The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, start-ups and general business topics.
We are pleased to unveil the newest addition to our extensive list of helpful and informational tools. You can now determine the cost of the state of Delaware annual Franchise Tax fees using our Franchise Tax Calculator.
Our new Franchise Tax Calculator can compute the amount of Franchise Tax Fees due for all types of entities, including corporations, LLCs, LPs and exempt companies.
You can use the Franchise Tax Calculator to compare the amounts due between different entity types, or perhaps you are trying to figure out how much your Franchise Tax Fee will be based on the difference scenarios of stock your new company has authorized.
For example, what if you are trying to decide between forming an LLC or a minimum stock corporation (which has less than 5,000 authorized shares) and want to know the potential annual Franchise Tax Fee.
Using our new Franchise Tax Calculator, you would be able to see that the annual Franchise Tax Fee due for an LLC is $300 per year. You would also be able to see that a corporation with 4,000 authorized shares will owe $175 for its annual Franchise Tax Fee.
This cost differential may not be a deal breaker, but at least you can gauge what your annual Franchise Tax Fee will be for a particular entity.
Or, let’s say you currently own a minimum stock corporation and would like to increase the number of authorized shares. Perhaps you need to sell the stock to investors for capital, and you want to know the potential Franchise Tax liability with the increased number of authorized shares.
A corporation with less than 5,000 authorized shares will owe $175 in Franchise Tax. However, with potential investors, you company now needs 1,000,000 authorized shares at a $5.00 par value per share.
Since there are two methods to calculate the Delaware Franchise Fee due, you will need to provide some additional information to determine the correct amount due. If there are 500,000 issued shares and $50,000 gross assets, the Franchise Tax Calculator will indicate that the estimated amounts due are $1,750 or $7,675, depending on which method used on the annual report filing.
Quite the difference in the amounts due, but don’t stress. The state of Delaware will allow you to file the annual report using the lesser of the two methods.
While the calculator will provide the Franchise Tax amounts due for an endless variety of options, it is not an exact science. The actual amount payable to the state of Delaware is ultimately dependent on your company’s specific internal details.
For instance, if your company owes a past due Franchise Tax balance, obviously that is not factored into the general calculator. In addition, if your company filed any type of stock amendment, renewal or conversion, any of these filings will have an effect on the exact amount of Franchise Tax due.
The final calculations could also be influenced by corporations with multiple classes of stock. Don’t forget that corporations need to add a $50 annual report fee that is imposed by the state of Delaware.
We hope you find our new Franchise Tax Calculator convenient and helpful. If you have any questions about Delaware Franchise Tax, please feel free to email us.
The HBR IdeaCast is a weekly audio podcast that brings together the analysis and advice of the leading minds in management brought to life by Harvard Business Review.
It has long been known as a leading resource for business news, and has featured many of the most important contemporary business leaders, Harvard University professors and thought leaders throughout the world.
While the website require a membership fee to read the articles, the podcast is free.
Recently, HBR IdeaCast broadcast a podcast entitled “Getting Growth Back at Your Company.” The guest speaker for this episode was Chris Zook, a best-selling business writer and partner at Bain & Company, one of the most popular management consulting firms in the world.
In this episode, Mr. Zook and the HBR IdeaCast host, Sarah Green Carmichael, try to explain the predictable crises of growth in any business and give advice on how to overcome them based on his recently published book (co-authored with James Allen), “The Founder's Mentality: How to Overcome the Predictable Crises of Growth”
According to Mr. Zook, statistics show that barely 10% of the world’s businesses manage to achieve even modest levels of sustained, profitable growth, and the rest just fall short of their long-term growth goals.
A second study by Zook and his team, which included about 400 executives, surprisingly revealed that the executives did not see an absence of external opportunities, a technology they could not afford nor a rogue competitor as the main growth barrier.
Instead, they found the main culprit to be internal factors, and in very large companies this same outlook was shared by 94% of the people interviewed.
This is a recurring premise in both Mr. Zook’s book and the “Getting Growth Back at Your Company” podcast—people too often look outward, at external factors, when setting out to grow their businesses.
They forget there are a number of things we can do to modify our internal, controllable factors in order to gear them towards more growth.
The podcast delves into what those internal barriers are, how people can recognize them and thus reduce complexity to improve a company’s internal processes to reach what the co-authors call the “founder’s mentality,” a three-step process which they have found to be the essence of successful companies.
The podcast runs less than 20 minutes, and you can listen to it right here—see below. I am sure you will find the conversation quite helpful.
CLICK BELOW TO LISTEN TO THE PODCAST:
HARVARD BUSINESS SERVICES, INC. IS NOT AFFILIATED WITH HARVARD BUSINESS REVIEW OR HARVARD UNIVERSITY.
This means that both startups and small businesses will have increased access to investors and, as a result, increased access to capital.
At the same time, House Bill 327 will allow more Delaware residents—regular people, not millionaires—to invest in Delaware startups and reap the benefits of early stage investors.
HB 327 is sponsored by Representative Bryon Short (D-Highland Woods) and Senator Brian Bushweller (D-Dover). Representative Short says, “We need to make sure our laws keep pace with technology so that our small businesses have access to new methods of raising much-needed capital. […]. This bill will take steps to help new companies by enabling Delaware residents to invest and participate in the success of homegrown Delaware startups.”
Previously, only certain types of investors were qualified to buy equity in startups—investors had to have either a one million dollar net worth or earn at least $200,000 per year. Thus, the term “angel investing” came about, as these wealthy investors were considered angels who funded startups with the right qualities.
As of mid-May, 2016, the new federal crowdfunding law allowed any Average Joe or Jane to invest in startup companies.
