The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, start-ups and general business topics.
The chief difference between a non-profit corporation and a benefit corporation— sometimes called a B Corporation—is the ownership factor. There are no owners or shareholders in a non-profit company. A benefit corporation, however, does have shareholders who own the company.
A traditional non-profit—or not-for-profit—company aims to serve a public benefit without making a profit, as defined by the IRS. If a non-profit company decides to stop doing business and dissolve, it must distribute its assets among other non-profits. The non-profit company isn’t really owned by anyone because there aren’t any shareholders.
However, a benefit corporation (called a public benefit corporation in Delaware) is a specific type of Delaware General Corporation—it is owned by shareholders who expect the company to make a profit, and return some of that money to them as dividends.
The Certificate of Incorporation of a benefit corporation commits the company to spending some of its profits or resources (or both) in support of a specific public benefit. If a benefit corporation decides to stop doing business and dissolves, the shareholders receive the proceeds of the sales of assets, after liabilities are paid. The shareholders of a benefit corporation actually own the company as well as its assets.
There are other significant differences between the two entities. Personal gain is prohibited in a non-profit corporation, except as the benefits of membership imply; in fact, the express purpose of a non-profit corporation’s existence is to serve a public benefit without making a profit.
In a benefit corporation, however, profit is the point—as is returning money to the shareholders.
However, a benefit corporation also possesses a greater specific purpose and a desire for the corporation to help make the world a better place.
The difference is that these generous companies contribute charitable donations voluntarily, and their financial commitment can change from year to year, whereas with a benefit corporation, the company is committed to dedicating resources, funds or both toward its chosen public benefit, and shareholders cannot extinguish or water-down the commitment from year to year.
Creating a non-profit corporation is a two-step process. First, the organization should form a Delaware Non-Stock company.
When preparing your Certificate of Incorporation, you must create a mission statement acceptable to the IRS. It should state the altruistic purpose to which the corporation is dedicated.
For example, a non-profit can pledge to benefit one specific group of people; fund research for a particular disease; build a public dog park; or support a religious, charitable, scientific, public safety, artistic, literary or educational institution or mission.
The second step to forming a non-profit corporation is to submit the proper application to the IRS—within 15 months of entity formation—to request non-profit status.
This is accomplished by submitting IRS Form 1023.
In order to qualify for non-profit status with the IRS, your Delaware Certificate of Incorporation must include a proper and appropriate mission statement that declares your mission and identifies the IRS subsection under which you intend to apply.
A non-profit company must devote all its resources to the fulfillment of its mission.
To form a public benefit corporation, file a Certificate of Incorporation in the state of Delaware for a General Corporation with a public benefit clause in it. No subsequent filing with the IRS is necessary.
The Certificate of Incorporation of a Delaware Public Benefit Corporation must clearly state that the entity is a public benefit corporation, and it must also list the company’s benevolent objectives.
However, unlike the non-profit company, the PBC may be first and foremost engaged in a profitable enterprise of a very different nature from its mission, such as making food products, engaging in real estate investments or any other for-profit enterprise.
For example, when the crowdfunding platform Kickstarter converted to a Public Benefit Corporation, it released this statement on its website:
“When we became a Benefit Corporation, we amended our corporate charter to lay out specific goals and commitments to arts and culture, making our values core to our operations, fighting inequality, and helping creative projects come to life.”
Non-profit companies raise money through donations and fundraising activities.
If approved by the IRS as a 501c company, the individual donors may deduct their contributions from their ordinary income on their federal tax returns, but they cannot profit from or receive anything of value for their contributions.
Delaware public benefit corporations can raise money by selling stock privately or publically, and by issuing any kind of debt instrument available to General Corporations.
Investors in Delaware PBCs can receive stock and make a return on their investments through dividends as well as through equity appreciation.
Reporting on Progress
Non-profit companies are not required to report progress to their members but they often do so in order to raise money from donors and members.
Delaware Public Benefit Corporations are obligated to complete a biennial report to shareholders, which outlines the corporation’s progress toward its public benefit purpose.
However, they are not compelled to share the required biennial report publicly. Not every state offers a Benefit Company, and none are as private as Delaware’s (in this respect).
Federal Taxation Differences
A non-profit company is tax exempt under Federal Income Tax Law. Since it has no profit, it pays no taxes. It is required to file a tax form each year (IRS Form 990), which is public record and includes information about the company’s finances and Board of Directors.
By contrast, a benefit corporation pays taxes on its profits, like any other U.S. corporation. It files and pays taxes to the IRS each year using Form 1120. The company’s previously filed tax returns are protected under federal privacy laws.
