The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, start-ups and general business topics.
The Delaware general corporation has had the strongest type of company structure in the United States since the late 1800s.
At that time, major entities, such as the railroads, Standard Oil and The DuPont Company, needed to arrange themselves into organizational structures that could provide for the governance of the companies once they had grown beyond their famous founders.
The general corporation is perfectly designed as an entity for engaging in business, yet it also provides a way to raise capital, as needed, throughout the life of the company.
In its simplest form, the general corporation has three tiers of power: the shareholders, the directors and the officers. The shareholders own the company; the directors manage the company; and the officers run the company on a day-to-day basis.
The bylaws of the company set forth the powers and the limits of power in each of the three tiers. Each group may have separate priorities, and they may clash occasionally.
When one tier rises up against the others, a takeover battle may ensue; takeover battles are usually fought and resolved in the Delaware Court of Chancery.
In this unique business court, a single judge decides the case—there are no juries, no tribunals and no 12 angry men. One judge determines—quickly—which party shall prevail, according to 200 years of laws and legal precedents.
It is said that the Chancellors of the Court respect the good faith decisions of directors over the profit priorities of shareholders, but a majority of shareholders can generally elect a new Board of Directors if they don’t like their current directors.
The rules on how these three tiers interact with each other are embodied in three general knowledge bases. The code, which is the written law passed by the state legislature (in this case, the Delaware General Corporation Law).
The case law, handed down by the Delaware Court of Chancery and the Delaware Supreme Court over the past 200 years; and Letter Rulings, which are individual, judicial decisions on a myriad of minute details that come up in court cases.
Stockholders are granted two rights that directors and officers are not permitted: the right to vote for the Board of Directors and the right to share in the dividends of the company when the directors declare dividends.
The shareholders, however, cannot operate the company; they cannot walk in and start telling people what to do. They act as a group, in a meeting, not individually. (Unless one person owns more than 50% of the company, in which case s/he could control the entire company and all three tiers of power.)
The Board of Directors also acts as a group in meetings. Directors generally do not act individually. Meetings must be announced in advance, to all Directors, and each meeting much be attended by a majority of directors in order to be a legal meeting.
The Board of Directors makes all the important decisions in the company; it is responsible for company policy and overseeing the managers.
The directors determine what the company will do with its profits, and they control the sale of stock in the company. They hire the officers of the company to run the business on a day-to-day basis.
The officers work at the pleasure of the Board of Directors, or by contract with the Board of Directors. Officers are usually the President, Vice President, Secretary and Treasurer, but the company’s bylaws can prescribe any officers and their titles, responsibilities and duties.
Officers are responsible for the conduct of the company as well as the profitability. If they fail, they usually get fired, quickly; if they succeed, they become superstars.
This unique structure, with its three mandatory tiers of power, deserves a great deal of credit for the success of the American Industrial Revolution, the American economy (since 1900) and the success of Wall Street itself.
This structure differs greatly from other forms of company organization, such as the sole proprietorship or the partnership, both of which precede it, as well as the LLC, which followed it chronologically.
If your vision is to form a big company, like Apple, Google or Dell, you couldn’t pick a better corporate organizational structure than a Delaware general corporation.
Some of the hottest new tech startups, SEO/PPC agencies and business incubators are based in Massachusetts, such as Care.com, Run Keeper and Word Stream. Several older, very well-established companies are located there as well, such as Houghton Mifflin Harcourt, Hanover Insurance Group, Liberty Mutual Insurance, Staples and Wayfair.
However, just because a company is based in Massachusetts doesn’t mean it can’t be incorporated in Delaware. Many corporations that are headquartered elsewhere incorporate in Delaware in order to take advantage of Delaware’s corporate law structure, which is known for providing the best corporate liability protection.
Incorporating in Delaware is not a difficult process, no matter where your company is based. When filing a Delaware corporation, your business is domestic to the state of Delaware and foreign to every other state. This is called Foreign Qualification.
In order to get the authority from your company’s home state to operate a Delaware corporation there, business owners typically register in their home state as a foreign entity. This is an important step that is sometimes overlooked.
By failing to comply with local compliance regulations, you may be putting your company at risk.
Massachusetts, like most other states, has an application process and requires a state fee as well as additional documents from Delaware. Every corporation registered in the state must also complete an Annual Report at the end of each fiscal year, no matter if the corporation is foreign or domestic to Massachusetts.
