The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, start-ups and general business topics.
Once again, Delaware’s dominance cannot be denied.
There is simply no better state in which to incorporate a company in the United States than Delaware.
No matter what type of company you’re thinking about forming—corporation, Limited Liability Company or Limited Partnership—Delaware is by far the best state in which to incorporate!
Think we’re exaggerating? Check out this data:
And check out this staggering statistic:
The total number of legal entities formed in Delaware increased to 1,181,000 in 2015, a 38% increase since 2008.
Let’s break it down by types of business entities, shall we? Here are the numbers of new business formations in 2015:
That’s not all, folks.
The general fund revenue collected by the Delaware Division of Corporations in 2015 hit $1 billion for the first time. One. Billion. Dollars.
But wait…there’s more!
There were also several positive changes to Delaware Business Entity Laws, including:
Data doesn’t lie, ladies and gentlemen—Delaware is clearly the conquering hero of all the supposedly corporate-friendly states in the nation.
From the largest public companies to early-stage ventures, corporations seek to attract and retain qualified, experienced individuals to serve on its Board of Directors.
Directors are often selected based on their past business experience and proven acumen; their financial, accounting or regulatory expertise; their network of professional contacts; and the solidity of their long-standing relationship with a company’s founders or senior management.
Serving on a corporate Board of Directors is not easy, however, and there are questions a person who is asked to serve as a Director should consider before committing to the position.
1. Do I have sufficient time to devote to board membership?
Board membership should not be taken lightly. You should understand the time commitment expected of you by company management, as well as the time required to adequately prepare for and perform your responsibilities. A board member of a corporation owes fiduciary duties of care, loyalty and good faith to the corporation, which are serious commitments and can dictate the level of diligence and involvement required of you on a regular basis. Your requisite time commitment will vary, depending on a number of factors, such as the nature and complexity of the company’s business and the issues under consideration at a given time (e.g., a potential merger, acquisition or capital raise).
2. Can I add value?
Ask yourself if, and how, you can add value to the company. Being aware of your strengths and the ways you can add value to the company is an important step in understanding the role you might serve on the Board of Directors and whether board membership is appropriate as a threshold matter.
3. Am I conflicted in any way?
As noted above, a board member owes the company a duty of care, loyalty and good faith. Be sure to disclose any conflicts of interest to the company and the other board members at the outset (and as any conflicts arise over time) so that appropriate measures can be taken to mitigate such conflicts. Conflicts could include substantial investments in key competitors; pre-existing relationships with vendors or customers; potentially conflicting fiduciary duties as a result of service on other Boards of Directors (particularly those of competitors, vendors or customers); or a relationship with vital company shareholders, among other things.
4. What risk does board membership pose?
Be sure to do thorough due diligence on the company before you commit to a position on the Board of Directors.
5. How committed is management to providing information and presenting matters to the Board of Directors?
Try to ascertain if the Board of Directors is merely acting as a figurehead in order to rubberstamp management actions. If this appears to be true, it should raise significant concerns.
6. How am I protected in the event of litigation?
Carefully review the company’s indemnification provisions in its charter and bylaws. Indemnification means that, assuming you, acting as a director, have not breached some standard of conduct set forth in the charter and/or bylaws that would make indemnification unavailable, the company will bear your legal costs (including attorneys’ fees), settlements and judgments and, in some cases, fines and penalties as a result of litigation.
The scope of, and qualifications on, indemnification can vary widely from company to company, so you should seek legal counsel to review these provisions. In addition, directors generally seek a stand-alone indemnification agreement to supplement the provisions of the charter and bylaws, and ensure indemnification is provided to the fullest extent possible and is enforceable under the company’s governing documents as well as a contractual right.
You should also inquire as to whether the company has obtained (and will maintain) D&O insurance, which covers certain costs of litigation for directors’ subject to the provisions and amount of the policy.
If you are asked to serve or are seeking to serve on a company’s Board of Directors, we strongly recommend you consult legal counsel in order to fully understand your rights and obligations associated with the position as well as garner a more extensive list of issues to consider.
A member of an LLC, by definition, is an owner of an LLC with a vested interest in the company. Members can be people or entities from anywhere in the world.
