The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, start-ups and general business topics.
Structuring and operating a business is a complex challenge under the best of circumstances. When family members are part of the equation, the complexity multiplies. Yet some of today’s oldest and most respected companies started out generations ago as family businesses, and many of these business are now among the wealthiest and most successful companies in the world. Consider these remarkable family businesses and their overall worth: Hearst (publishing, 35 billion); DuPont (chemicals, 15 billion); Brown (liquor, 11.6 billion); Gallo (wine, 9.7 billion); LeFrak (real estate, 6.5 billion); Marriott (hotels, 5.7 billion); Nordstrom (department stores, 3.7 billion); Steinbrenner (N.Y. Yankees, 3.1 billion); Bean (catalog clothing retailer, 1.8 billion).
The LLC, in particular, offers family businesses the flexibility to structure their companies in a way that takes complex variables such as family dynamics into account. However, both a corporation or a limited liability company (LLC) create a barrier of separation between your personal assets and the assets of your family business.
As owners or participants in a business, family members must confront a range of issues:
Many family businesses today are taking advantage of Delaware's flexible LLC and close corporation laws. The flexibility of the Delaware LLC stems from the way LLCs allows business owners to establish private, internal agreements, known as Operating Agreements. An Operating Agreement is similar to a contract between family members. The contract sets forth the company’s governance structure, and it does not have to be filed with the state of Delaware; the arrangement is the personal, private business of you and your family.
In the Operating Agreement, you can determine the rights and privileges of the members of the LLC; you can identify and separate owners from managers, define compensation agreements, mandate what will happen in the event one of the LLC's principals retires or passes away and outline a wide variety of other arrangements.
A Delaware LLC can even allow for different classes of members: those who run the company, those who are employed by it, children of family members and future generations of children of family members. At the same time, a Delaware LLC provides your family with the benefits of pass-through taxation and limited liability.
LLCs are a good choice to hold the family business' assets because they are tax-free companies with strong liability protection. In addition, if they are set up properly, you won't need to file separate tax returns for each LLC, which saves time and money. Since the family home is a personal asset, your home should be homesteaded and insured. Homestead laws vary from state to state, so be sure to check with a local lawyer about the rules that govern your state's homestead protection. In some states, you will need to register to be covered; in other states, there may be a limit on the value you can protect.
The Delaware close corporation is meant for tight-knit groups, such as family businesses. Its structure makes it very difficult for a (family) shareholder to transfer ownership to someone outside the family without the consent of the other family members. This is a reliable way to ensure the business remains in the family as long as its members want it to. And, if the close corporation elects Subchapter S status with the IRS, it also enjoys the benefits of pass-through taxation and limited liability.
If there is a family farm involved, you can protect it by placing it in a Family Limited Partnership (FLP). The FLP will allow you to maintain control, but will spread out the legal ownership. If you are sued personally, the farm can't be sold to satisfy a judgment against you. In addition to being the first step in estate planning, Family limited Partnerships are also great asset protection plans.
Harvard Business Services, Inc. can help you decide how to set up and protect your family business. You can get in touch with us in a variety of ways. Just follow this link to contact us by phone, email or live chat: https://www.delawareinc.com/contact-us/
Source: "Dominant Dynasties." Forbes. July 2014: 78-88. Print.
Successful organizations spend a lot of time saying, "that's not what we do."
It's a requirement, because if you do everything, in every way, you're sunk. You got to where you are by standing for something, by approaching markets and situations in a certain way. Sure, Nike could make money in the short run by licensing their name to a line of wines and spirits, but that's not what they do.
"That's not what we do," is the backbone of strategy, it determines who you are and where you're going.
Except in times of change. Except when opportunities come along. Except when people in the organization forget to ask, "why?"
Did you know that Harvard Business Services, Inc. started as a home business almost 29 years ago? That's righ;, in 1981 we started this company in the basement of our new home in Wilmington, Delaware. We truly believe that a terrific business idea can grow from anywhere, and your home can be a great place to begin your road to success as an entrepreneur. Below is an excerpt of an article from the American Express OPEN Forum with some interesting facts about home businesses.
"According to the SBA, there are over 15 million home-based businesses in the U.S. And based on analysis of data from the Network Solutions Small Business Success Index (SBSI) and the SBA, around 6.6 million of these are serious home businesses providing at least half of their owner’s household income.
The home has long been viewed as a great place to start a business. Lower costs are, of course, the key reason. Many large enterprises such as Ford, HP and Apple Computer started as home businesses.
A recent SBA study of growth-oriented firms that began operations in 2004 shows that the home continues to be a great place to start. About half of the growth oriented start-ups surveyed were home-based. And almost all of these firms were still home-based 2 years later."
Mission statements are like corporate Hallmark cards. Often written in a bland cursive font and plastered conspicuously at headquarters, these aspiring epigrams are pretty words in Air Supply -- like rhythm. Sometimes they're created at a retreat in the woods, between the trust fall and the passing of the speaking stick. Vigorous fights over semantics last for hours, even months. Then you end up with some variation of the jargony quasi-poetry above.
For three years, I sat on an advisory board at my alma mater that helped shape the university's entrepreneurship program. At every board meeting, someone would say, "So why are we here?" Then someone would read the mission statement (it was packed with words like "commitment" and "empowerment"), and even the most dramatic James Earl Jones -- like vocal effect couldn't help motivate us to think more clearly. Because it was neither clear nor useful -- and if it wasn't useful, why the heck were we arguing about it?
Mission statements don't have to be dumb. In fact, they can be very valuable, if they articulate real targets. The first thing I'd do is forget the exact words and remember the reason for a statement in the first place. In 2006, Wilson Learning surveyed 25,000 employees from the finance and tech industries. Respondents said they wanted a leader who could "convey clearly what the work unit is trying to do." The same applies to mission state-ments, which set the tone. Employees, vendors, and clients don't get stoked by fuzzy mission statements. They will line up behind concrete goals.
Below is an excerpt:
As the CEO or founder of a growing small business today, you are likely swamped meeting customer needs, dealing with inventory, shipping or customer service problems, pleasing investors, watching your budget, and looking for the next big opportunity. Wait: did you forget about your financial plan? While you might consider this a time-consuming business school exercise with little value for a hands-on small business owner like yourself, former Wall Streeter Tim Ferguson and others say that financial plans are in essence a roadmap to your future success.