Delaware Franchise Tax Differences
A non-profit company pays only $25 annually in Delaware, and files an annual report; this report is an informational form that lists the names and addresses of the Board of Directors and officers but does not include any financial information.
A Delaware PBC is a Delaware corporation, which means it must pay annual Franchise Tax to the state of Delaware based on the number of shares it issues.
Non-profit corporations are, structurally, non-stock corporations, which means non-profit corporations do not have any shareholders.
They are managed by a Board of Directors, sometimes called a Board of Trustees. The Board may elect its own successors (called a perpetual Board) or they may be elected by the members, depending on the structure outlined in the corporate bylaws.
There can be different classes of members in a non-profit corporation, including voting and non-voting members.
The types of members, as well as the qualifications for membership, are also defined in the corporation’s bylaws. Members and Directors are not shareholders, and thus do not have any interest in the company’s assets or income.
Delaware benefit companies are simply Delaware General Corporations with a charter commitment to dedicate themselves to a stated public benefit, thus they are structured according to the Delaware General Corporation Law (DGCL).
They have three tiers of power: the shareholders, the directors and the officers. The shareholders own the company and are the investors.
They elect the members of the Board of Directors at an annual meeting, and the directors are then responsible for the policy and direction of the company as well as for hiring the officers.
The officers (President, Vice President, Secretary and Treasurer and optionally any other titles the Board of Directors dictates, such CEO, CFO, COO) are charged with handling the day-to-day business of the company. Absent a contract, the officers work at the pleasure of the Board of Directors.
Another difference between non-profit corporations and benefit corporations is that the stock certificates of the latter must be clearly marked with the words “Benefit Corporation.” A non-profit company has no shareholders and therefore no stock certificates.
Some examples of successful non-profit corporations are:
On a smaller, more local level, home owners associations and little leagues can also be non-profit organizations.
Examples of successful benefit corporations (in addition to Kickstarter) are:
Disclaimer: The above is meant as an introduction to some of the major differences between a 5015c non-profit corporation and a Delaware public benefit corporation. Be sure to consult your lawyer and accountant for details which may specifically address your situation.
In the business world, just as in life, we all make mistakes from time to time. Unfortunately, there are several common mistakes made by new start-ups that can be both time-consuming and costly.
However, these mistakes can be avoided if you’re well informed.
State of Incorporation:
A crucial mistake made by many start-ups occurs when choosing the best state in which to incorporate. Traditionally, the state of Delaware is considered the gold standard and the most attractive state to potential investors.
Delaware is the most popular state for start-ups to incorporate in, and for venture capital investors, it is the only state to consider.
The primary benefit to incorporating in the state of Delaware is that Delaware offers the strongest and most current corporate law structure, which means that Delaware provides the greatest asset protection of all 50 states.
Essentially, Delaware erects an impenetrable wall between your personal assets and your new company. If you don’t incorporate your start-up in Delaware, you could—possibly—be putting your company’s assets at risk.
In some cases, this common and avoidable start-up mistake can be addressed by converting the business entity to another state. However, many states do not allow entities to convert from one state to another, and you’re then stuck with a company formed in the wrong state.
If you decide to start all over again and form your company in Delaware, you’ll have to spend more money in order to dissolve the corporation and form another one in Delaware, where you should have incorporated your start-up in the first place.
This error can be avoided by carefully mapping out and choosing the optimal state of incorporation for your start-up.
Type of Entity:
Another common but avoidable mistake amongst new start-ups is choosing the correct type of business entity. Generally, most new start-ups who plan to raise capital will establish a C corporation, with an eye toward the future—bringing investors aboard, raising capital and going public.
In many cases, when fundraising is the plan, an LLC or non-profit corporation is less than ideal for a start-up, for a variety of reasons.
However, for private businesses or for holding real estate or other assets the LLC is the entity of choice.
New business owners should thoroughly educate themselves or contact an attorney or tax professional to discuss details about which type of business entity would be best for their start-up.
Number of Authorized Shares:
Did your new corporation authorize the correct number of shares? It is important that your start-up has the proper number of authorized shares to issue. If your company has too many authorized shares you’ll pay higher franchise taxes.
However, having too few shares can be an even bigger problem and will require filing an amendment to the Certificate of Incorporation to obtain more shares, which is also expensive.
Although it may seem like a foregone conclusion, the company name can often be the biggest blunder for start-ups. Before you file your Certificate of Incorporation you should ask yourself—and answer—these questions:
It’s a good idea to wait until you have investigated any and all potential problems with your company name before you file your startup documents.