Your corporation will also have to present a Foreign Corporation Certificate of Registration, on which you will have to list the names and titles of the corporation’s directors and officers. One of these directors or officers will need to act as the Authorized Individual and sign the Certificate of Registration.
Massachusetts will also require your business address and make you obtain a Registered Agent. Any legal documents from the Secretary of State as well as any service of process will go to the Registered Agent, whose job it will be to forward the documents to the responsible party.
Massachusetts also requires a Certificate of Good Standing from the state of Delaware. The Certificate of Good Standing must be current within 60 days.
Once approved, Massachusetts will send your company a Certificate of Authority. This is the way in which Massachusetts gives your Delaware corporation permission to operate in Massachusetts. The turnaround time to receive your Certificate of Authority is about 2-3 business days.
Once your Delaware corporation is registered as a foreign entity to do business in Massachusetts, keep in mind that you will be responsible for the Massachusetts annual compliance matters as well as Delaware’s. The Massachusetts annual report is often due before March 15. Delaware’s annual report, which includes yearly Franchise Tax, is due before March 1.
A Delaware Registered Agent like Harvard Business Services, Inc. can help you complete the Massachusetts Foreign Qualification process. If you would like assistance in registering your Delaware corporation in Massachusetts, or just have questions about Foreign Qualification, please call 1-800-345-2677, Ext. 6130 or email us.
You have an amazing idea for a new business. You’re ready to incorporate in order to protect yourself and your personal assets, and you’ve decided it’s time to take the next step and form a Delaware LLC for your new entrepreneurial endeavor.
Then the confusion swirls:
Delaware LLCs can conduct any lawful business activity anywhere in the world. Some people explore the low-cost series LLC when they want to operate several different businesses, which is very enticing since there is only one annual Franchise Tax payment to the state of Delaware and one annual Registered Agent Fee.
However, the structure of this business entity is relatively new and unproven, so there are often many hurdles that arise when dealing with a series LLC. It is generally considered safer and smarter for people to keep their business ventures completely separate from one another by forming an LLC for each aspect of a business; in essence, what you are doing is creating one Delaware LLC as a holding company, and other, individual LLCs within it yet separate from it.
Many people consider setting up DBAs for numerous, different business operating under the umbrella of one LLC. A DBA (Doing Business As) or fictitious name registration is simply assigning the LLC another name, or multiple other names, that may better fit the spectrum of services or products offered.
However, DBAs do not provide any type of legal separation between the different aspects of the business. If anything should happen to any one segment of the LLC, the LLC as a whole, as well as every other aspect of the business, could potentially be affected and held liable.
As it stands today, the battle tested, proven practice of creating individual LLCs that are formed for every variant of a business is traditionally still the most highly recommended strategy by tax professionals, attorneys and business consultants all over the world.
This means that for every sector of the business, for each product line, for every service provided, for each piece of real estate held, clients will often consider creating separate, traditional LLCs. Doing so ensures that the assets, debts, and liabilities of each LLC are completely disconnected and shielded from one another in the event of any possible litigation.
When establishing multiple LLCs, it can be extremely helpful to develop a blueprint hierarchy that will coincide with the relationship of the respective LLCs. For example, people typically set up numerous LLCs for real estate development.
This framework often consists of one parent LLC at the top of the hierarchy—let’s call it ABC Holding Company, LLC. People then typically create multiple sibling LLCs, one for each piece of actual real estate—let’s call them ABC Real Estate 1, LLC; ABC Real Estate 2, LLC; and ABC Real Estate 3, LLC.
Each LLC may own, manage and be responsible for a single piece of property; thus, while all the LLCs share the same holding company—ABC Holding Company, LLC—and may possess similar structures, ownership interests, assets and liabilities, they are insulated and shielded from one another in order to protect the properties and resources of each individual LLC.
This is also considered a smart, strategic way to further protect your personal assets from your LLCs.
Over 65% of Fortune 500 companies are incorporated in Delaware. The often-repeated mythology related to the question of “Why?” is two-fold: to pay less in taxes and to file companies without listing an owner’s name.
Both are incorrect. The real reason is the Delaware Court of Chancery, which hears all corporate litigation cases for companies incorporated in the state.
The Court of Chancery possesses, and relies on, many years of judicial precedents; it is these judicial precedents that the founders and CEO’s of some of the world’s biggest and most successful companies are seeking when they incorporate in Delaware.
