sports fan, you may not know that the Los Angeles Dodgers, one of baseball’s more storied franchises, filed for Chapter 11 bankruptcy protection in a Delaware court this summer.

According to the bankruptcy petition, Los Angeles Dodgers Holding Company LLC, a Delaware company headed by Frank McCourt, is currently in financial hardship and carrying as much as $500 million in liabilities; thus it is unable to fund its current operations. "What Small-Business Owners Can Learn from the Dodgers' Financial Woes," an article published on entrepreneur.com, outlines the L.A. Dodgers' financial problems. Below is an excerpt.

A Boston real-estate developer Frank McCourt purchased the Los Angeles Dodgers in 2004 for $430 million. In a recent article from Jason Fell from Entrepreneur.com he said, “Despite the large size of the organization, the financial downfall of this storied baseball franchise can offer a number of important lessons for small-business Owners.

A Los Angeles-based bankruptcy attorney Leon D. Bayer, said “If this can happen to the Dodgers, it can happen to a small business.”

Bayer went on in the article to offer three big lessons small-business owners can learn from the Dodgers bankruptcy filing:

  1. 1.     Keep personal and business finances separate. Between 2004 and 2009, the McCourt family is said to have taken $108 million in personal distributions from the team to help fund personal mortgages and real estate. A business owner should never remove so much capital that a business cannot maintain its ongoing operations, Bayer says.
  2. 2.     Understand the power of a franchisor. Some franchise agreements contain "onerous provisions" that might make potential franchisees leery of buying in, Bayer says. In the case of the Dodgers, Major League Baseball Commissioner Bud Selig last week blocked a $3 billion television deal between the Dodgers and Fox. In a statement, Selig said McCourt's "ideas and proposals," including the deal with Fox, "have not been consistent with the best interests of baseball." 
  3. 3.     Don’t overstaff. Among the Dodgers' creditors (it has as many as 10,000, according to the bankruptcy petition), former slugger Manny Ramirez is owed the most at almost $21 million. Next up is another former player, Andruw Jones, who is owed more than $11 million. While baseball player salaries can be debated, the lesson for small-business owners is not to hire too many employees, and not overpay the ones you do hire, Bayer says.

What lesson can we all take away from this? Well, there are many, but the biggest one is that Delaware protects your personal assets in bankruptcy better than other jurisdictions. I will keep you posted on how it works out for the Los Angeles Dodgers.

 

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Common Delaware Annual Report Questions
By Amy Fountain Wednesday, October 12, 2011

If you have an incorporated company, then you probably are filing some type of annual report with your state government on yearly basis.  Just about every state requires companies to file a report and/or pay a fee annually or bi-annually, which is commonly called a “Franchise Tax.”

 

Every company that is incorporated here in the State of Delaware is required to file an annual report and pay a Franchise Tax fee each year.  This annual report filing applies to the following types of companies:  General, Close, Non Stock and Exempt/Non-Profit. While Exempt/Non-Profit companies do not pay a franchise tax, they must still file an annual report.

 

What information must be provided on the actual annual report? 

The State of Delaware asks for a few basic internal details about the company.  The items required to be reported are:

  • Principal place of business-the physical location of where the company is located
  • Name and address of one officer-typically a President, Vice President, Secretary or Treasurer
  • Names and addresses of all directors-if none elected yet, then the report can reflect zero
  • Authorization-by an officer or director to file the annual report

 

If the company has more than 5,000 shares authorized then there are couple more items to provide on the annual report:

  • Total gross assets-which are reported on the company’s Federal Tax Return Form 1120
  • Total issued shares-that can be found in the company’s stock transfer ledger

 

What happens when you are ready to file the annual report and the information has not changed from the prior year? 

For a lot of companies, the information that has to be reported is the same each year.  Our clients are always asking if they need to fill out an annual report if the information is the identical as the prior year.  As per the Delaware Code, the details must still be provided on the annual report each and every year to keep the company in compliance.  It is unacceptable to file an annual report marked “same as last year”.  Therefore, regardless if there are any changes within the company throughout the year or not, a completely new annual report must be filed.

 

Where does the annual franchise tax report information get filed?

Our clients want to know what happens with the details listed on the actual annual report.  The report is filed with the Delaware Secretary of State’s office, just like the company’s original Certificate of Incorporation.  It remains part of the company’s official filing history, just like any other type of filing the company had done and every type of corporate document the company ever obtained. Every annual report that is paid and filed for the company is always kept on record.

 

We offer a Franchise Tax filing service to help you file the annual report each year with the state of Delaware.  Contact us at 1-800-345-2677, or 1-302-645-7400, Extension 6904 with any additional questions regarding the annual report filing.  Or send an email to payments@delawareinc.com and we would be glad to assist.

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101: Setting Salary
By Matt Cholerton Tuesday, October 11, 2011

For many companies, setting the salary for a new hire is a huge challenge. You need to attract the right person, retain them after hire, stay within budget, and have a salary structure your organization can grow with.  Getting familiar with some of basic pay practices can help you to feel more comfortable doing this yourself.