Entrepreneurs that spend the time to lay out their business plans and research their target markets possess a much greater chance of success. A bit of due diligence goes a long way in preventing wasted time, wasted money and wasted opportunities.
If you own a Delaware corporation, LLC, LP or other business entity, you should familiarize yourself with the term “service of process.”
So what is service of process? What does service of process mean, and why is it important for a Delaware company owner to understand service of process?
In Delaware, service of process is the method by which a company is served time-sensitive legal documents, including lawsuits and subpoenas; all services of process include a deadline for a response. For example, service of process is the means by which a person filing a lawsuit informs the person being sued about the lawsuit. The person receiving the service of process has a designated period of time in which to send a reply.
In Delaware, each business entity is required to retain a Registered Agent; one of the reasons for this regulation is so that service of process can always be executed in a judicious manner. The Delaware Registered Agent is required to maintain a physical location with standard office hours, which means the office must be open and accessible to accept service of process Monday through Friday, during normal working hours.
The Registered Agent is responsible for receiving service of process and forwarding it to the appropriate company in a timely fashion. This is why it is so important for Delaware company owners to choose an experienced, efficient Registered Agent (it is also why, in states where a Registered Agent is not mandated, it is highly recommended that companies maintain one in order to ensure they receive all service of process and other significant documents).
Here is what happens when a Registered Agent, such as Harvard Business Services, Inc., receives a service of process for one of its clients:
Receiving and responding to a service of process is a serious matter—ignoring legal proceedings or subpoenas could be disastrous for you and your company. If you fail to respond to a lawsuit in a timely fashion, the judge could declare that you lose the case, without your even showing up. If you fail to respond to a court order in a timely fashion the judge could declare you in contempt of court and issue a warrant for your arrest.
Reversing these situations will take time and cost money. You’ll need a lawyer to go to work for you right away. If you would like to ensure you receive all services of process as well as all of your company’s Franchise Tax reports and late and/or void notices from the Delaware Secretary of State, change your Delaware Registered Agent to the best and most reliable in the industry.
The Delaware legislature created the limited liability company (LLC) in such a way as to allow the LLC's members the freedom to contract with one another upon whatever terms they deem are best suited to their company.
In a corporation, for example, Delaware law requires certain terms to be included in the corporation’s constituent document and mandates certain provisions related to corporate governance are followed; it also limits (to some extent) the ability of the parties involved to modify certain terms relating to voting or fiduciary obligations.
In an LLC, however, the members are free to organize the LLC in any manner they choose, with near-total freedom to define the relationship among the members as well as the terms governing the operation, oversight and maintenance of the LLC.
The fundamental terms of an LLC’s ownership, operation and management are set forth in its LLC Operating Agreement.
So what is an LLC Operating Agreement? It can be a written document or merely an oral understanding. A written agreement, however, is typically used because it memorializes the understanding and agreements between the members which, in the event of a future dispute or misunderstanding (or the unfortunate possibility of litigation), is invaluable protection for all parties involved.
Although each LLC Operating Agreement is different, it should generally set forth certain fundamental terms, such as:
There are numerous benefits to a Delaware LLC. One of the most popular aspects is that the state of Delaware does not require a Delaware LLC's Operating Agreement to be filed or made public, as some other states do; thus your Delaware LLC's Operating Agreement remains completely private among you and your fellow LLC members.
A Delaware LLC is typically formed by filing a Certificate of Formation with the state, which includes only the name of the LLC and the office of the Registered Agent, which allows all the members of your LLC to remain private.
If you are about to launch a start-up, you have no doubt asked yourself, “Do I need a business license?”
No matter what type of business you own—whether it’s in a physical storefront or based online—and regardless if it’s a small or large company, you are going to need to obtain and maintain a business license (possibly more than one). Business licenses can be complicated, so we have put together a blog that addresses the often-confusing topic of business licenses.
What is a business license?
What is the point of a business license?
Who needs a business license?
Where can I get a business license?
How do I get a business license?
What happens if I do not obtain a business license?
What happens after I have my business license?
Our partnership with LicenseLogix makes it easy for new and existing businesses to obtain all the licenses and permits your business may need. Their Client License Information Center, or CLiC, makes it easy for you to manage the business license renewal process, thus avoiding late charges and fines.
Keep in mind that it is not just new businesses that have to think about business licenses. Existing businesses must be mindful as well. Many situations could cause your company to fall out of compliance. The following are circumstances in which the requirements of your existing business license could change, and your company could need to update its business license:
Business license compliance is an important aspect of owning a company, but it doesn’t have to be stressful or tedious, however, some governmental agencies are easier to deal with and more efficient than others.