If you earn under $100,000 per year, you are allowed to invest up to $2,000 or 5 percent of your annual income—whichever number is greater. If you earn more than $100,000 per year, you are allowed to invest up to 10 percent of your income once every 12 months.
The startups themselves are allowed to raise up to one million dollars every 12 months.
The new Delaware law will focus specifically on local companies and local investors. Startups have to abide by the same million dollar fundraising limit; however, people can invest up to $5,000 at a time.
There are, of course, risks involved with selling pieces of your company to strangers, and some entrepreneurs will likely prefer the old-school model of angel investing, which often includes mentoring, brainstorming and networking.
Although the Delaware startups participating in equity crowdfunding will not be mandated to acquire a comprehensive valuation before accepting investors, there will be safeguards in place in order to protect investors. The Investor Protection Unit (part of Delaware’s Department of Justice) will be in charge of oversight.
Senator Bushweller states, “We must strike the right balance between protecting the public from fraudulent activity and making sure our small businesses can access investment capital, and this bill accomplishes that.”
Since Delaware is such a small state, the number of extremely wealthy people—there are no billionaires and very few multi-millionaires—who are willing to invest in entrepreneurs is quite low. This equity crowdfunding bill “removes some of the roadblocks and widens the pool of investors […] businesses can access,” says Vincent DeFelice, who works at the University of Delaware’s Horn Program in Entrepreneurship.
This law won’t go into effect until at least October of 2016; however, Delaware Governor Jack Markell is fully supportive of the bill, and signed the crowdfunding equity legislation into law on Monday, July 11, 2016. He is confident it will help keep the state competitive.
Markell says, “When combined with progress in strengthening our workforce, streamlining regulations and leading the nation in broadband availability, these efforts will ensure Delaware remains well-positioned to thrive in our new economy.”
The Delaware General Corporation Law is flexible with respect to the type and number of officers a Delaware corporation must appoint.
The applicable portion of the Delaware Corporation Law provides that a Delaware corporation shall have “such officers with such titles and duties as shall be stated in the bylaws or in a resolution of the Board of Directors which is not inconsistent with the bylaws.”
Therefore, a corporation can create, by board resolution or through its bylaws, titles and positions for corporate officers that are as mundane or creative as it would like.
A corporation may also grant these officers whatever powers—and authority over company operations—that it deems necessary or appropriate.
There are no required officer positions or titles that a Delaware corporation must create, as opposed to a set of required titles in other states. Most Delaware corporate founders deem it prudent to have an executive officer, such as a Chief Executive Officer or President, as well as a Secretary.
The Secretary fulfills the requirement in the law that dictates an officer must be assigned to record the proceedings of stockholder meetings and Board of Directors meeting.
One person may hold multiple officer positions or be the only officer, as is often the case in the early stages of a start-up’s existence.
In recent years, particularly among tech companies and millennial-owned start-ups, creative (and sometimes downright silly) corporate officer titles have been used, including:
This creativity in titling can add an interesting and fun aspect to a corporation, but in a start-up or relatively early-stage corporation, it is often recommended to create clearly-defined officer positions that will convey a distinct meaning to both customers and potential investors.
Therefore, while the title of “Tech Jedi” may be unique and alluring, “Chief Technology Officer” (or another, more recognizable title) may prove to be more sensible.
Customizing officer titles via unusual naming conventions can always be adopted once a corporation’s initial viability and business model have been proven, and growth is moving consistently forward.
Whatever titles are utilized, Delaware courts have held that corporate officers created at the board level, or through the bylaws, owe the corporation the same traditional fiduciary duties of care, loyalty and good faith as the members of the corporation’s Board of Directors.
Therefore, a corporate officer, particularly if he or she is not already on the Board of Directors, and therefore already subject to fiduciary duties, should become familiar with his or her fiduciary duties to the company and the resulting obligations.
The Delaware Corporate Law structure does not impose restrictions on foreign ownership or management.
It also does not require a Delaware LLC to maintain any physical presence in the state of Delaware other than a Registered Office and Registered Agent.
The only document required in order to create an LLC in Delaware is the Certificate of Formation. Unlike other states, Delaware requires very little information to be made public in order to form an LLC.
The Certificate of Formation, which is filed with the Delaware Secretary of State, has to contain only two articles: the name of the Delaware LLC and then the name and address of the Delaware LLC's Registered Office and Registered Agent in Delaware.
In Delaware, members and managers of an LLC are not required to be named on the Certificate of Formation.
Preparation, execution and filing of the Certificate of Formation must be handled by an authorized person or entity; an authorized person is an individual or entity that forms an LLC on behalf of the members by filing the necessary formation documents with the Secretary of State and returning them to the members.
Typically, the authorized person is the LLC’s Registered Agent or an attorney. Once this document is filed, the authorized person releases the LLC to the initial member(s).
The legal instrument that releases the LLC to the initial member(s) is called the Statement of the Authorized Person; this statement is prepared and signed by the Registered Agent, and it is not provided to the state of Delaware.
This information is not required to be filed publicly in Delaware.
Why would someone from outside the United States form a company in Delaware? There are numerous advantages to non-residents of the U.S.A. who form companies in Delaware.
When all of an LLC's income is Non-United States Source Income (as defined by the IRS), the members of the LLC who are not residents of the U.S.A. are typically not subject to U.S. federal income taxation.
U.S. non-residents can take advantage of Delaware’s freedom of contract and strong U.S. legal infrastructure without having to provide any member information on the public record; they can also operate their LLC anywhere in the world.
For help determining if your company earns U.S. source income, view the helpful Summary of Source Rules for Income of Nonresident Aliens provided by the IRS.
For more information or questions regarding U.S. company formations for non-residents, please feel free to call us at 1-800-345-CORP.