Find your midpoint.  Arrive at a target annual salary number. I like to think of this as your fulcrum - other factors will pivot off this number. There are plenty of good resources online to get you started - payscale.com, salary.com and glassdoor.com all have position descriptions and salary benchmarks. Browse  indeed.com and craigslist.org for companies and jobs similar to yours - occasionally salaries are included, which gives valuable benchmarks.  Another trick is to call a staffing agency and ask for input on the market salary range for your position. I’ll stretch to say this is not an underhanded strategy because it does give the agency the opportunity to convince you to use their services (at a fee of 15%~20% of annual salary). Ideally, your midpoint considers the position’s duties, the size and stage of your company, your industry, and geography. Don’t exhaust yourself on these points as your general midpoint investigative work will do much of this for you.

Match job duties: When researching, closely match job duties and titles to ensure they are aligned. Compare responsibilities, scope of job and decision making authority.  Titles are far from standard across organizations.  A ‘Web Developer’ or ‘Accountant” has a wide range of variance in the duties and responsibilities they perform. Match duties, titles and salary points across a number of jobs and sources until you feel comfortable with a midpoint.

Small companies often have positions with responsibilities across functions.  For example, your Receptionist (at $32,000) might do occasional Sales Support ($47,000). Don’t be afraid to blend these to create a midpoint (i.e. 75% of $32,000 and 25% of $47,000 = $35,750).  If you increase the Sales Support tasks for the role you will have an idea about how to fairly adjust salary.

Consider your compensation strategy: Do you want to pay market as a company or for this role? Do you have the brand recognition and amazing benefits to pay below the market range and focus on candidates that truly want to work for you? Do you want to pay above the market range to fill the spot quicker or to remove money as a turnover factor? From economic conditions, to time-to-fill, to reputation there are many aspects to consider when crafting your compensation strategy.

Create a salary range: Starting with your midpoint, create a range.  20% above and below the midpoint is a good place to start. Our Receptionist/Sales Support employee would have a range that looks like this:

Generally, entry level positions have a skinnier spread and higher level roles have a wider range.  For example, a Accounts Payable Clerk might have a range of $35,000 ~ $45,000 and the Director role spread from $60,000 to $100,000.

Though compensation experts won’t easily admit it, there is plenty of subjectivity and discretion involved in setting ranges, job matching, and strategy. There is no magic key.  But there is an art and a skill you can develop with practice.  Use these basics, do your due diligence, be confident and iterate as needed!

 

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101: Job Posting Tips
By Matt Cholerton Tuesday, October 4, 2011

Recruiting is a numbers game. You need as many people as possible to know you’re hiring. If a thousand people see your posting, you’ll be lucky if a hundred apply. And for every hundred applying, it’s likely only one will be a high potential candidate. That is “needle in a haystack” territory. How can you expose your open position to the masses but focus only on the ones that matter?

Take the time to be creative and detailed. Great candidates can choose where they want to work, they don’t apply everywhere, and they aren’t attracted to postings that look like all the rest.  Luckily, there isn’t much thought behind most postings.

In your posting, explain what your company does and why. Reflect on your culture and give examples of why you’re great to work for.  Sell the company. Detail how the new hire will help the company’s quest to dominate the industry. Be entertaining. Be frank. Set aside real time to think about the new hires’ responsibilities and skills.  What certifications or education do they need to have? What might their other interests be? Do they really need to have experience or just have the potential? Scrutinize the posting and edit away anything generic or implied, such as ‘excellent communication skills.’  If you change your idea for the role after meeting applicants, you can always update the description.

Add filtering questions to the posting.  An amazingly efficient way to get the cream to rise to the top is to create some simple hurdles in your posting.  The vast majority of applicants don’t know about your company or care about your job - you are just a victim of their resume spamming. You want people that want you. Moreover, candidate responses provide invaluable insight. For example, ask applicants to name their favorite of your products and why. Think of a question specific to the skill set of the job or even something fun, like the last book they enjoyed.  The way they respond provides an immediate screening tool and helps gauge genuine interest.

Post strategically.  Craigslist is a consistent favorite and reliable high traffic site in just about all major parts of the country.  For lower volume and higher quality candidates, I first go to niche job boards appropriate for your industry and location (for me, this is Startuply and NextNY). Go to where your ideal hire might lurk - if you are looking for a QA Manager, start with devBistro or QAjobs, for example.

Target people already in your community by using Twitter, LinkedIN and Facebook.  These are easy to do yourself and are often patrolled by candidates that would be a great fit. Be creative! Post at local Universities, hold an open house, or host a Meetup on a topic related to your opening. Seriously consider offering a healthy internal referral bonus. Referred employees are most accurately prepared for what they are getting into and already have someone on the inside supporting them.

Re-post.  Remember, it’s a numbers game. Your ideal candidate might browse the web only once a week.  You need to post multiple times in the same place to increase the odds they see your posting. An insider shared statistics showing job searches happen most on Monday, Tuesday, Thursday and Sunday.

Follow up quickly.  Identify top candidates quickly and get back to them. The good ones always go quick. Prepare for what will happen next - from follow up interviews to reference checks.  Communicate frequently, honestly and kindly. Remember, adding someone to your team is an important decision and making the wrong decision can be costly and unproductive. Making the right decision can give your company an enormous boost internally and externally.

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