LLC Operating Agreement – Lawyer Up or DIY?

Go ahead and google “Operating Agreement Disputes” under the news search function. Go ahead – I’ll wait.

Depending on when you read this article, you may see a news story about a $65 million dollar hotel renovation in Palm Beach that is currently on hold as partners sue each other over a breach in the operating agreement. Perhaps you read about Walker’s Restaurant and it’s former LLC manager being sued for a breach of fiduciary duties as listed in the LLC’s operating agreement. Or, you may have read many of the countless partner and member disputes that occur every day that rely on the LLC’s operating agreement for clarity.

If the Articles of Formation is the birth of an LLC, then the operating agreement is the brain (and you’re the heart!). But unlike the Articles of Formation, which is generally a short form you have to fill out for the state, the operating agreement can be significantly more complex, less understood for most new business owners and not as straightforward. The operating agreement can address an almost infinite number of issues pertaining to the operation of your new business and can lay out how to handle the evolution of your business (the only consistent thing in this world is that things will change!).

Because of the potential for complexity in an operating agreement (and I to want to emphasize “potential” – because it doesn’t have to be complex, but it can), we’ve reached out to dozens of experts on the topic, including highly successful entrepreneurs, investors and many business attorneys. We’ll be including their thoughts and comments throughout to help expand on the topic.

What is an Operating Agreement Anyways?

No state requires you to file an operating agreement with the Secretary of State, many just require that you have one on record. Moreover, there are three states – Maine,  New York and Missouri – that actually require you to create an LLC operating agreement and 2 states – California and Delaware – that mention that, even if you don’t have a written operating agreement, they will look for an oral agreement or “implied” agreement; wether or not you explicitly executed one!

Despite this lack of state oversight, an operating agreement is the lifeline of your business. It not only establishes the structure of your business, but it also protects you from liability and, most importantly, it creates the governing rules of your business. That includes detailing how you’re going to account for and handle difficult situations in the future.

Kevin O’Connor, Partner on the Commercial Litigation team at Peckar & Abramson has over 20 years of experience working with corporate disputes. Kevin says “ Business people are often starry eyed about their future prospects together and are simply not able to have foresight about the many difficulties that can arise a few years or even a decade or more into the future.” An operating agreement is meant to help plan for those difficulties.

Generally speaking I think its always in the interests of the business owners to have their agreement prepared by qualified counsel. As a litigation attorney, I can tell you that one common element of a dispute is that the agreement was not fully vetted by legal counsel but instead pulled together by business people or, worse yet, there was no agreement at all. Business people are often starry eyed about their future prospects together and are simply not able to have foresight about the many difficulties that can arise a few years or even a decade or more into the future. There is a misconception that drafting an operating agreement is an expensive proposition. It does not need to be. You just need to shop for the right attorney who is willing to do it on a flat fee. Often these agreements can be drafted in a few hours’ time, assuming no heavy negotiating over the terms.

An operating agreement is a special business “contract” that defines the operations and procedures of a limited liability company (LLC). Business Attorney Mia Mota with the Tech Law firm describes it as being almost equivalent to having a company’s bylaws and shareholders’ agreement in one document.

In an operating agreement, you should try to think through possible contingencies to ensure they are accounted for and included in order to protect the owners and the company in certain situations. That sounds ominous and daunting – where do you even start, what are the factors every business should consider, and what are the factors that you should consider for your business specifically? Remember, an operating agreement is built around your business – and depending on what you plan on doing with your business, there may be specific items for you to consider.

[We] recommend that small businesses hire experienced legal counsel to assist in drafting a LLC’s operating agreement. An operating agreement is basically an internal guidebook on the rules and management of a LLC. Your company’s operating agreement should be specifically tailored to your company, your manager/owners, and to your business’s needs. Obtaining legal counsel for drafting your operating agreement ensures that specific clauses and legal phrases are included, such as:
Who get’s to determine when there are profits to distribute?
How profits – or, often more importantly, loses – allocated?
If someone wants to be bought out and leave the company, how do you decide how much their interest is worth?
What happens in the event there’s a dispute between owners or the company and an owner?
What if an owner dies, what happens to their membership interest?

