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Picture this: you have gone into business with your best friend. No matter how close you are, how long you have known each other and how perfectly you have put together your business plan, you must consider a business partnership a marriage. Every spouse, and every business partner, begins the relationship with the expectation of a long and fruitful relationship, yet this can be a somewhat naïve assumption. Therefore it is best for all parties involved if you are prepared for the possibility of an irreconcilable breakup. In the case of a marriage, this preparation is called a prenuptial agreement; in the case of a business venture, the preparation is called a buy-sell agreement or, a bit more caustically, a shotgun clause.
If you are forming a corporation with your best friend, your buy-sell agreement would typically be included in the Shareholders Agreement or the corporate bylaws; if you are forming an LLC with your best buddy, the buy-sell agreement is usually found in the LLC Operating Agreement. While the buy-sell agreement can be customized for more than two partners, the typical agreement is between two parties. Essentially, a buy-sell agreement allows for one of the partners to offer to buy the other partner’s share of the business for a specific price. This price is set by the partner executing the clause. The other partner has the opportunity to either accept the cash offer or buy the other partner out for the exact amount. The period of time in which the transaction is to be completed is stipulated in the buy-sell agreement ahead of time. The response time is typically short, somewhere in the neighborhood of 20 to 40 days. If you and your friend cannot effectively communicate in order to split the business fairly and hostilities are mounting on a daily basis, then at this point it may be best to end the business (and, unfortunately and inevitably, personal) relationship as soon as possible.
This is obviously not an ideal situation. However, if all avenues of disagreement resolution have been exhausted, the buy-sell agreement exists so that one of the partners can execute it in order to avoid the financial (not to mention emotional) distress of potentially acrimonious actions. Once the falling-out occurs, the hope is that by dividing your mutual business quickly and equitably, the business itself will not be adversely affected.
Let’s look at a specific (but hypothetical) example: two close friends open a restaurant together, each agreeing to invest $50,000 of their own money. After they form an LLC, the friends (and now business partners) are able to secure a small business loan for an additional $100,000. In their LLC’s Operating Agreement, they stipulate the equity contribution and the fact that all profits shall be shared evenly. They also include a shotgun clause in the Operating Agreement, stipulating a 30-day response time should this clause ever need to be executed by one of the partners. Their restaurant does well at the beginning; however, business eventually flattens out. Minor disagreements that were easily resolved when their business was successful are now more difficult to resolve. Each partner still believes the restaurant will succeed—they tell themselves it is seasonal, or perhaps there are other economic factors are affecting sales. Stress levels rise as table reservations wane. Bills are piling up but business is dipping even lower. The partners, once best friends, reach the point where they rarely speak to one another. Tensions continue to escalate and the business begins to suffer. The solution is clear: the former friends and current business partners need to split up; just like in an unsuccessful marriage, their problems have become too big and invasive to tackle. Unfortunately, there are no corporate marriage counselors to assist in the reconciliation process. Finally, one of the partners offers to buy the other partner out for $60,000, per the buy-sell agreement. Although this seems like a fair price, both partners feel the true value of the investment is worth far more. However, once the shotgun clause has been triggered, there is no going back.
The danger of the shotgun clause is that everyone’s personal financial situations are not identical and, due to the short response time of the buy-sell agreement, one partner may possess a distinct advantage. Let’s add to our hypothetical situation: the partner executing the shotgun clause knows that the other partner has just extended himself financially by purchasing a new home, and thus cannot match the offer. This leaves the surviving partner with 100% equity in the business as well as the small business loan debt. Since it is typically difficult to secure financing for the purpose of responding to a buy-sell agreement, the surviving partner would be in serious financial trouble.
There are two lessons here: it is best to always carefully consider all the terms and ramifications of your buy-sell agreement, which can make your Shareholders Agreement or Operating Agreement infinitely more important (far too often this is an afterthought not given the attention it deserves). If you choose to include a shotgun clause, keep the Latin phrase Praemonitus, Praemunitus in mind: it means “forewarned is forearmed.” As for the second lesson? As Mario Puzo, author of the The Godfather series succinctly put it, “Friendship and money: oil and water.”
Unfortunately, companies sometimes run their course and no longer yield any profit for their owners. Harvard Business Services, Inc. is always sorry to hear that an owner needs to cancel his/her LLC or dissolve his/her corporation. We’re here to help when the situation occurs, and we can answer any questions you may have about how to close a company. We have greatly appreciated and enjoyed the opportunity to serve as your Delaware Registered Agent for the years your company was in existence.
What Will You Need to Close a Company?
When your company was originally filed, a Certificate of Formation/Certificate of Incorporation was submitted in order to create the new entity. When it is time to close a company, a document is filed with the Delaware Division of Corporations; this document is called a Certificate of Dissolution for corporations, and a Certificate of Cancellation for LLCs.
How can we help you close your company?
