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The HBS Blog offers insight on Delaware corporations and LLCs as well as information about entrepreneurship, start-ups and general business topics.

Where to Incorporate: Delaware vs Nevada Infographic
By Michael Bell, Veselin Ganev Tuesday, May 31, 2016

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.

 

where to incorporate: Delaware VS Nevada

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Business Terms for Delaware Companies
By Andrew Millman Monday, May 23, 2016

Business Terms for Delaware Companies

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.

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The 3 Key SEC Rules on Crowdfunding You Need to Know
By Brett Melson Sunday, May 22, 2016

The 3 Key SEC Rules on Crowdfunding You Need to Know

The Securities and Exchange Commission (SEC) finally adopted exciting new rules that permit companies to raise money through crowdfunding.  As a result, companies will be able to raise up to $1 million in any 12-month period from a broad base of ordinary investors through the internet.

Persons contributing money will receive either an interest in the company (an equity stake) or a repayment of principal invested plus interest (through a debt instrument). Unsurprisingly, the jurisdiction of choice for most crowdfunding campaigns to incorporate is Delaware, because the Delaware corporate law structure is the best in the world.

Previously, raising money through crowdfunding involved one party providing money to an individual or company in exchange for some tangible goods. For example, a band raising money for a new album would accept contributions from fans in exchange for future free copies of the new album or band-related goods like T-shirts, concert tickets or key chains.

These crowdfunding offerings—tokens of gratitude, in a way—were conducted through popular internet sites such as Kickstarter and Indiegogo. Now, however, crowdfunding investors can obtain a piece of the actual company or make a loan to the company instead of an investment. Soon there will be other new and innovative crowdfunding campaign platforms to capitalize on the new rules enacted by the SEC.

However, the new SEC rules impose a number of requirements upon companies seeking to raise money through crowdfunding:

  • Companies will need to engage in crowdfunding through qualified internet "funding portals."  Many of these portals are preparing to begin operating now that the SEC's final rules have been passed. These portals will assist companies in meeting their requirements under the crowdfunding rules.
  • Companies will need to provide certain information to the SEC, the funding portal assisting in the offering and to the investors, including (but not limited to) the following types of disclosure:
  • a statement of the target offering amount, the deadline to meet the target amount and whether the company will accept amounts in excess of the target amount
  • a discussion of the company's financial condition
  • financial statements (which, depending on the amount raised as well as other factors, may need to be reviewed by an auditor)
  • a description of the company's business and intended use of the proceeds
  • Information about the Directors, officers and key owners of the company
  • Companies will also need to provide an annual statement to the SEC and investors containing all requested information. There are also limitations on the aggregate amount that individual investors can invest in crowdfunding offerings.

With the arrival of the new Security and Exchange Commission rules, the crowdfunding community now has clear definition on how to progress and how to further the potential of crowdfunding campaigns.

Please feel free to contact us with any questions or concerns about starting a Delaware entity for your crowdfunding campaign. We will be glad to assist you.

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Filing Delaware LLC Franchise Tax [INFOGRAPHIC]
By Veselin Ganev, Meri Weiss Tuesday, May 17, 2016

All Delaware LLCs and LPs must pay their annual Franchise Tax Fee on or before June 1. The state of Delaware currently issues its official LLC/LP Franchise Tax notices as a white, paper report. As your Delaware Registered Agent, Harvard Business Services, Inc., which represents over 39,000 Delaware LLCs and LPs, receives, sorts and mails all those paper notices to our clients.

By now you should have received the official notice; please note, however, it is possible you will receive your Franchise Tax notice after you have already paid online or over the telephone. If you’re unsure, please feel free to contact our Franchise Tax Department. The infographic below contains FAQs to further assist you. 

Filing Delaware LLC Franchise Tax

 

 

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Why Convert Your Tax Status from S-Corp to C-Corp
By Jeremy Reed Monday, May 16, 2016

why convert your status from s corp to c corp

Why Convert Your Tax Status from S-Corp to C-Corp

 

The most common change in taxation status is from a C corporation (usually a General Corporation) to an S corporation in order to allow for pass-through taxation of income or loss. This is typically done to avoid double taxation of corporate income.

However, business owners do sometimes want to convert their tax status from an S corporation to a C corporation, sually because their companies no longer meet the requirements outlined by the IRS to be considered an S corporation. The following requirements must be met in order to retain S corporation tax status:

 

  • Must file IRS Form 2553 in a timely manner
  • Approval of all shareholders of the corporation
  • Limited to no more than 100 shareholders
  • Shareholders cannot be non-resident aliens
  • Shareholders cannot be other S corporations
  • Cannot have more than one class of stock

If any of these requirements are not met, you must convert the tax status of the corporation. For example, you would need to change your corporation’s tax status if you want to increase your company’s number of shareholders with the goal of receiving additional funding or if you’d like to bring on foreign investors.

Another reason to change the tax status is if your corporation would like to accumulate income without the shareholders being taxed on their portion of the retained income. If your company is a C corporation, the shareholders are only taxed on the dividends they receive.

If the corporation violates any of the S corporation requirements the IRS can automatically terminate a company’s S tax status.

 

How to Convert Your Tax Status from S-Corp to C-Corp

 

The IRS does not offer a standard form for changing your company’s tax status from S corporation to C corporation. Instead, it simply requires a written statement be filed with the appropriate IRS service center, along with a consent signed by a majority of your corporation’s shareholders (more than 50%).

The written statement can specify a date as long as it is not prior to the filing of the actual tax status reversal. If no specific date is listed, the filing becomes effective during the current tax year as long as the revocation is filed by the fifteenth (15) day of the third month of the current tax year. If it is filed after that date, it becomes effective as of the first day of the following tax year.

Before making any changes to your corporation’s tax status, it is best to consult a tax professional, as tax professionals are experts in this area and thus best suited to advise on tax status matters.  

 

Sources:

“When is the Best Time to Switch from an S Corp to a C Corp?”

“Can I Change My Business From an S Corporation to a C Corporation?”

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