The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, start-ups and general business topics.
“There are certain emotions that will kill your drive; frustration and confusion. You can change these to a positive force. Frustration means you are on the verge of a breakthrough. Confusion can mean you are about to learn something. Expect the breakthrough and expect to learn." - Kathleen Spike
Double taxation is a horrible practice, which many governments around the world embrace thoroughly. It’s the nasty habit of a government to tax your company’s profits, and then when you distribute the after-tax profits to the shareholders, they, too, have to pay tax on money for which the company already paid tax.
In the United States, we have wrestled with the dividend tax in many ways, but the creation of the IRS tax code known as Subchapter S is probably the best known and most effective way to avoid double taxation. Basically, it states that a company organized as an S corporation does not pay tax at the entity level. Instead, the company passes its dividends through to its shareholders and they pay the tax on their portion of ownership.
Pass-through tax treatment can also be achieved through the LLC but major corporations, with thousands of shareholders, cannot avoid double taxation since there is 100-person limit on the number of shareholders an S-Corp can have.
This blog category will help you understand all the benefits of an S corporation as time goes on. We invite you to join the conversation by leaving a question or comment.
On January 29, 2009, Delaware Governor Jack Markell appointed Jeffrey W. Bullock as new Delaware Secretary of State. The Secretary of State oversees the Delaware Division of Corporations.
See this link for more details: http://www.portofwilmington.com/HTML/our_port/Board/jeff_bullock.htm
When corporations were first introduced in Delaware in 1875, you had to have at least three people working together to form a corporation. The whole idea of a single person corporation was not even envisioned by the early lawmakers. But entrepreneurs demanded control so they would include their lawyer and perhaps a secretary to be the stand-in shareholders to meet the requirement.
The law was also very strict about the separation between the three tiers of power in a corporation: the Shareholders, the Directors and the Officers. It was unthinkable that one person could be all three all at once. Every year the company would have to have a Shareholders’ meeting, with a few Board of Director’s meetings throughout the year, to direct the Officers of the company on the day-to-day affairs.
Delaware, as usual, was the first state to respond to this need for control, desire to own, run, and operate a company by a single person or a small tight-knit group. This is the “Close” or “Closely Held Company."
Stock sounds like a substantial word, doesn’t it? It reminds one of livestock (cattle) or rolling stock (rail cars), or stock-in-trade (physical inventory), but it is none of these. Shares of Stock in a company are worth just about whatever you can get for them, and that can fluctuate, as we’ve all experienced watching the Stock Market. In reality, they are a piece of paper that could be worth any amount.
Shares of stock are first authorized by the company’s Certificate of Incorporation (or later amendments) that state the number of shares the company has in total. Authorized means the total number you can own or sell. Authorized shares can be increased by filing an amendment to the Certificate of Incorporation with the Secretary of State’s Office. If a majority of directors and stockholders approve, you can raise the number of shares and sell them to raise capital for the company as often as you need to.
Issued shares is the number of authorized shares that have actually been issued to individuals or corporate owners of the company including founders, managers, insiders and investors.
Stock in private companies is valued differently than stock in public companies. We’ll talk more about that in later blog posts.
Just to complicate things, it must be mentioned that a Delaware General Corporation can have more than one “Class” of stock. Specifically, every corporation must start with one class of “Common” stock that is entitled to one vote per share. On top of that, you might want to consider a separate class of stock authorized as “Preferred” shares that you can use to raise money or retain power. An upcoming blog post will focus on Preferred Stock and its uses.