Harvard Business Services, Inc. makes the process of closing your company as simple as possible. All you need to do is call us at 800-345-2677 or email us and we'll take it from there. We can prepare and file all the necessary documentation for you. Before we can proceed with the filing of the documents, however, all your company's Franchise Taxes must be paid, including the current year. Harvard Business Services, Inc. can prepare a Certificate of Dissolution or Certificate of Cancellation for your signature and forward it to you via fax or email. It must be signed by the authorized person of the LLC or an appropriate officer of the corporation. Once signed, simply return it to us by fax or email, and we will file the certificate with the state of Delaware within 24 hours.
The state typically takes 3 to 5 business days to return the receipt of filing. As soon as the approved document is available, we will forward it to you for your records. We strongly suggest clients speak with their accountant/tax professional before proceeding with a dissolution or cancellation of a company. Once the filing is approved, it is difficult to undo.
If your company has a bank account, you should close the account before filing the Certificate of Dissolution/Cancellation. If you have filed taxes with the IRS, you will need to file a closing tax return after filing the Certificate of Dissolution/Cancellation, and attach a certified copy of the certificate to your final tax return.
Please call us at 800-345-2677 or email firstname.lastname@example.org for more information on how to close a company. Harvard Business Services, Inc. is here to assist you.
The “Close” in Close Corporation should be thought of as an abbreviation for “Closely Held Corporation.” Close Corporations are often operated by a single person or a small, tight-knit group, such as a family, and cannot have more than 30 shareholders.
The Delaware Close Corporation is an often-misunderstood entity type. Some people refer to it as a “Closed” Corporation, which is not accurate. Other people refer to it as a C Corporation, which it can be, but a General Corporation can also be a C Corporation. So what is the major difference between a General Corporation and a Close Corporation?
A General Corporation can have as many shareholders as it sees fit. With a Close Corporation, there are restrictions on the sale or transfer of stock. The sale or transfer of stock in a Close Corporation can be restricted by the Right of First Refusal clause. Let’s look at an example in order to clarify.
Johnny, Larry and Sally form a Close Corporation. They authorize 3,000 shares and distribute them amongst themselves, equally. After some time, Larry decides he wants to leave the company; in addition, he would like to sell his 1,000 shares to his friend Tony, who agrees to purchase them. The Right of First Refusal clause can explicitly state that Larry cannot sell his shares to Tony unless Johnny and Sally agree they do not want the shares; they must also be in agreement that Tony is permitted to purchase the shares. If either circumstance is not agreed upon by Johnny and Sally, then Tony cannot be issued the shares.
These types of situational agreements illustrate why it is typical for family-run businesses to form a Close Corporation. A General Corporation does not include a Right of First Refusal clause. In this same example, had it been a General Corporation the three friends had formed, Johnny and Sally would not have had a say in whether or not Tony could purchase the shares from Larry. If it were a General Corporation, Larry could have split up his shares and sold them to 1,000 different investors if he had wanted to do so.
In general, most clients who are looking to raise funds and attract investors will choose the General Corporation as their business entity type. However, when it comes to small, tight-knit groups, families or single-person businesses, the Close Corporation can often be the logical, strategic choice.
The Close Corporation, like the General Corporation, can elect to file for Subchapter S tax status by filing IRS Form 2553 in a timely manner (and if it has met all the other qualifications). The individual shareholders must be United States residents. This filing allows the Close Corporation to enjoy pass-through taxation, similar to that of an LLC.
When it comes to Delaware Franchise Taxes, General and Close Corporations are taxed in the same manner. Minimum stock General and Close Corporations pay $225 for the Franchise Tax and Report, while maximum stock General or Close Corporations pay a minimum of $400 for the Franchise Tax and Report, but this amount can increase based on the issued shares as well as the company’s gross assets.
Feel free to read more detailed information on Delaware Close Corporations here.
If you have additional questions on forming a Close Corporation, General Corporation, LLC or any other type of Delaware business entity, please call Harvard Business Services, Inc. at 1-800-345-2677 or email email@example.com.
How can you keep up with the competition if you don’t know what they’re doing? To compete in today’s marketplace, your business needs the competitive edge, and one way to do this is by gathering information about competitors in order to acquire an advantage, or to protect an existing one. It’s easy for new entrepreneurs to be so focused on the progress of their own company that they don’t take time to look up and around.
“Learning everything you can about your competition is time-consuming, but the return on investment is enormous," says Sally Wright, president of Alliance Consulting Group in New Brunswick, N.J. Knowing the strengths and weaknesses of competitors, as well as how they are viewed, what attracts customers to them, and how their quality of service compares to yours will help business owners know what they are up against.
One of the best ways to gather information from competitors is to visit their business and buy from them. If you perceive a weakness, capitalize on that by improving your own products and services. Keeping files on the competition can be beneficial in identifying habits and trends. Keep copies of promotional material to model their success, while adding your own creative strategies to put yourself in a better position. Always look for ways to differentiate yourself from others.
Visiting trade shows and using the internet are excellent ways to keep up with competition. The web is a wealth of information which can be used to your advantage. Monitoring all information, including job postings on a rival’s website or other industry job boards can help detect a company that is introducing a new initiative, and also find competitors looking to lure your talent away. Making phone calls on a regular basis with specific questions is an easy way to do research on the competition in order to learn what they are doing and what changes they are making. You can’t afford to be complacent in today’s marketplace, but keep in mind that the competition is probably checking on you also.