Typically, the rights and responsibilities of members are listed and explained in the LLC’s Operating Agreement. It is not required that all members possess the same rights. The Operating Agreement may spell out different rights for specific members.
In addition, there may be different classes of members with specific rights for each class, as long as these classes are clearly delineated in the LLC's Operating Agreement.
Remember, once the Operating Agreement is finalized and ratified by all members, it cannot be changed without the unanimous vote of the members; if all members choose to amend, the amended Operating Agreement must then be signed by all the members of the LLC.
A member of an LLC may also function as a manager, but an LLC does not need to have a manager; members can run the company on their own. As for managing-member vs member classifications, it is simple: when a member is also a manager, he or she is usually referred to as a "managing-member."
A manager is an individual or entity chosen by the members of an LLC to manage the daily operations of the LLC. A manager can be, but does not have to be, a member. Typically, managers are in charge of overseeing day-to-day activities but don’t possess ownership interest in the company.
In some cases, when the LLC is 100% manager-managed, the manager is in charge of everything. The member-managed LLC Operating Agreement would state these responsibilities. We are happy to share this template of a member-managed LLC Operating Agreement with you.
Members of a Delaware LLC don’t own stock, like corporate shareholders do. Members usually split the company into percentages of ownership, or membership units.
Members are typically issued membership certificates rather than stock certificates, which indicate the percentage owned or the number of membership units they own.
If you are considering forming a Delaware LLC and have further questions about the role and responsibilities of members, or how to structure an LLC, you can call us at 800-345-2677, live chat with us or email us to speak with a specialist on these matters.
When people start thinking about incorporating a company outside of their home state, often the two most popular states considered for incorporation are Delaware and Nevada. Although many people believe Nevada is just as corporate-friendly as Delaware, that is simply not true.
The infographic below illustrates how much more supportive of corporate entities Delaware is, and reveals the myth of incorporating in Nevada.
You can read more about why so many companies incorporate in Delaware.
If you own a Delaware company, there are several important date-related business terms you should be familiar with so understand all your company’s documents and important dates.
Date of Formation – Date of Formation is the day when the Certificate of Formation, which includes the Articles of Organization, is filed with the Delaware Secretary of State as you form a Delaware LLC. Unless an alternate Effective Date is specified, this day is the official birthday of the LLC.
Date of Incorporation – Date of Incorporation is the day when the Certificate of Incorporation, including the Articles of Incorporation, is filed with the Delaware Secretary of State as you incorporate a Delaware Corporation. Unless an alternate Effective Date is specified, this day is the official birthday of the corporation.
Perpetual Existence – Traditionally, Delaware LLCs, LPs, and corporations are designed to continue indefinitely and continuously, regardless of any change of members, shareholders, officers, Directors or partners, unless a predetermined length of existence is otherwise specified, or the company is administratively or voluntarily cancelled or dissolved.
Effective Date/Time – A specific date and/or time can be chosen to be the Effective Date and/or Effective Time of the filing, whether it’s the original Certificate of Formation, an amendment or the Certificate of Cancellation/Dissolution. Business owners do this for a couple of different reasons; the most common reason to create an Effective Date is when a person files a company in December but chooses an effective date of January 1 of the following year. (This extends the Franchise Tax deadline by an additional year.) There are many other reasons company owners may opt for a specific effective date, such as a birthday, an anniversary or a lucky number.
Date of Dissolution – Date of Dissolution is the day the Certificate of Dissolution is filed with the Delaware Secretary of State in order to formally close a Delaware Corporation, unless a different Effective Date has been specified.
Date of Cancellation – Date of Cancellation is the day the Certificate of Cancellation is filed with the Delaware Secretary of State in order to formally cancel a Delaware LLC, unless a different Effective Date has been specified.
Date of Amendment – Date of Amendment is the day the Certificate of Amendment is filed with the Delaware Secretary of State when a Delaware corporation, LLC or LP files an amendment in order to update the company name, increase the number of shares or add preferred shares.
Fiscal Year-End/Closing Month –Fiscal Year-End, otherwise known as the end of the accounting year or the closing month, is the end of the actual business year. Some business owners follow the traditional calendar year, January 1 through December 31, while others choose an alternative business year, June 1 through May 31 of the following year, for example.
For a detailed explanation of some of the documents described above, please read Company Formation Documents, Defined.