The Delaware Court of Chancery was borne from the English common law system, which is law that is developed by judges, courts and tribunals which not only decide individual cases but also create law precedents (as opposed to statutes, which are created via legislation).
In the English common law system, separate courts heard law and equity matters. England’s highest court of equity was called the High Court of Chancery.
In 1792, the state of Delaware revised its Constitution and added a special provision for a court of equity, i.e., the Delaware Court of Chancery. Delaware’s Constitution states it “shall have all the jurisdiction and powers vested by the laws in this state in the Court of Chancery.”
The Delaware Court of Chancery’s jurisdiction is meant to be the same as the English High Court of Chancery’s jurisdiction in 1776, and so it hears and determines all equity-related matters.
In this modern era, the Court of Chancery mostly hears corporate litigation cases as well as litigation related to trusts, estates, wills and land purchases. It also hears cases based on real estate title ownership and general contractual issues.
The most noteworthy type of case handled by the Delaware Court of Chancery is called a “Derivative Suit.” This is where the stockholders of a company are suing the Board of Directors of the company over financial matters or control issues.
The interest of the stockholder is the money the company makes. They want it to be distributed to the shareholders as dividends. The Directors, however, hold the power to dictate how the money will be spent, and they will often opt for buying out competitors, creating an expansion program or initiating huge salaries for company officers.
When the two groups clash, the case goes to the Delaware Court of Chancery where one Chancellor (not a jury or a group of judges) decides the case as a matter of fairness.
Over the 200 year history of the Court of Chancery, these cases are usually decided in favor of a Board of Directors, as long as the Directors have acted in good faith in their decision making. The proper way to say this is, “The Delaware Court of Chancery usually respects the good-faith decisions of the Board of Directors above the selfish interests of the shareholders.”
However, when the Directors shirk their duty to be loyal to the best interests of the company, or to take due care in making their decisions, or when they engage in self-dealing and fraudulent actions, the Court of Chancery has the power to punish them by levying personal fines and removing them from office.
The Court also has jurisdiction over several other matters; it has the sole power to appoint guardians of the property and person for mentally and/or physically disabled Delaware residents and can also assign guardians for minors.
The Court of Chancery has earned the respect of both the domestic and international business world, and it is the wisdom and consistency of the Chancellor and Vice Chancellors that continues to motivate new entrepreneurs to incorporate their startup companies in Delaware.
A Delaware Certificate of Incorporation is the foundation upon which a Delaware corporation is built.
Until you receive the approved Certificate of Incorporation back from the Delaware Division of Corporations, you do not yet have a valid Delaware company.
The state of Delaware requires very little information to be made public in order to form a corporation; the Certificate of Incorporation only requires a few pieces of information.
In Delaware, your officers/Directors and shareholders are not usually listed on the Certificate of Incorporation. The preparation, execution and filing of the Delaware Certificate of Incorporation is handled by an incorporator.
An incorporator is an individual or company that forms a corporation on behalf of the corporation's Board of Directors by filing the Certificate of Incorporation with the Delaware Division of Corporations.
The incorporator then names the initial Directors of the corporation until the successors are elected (and qualified internally) within the company. The powers of the incorporator are then terminated, and the incorporator shall no longer be considered a part of the corporation.
Harvard Business Services, Inc. is the incorporator, on behalf of all our clients, for the companies we file. The Delaware Certificate of Incorporation is signed by Richard H. Bell, II, as president of Harvard Business Services, Inc.
The powers of the incorporator are limited to executing the filing of the document with the Division of Corporations. Once the document is filed, the incorporator releases the company to the initial Directors.
No information about the officers or Directors is required to be filed publicly in Delaware in the formation process. It is a nice feature of Delaware; this way, should an officer or Director change, the company is not obliged to file amendments with the Division of Corporations to update that information.
Instead, the change is recorded internally, which allows the business owners to focus on the operation of the corporation rather than tedious paperwork. All Delaware corporations are required to file an annual report each year on or before March 1, naming the Directors and officers.
Harvard Business Services, Inc. is here to assist you if you have any questions or concerns about the company formation process and/or the Delaware Certificate of Incorporation.
To file a new company Delaware LLC or corporation now, visit our easy-to-use order form. You can also call us anytime between the hours of 9 AM and 5 PM, Monday through Friday, at 1-800-345-2677.