Welcome to the Successful Entrepreneurs Blog Series. In this monthly blog series, Harvard Business Services, Inc. will interview a variety of successful entrepreneurs whose company’s range from large to small and from local to international.
Disclaimer: Some of the featured companies will be clients of Harvard Business Services, Inc., and we will always disclose this information. If you have a suggestion for a Successful Entrepreneur Blog or would like your company to be featured in this series, send us an email.
Jamu Juice At-A-Glance
|Incorporation Date:||December 2, 2014|
|Type of Business Entity:||Public Benefit Corporation|
|Delaware Company?||Yes, via Harvard Business Services, Inc.|
|Products/Services Offered:||A variety of instant turmeric and ginger chai teas inspired by Indonesian traditions and Ayervedic medicine.|
A Public Benefit Corporation has a dual purpose—to profit shareholders and to benefit the public. In fact, every Public Benefit Corporation includes a proclamation that it will attempt to maximize shareholder value as well as provide a social benefit. It is an excellent option for entrepreneurs who want to form companies with clearly defined social contributions. Recently, we spoke with Jessica Filkins, founder of Jamu Juice, and her business advisor and brother, Walter Filkins to find out why Jessica decided to form a Public Benefit Corporation, how it is working for her and what is ahead for Jamu Juice.
What inspired you to start Jamu Juice?
I spent four years learning about health and healing. After several rounds of antibiotics, I had developed stomach problems and I wanted to heal myself. I traveled and I also went to the Institute for Integrative Nutrition. While traveling in Indonesia, I learned how to make a tea with significant anti-inflammatory properties. From it, I saw a positive healing response in my body. I wanted to share the anti-inflammatory tea that helped me with the rest of the world.
At the same time, I noticed that people in that area of Indonesia sold turtle eggs as a source of protein and I found it rather sad. One day, when I was swimming in the ocean, a small turtle swam with me and I got the idea for a business venture that would have a dual purpose— to bring a healing product to the rest of the world as well as make an impact on important social issues, particularly conservation or food security.
There is another part of the public benefit of Jamu Juice, too—the purpose of this tea is not just to taste good but also to maintain the medicinal qualities of the spices in the tea by using the highest quality and often the most expensive ingredients available. Being a PBC allows us to write this purpose into our mandate, and protect this purpose, even if down the road, we decide to sell the company.
Why did you choose the Public Benefit Corporation over a General Corporation or a Non-Profit Corporation?
The primary reason we incorporated as a Public Benefit Corporation was so that, in the future, if we do take on shareholders, our mission will continue to come first.
You operate out of Rhode Island; why did you choose to incorporate in Delaware?
We incorporated in Delaware because Delaware corporations simply have more clout. In my research, I found out that being a Delaware corporation will make it easier for another company to fund, or acquire a piece of, Jamu Juice.
Has owning a PBC helped you to raise mission-aligned capital? Has it helped you to attract the attention of venture capitalists or social investors?
We started a year ago, and until recently we have been focused on the beginning stages of the business. We have not sought out investors yet. We choose the PBC with the long-term in mind. However, being a business with a higher purpose did help us raise $5,000 through a crowdfunding campaign this past winter. The money we raised paid the first two month’s rent in our new space, which includes our own certified kitchen and dedicated office.
Do you have any resources or tools that you have relied upon that you would recommend to other entrepreneurs?
A lot of people have asked me, “How did you start this company with no business experience?” I can say that I relied on the fact that I do a lot of research and I am willing to talk to people and ask questions.
One of the biggest challenges I had when I first started was becoming certified in the state of Rhode Island to work with food products. In the beginning, it was like a scavenger hunt. It seems easier now, looking back, but there was no book or resource I could turn to at that time. Now, I do my best to help others who are just starting this process.
What I would say to entrepreneurs is to find others in your area who have done something similar to what you are doing and ask them questions.
How did the people at Harvard Business Services, Inc. help you get your start? They were extremely helpful and did a great job explaining the whole process of incorporating. It went very smoothly. They were easy to talk to and that was a big help to me, especially since I really did not have a lot of knowledge about this part of being a business owner.
What is next for Jamu Juice?
Right now, we are in over 30 different stores, including several co-ops, cafes, health food stores and yoga studios. Our products are available in anywhere from two to six farmer’s markets (depending on the time of year) and our online orders continue to increase each week.
We are looking into bottling our products; it is at that point at which we will start seeking investors. We are currently talking with Whole Foods. In the next month or so, Jamu Juice will be available in their barista bar in Rhode Island and, with some changes to our packaging, it may soon be on the shelves at Whole Foods as well. We are currently moving into our own office and production facility; in fact, we brought everything there today.
Harvard Business Services, Inc. would like to thank Jessica and Walter for taking the time to let us interview them. If you are interested in learning more about the Public Benefit Corporation or you are ready to form your company today, our friendly and experienced customer support staff is ready to assist via phone (1-800-345-2677), email (firstname.lastname@example.org), live chat from our website or Skype (Delawareinc).