Operating Agreement Overview

Let’s start with an overview of the items in a standard operating agreement, then dig a little deeper into specifics.

An operating agreement should include the following:

  • Major Terms – Think of this as setting the baseline for your agreement. Major Terms are the major contractual obligations within a contract. They may be more or less enforceable based on the actual law, but this is the core
  • The Name of the LLC – Straightforward – what is the name of your LLC as registered
  • The Term of the LLC – Does your LLC have a specific end date or trigger to end – is it limited in how long it will operate before you wind down? The majority of LLCs are perpetual (i.e. they go on forever), but you can force closure for any number of reasons
  • The Formation Date of the LLC – Straightforward
  • The Purpose of the LLC – Do you know what you’re going to be doing with this LLC? It’s possible to have a general purpose LLC (e.g. something like “The LLC is formed for the purpose of engaging in the business of *. The LLC has the power to do all things necessary, incident, or in furtherance of that business.”) – or it can be more specific if you know what the company will be doing
  • Contributions of Members – Are you starting this LLC with one or more partners? What is each partner contributing to the LLC. Are partners putting in money? Are they experts in a field and will be providing some sort of IP (intellectual property)
  • Liability of Members – Does the LLC agree the members should not be held liable to the company when acting as a Member? What about due to negligence or malice?
  • Management – Who within the LLC manages what? In what cases do you need unanimous approval? Who gets final say in a dispute?
  • New Members and Transferring Shares – Can a new member be added? What happens if a member dies or gets incapacitated – who gets their shares and how are they paid for?
  • Fiduciary Duties – What are the duties of the members to the Company and other members? Are there any scenarios where conflict of interest may arise, or is it ok for a member to act in their self interest (or under what circumstances is it ok?)
  • Meetings – How often do you plan on meeting and what’s to be discussed there
  • Dissolution and Termination – What happens if the company needs to shut down? What happens if a member owes the company money? Can a member ever be removed? If so, how?
  • Miscellaneous By-Laws – a catch all for * a lot* of other potential issues that may come up

Once an operating agreement is drafted and agreed upon by the LLC’s members, the operating agreement becomes the heartbeat of the LLC – every decision will somehow be rooted in the operating agreement.

At this point – you might be asking yourself, do I need an operating agreement if I’m a single-member LLC. Isn’t it redundant to have one? You’re basically writing up a contract with… yourself. Attorney and CPA Michael Margrave absolutely recommends that you do –

If the operating agreement is for a single-member LLC, we recommend some form of operating agreement be utilized, be that our basic form or a form that the member procures. If the member wants us to review a form not prepared by us, we will advise that we can do that although it may be more cost effective for our form to be utilized. In this scenario, the operating agreement is often more important to provide evidence downstream if liability issues arise that the entity has been operated as a separate business and is clearly distinguishable from the activities of the member/owner.

To parse that down, one of the big reasons you are opening up an LLC is to protect yourself as an individual from debts and liabilities that the business may incur – i.e. if the business takes on a bank loan and ends up failing, the bank can’t come after your personally to collect on the loan (assuming you didn’t personally guarantee the loan). However, the courts are not dumb, if you use the limited liability company in a way that it co-mingles with your personal accounts, or the LLC is clearly a sham – it’s possible that some or all of the debts and liabilities can be assigned to the individual member(s), something knowns as “piercing the corporate veil”

courthouse

So – how does having an operating agreement help you?  If someone is trying to make a claim against you personally (to pierce the corporate veil) – you will have to show that the business entity is in fact separate from you as an individual. The operating agreement can act as a proof point.

How to Get Started

It’s clear that an operating agreement should be part of your plan when starting a new company via LLC. The next question is generally… what do I do now? How do I start writing the operating agreement and do I need an attorney to help me or should I do it myself?

After talking to dozens of experts, successful business people, attorneys specializing in business law and others closely tied to the start-ups and company creation, we got an answer…

So, without further ado – THE DEFINITIVE answer is… It Depends.

Sorry for the build up and the let down, but, like most things in business, the right answer is not always straightforward and there is too much nuance to be able to say that there is a right approach for every case.

With that in mind, let’s explore the different options and hear from the experts so that you can make the decision that is best for your business.

There are 2 main approaches to creating an operating agreement:

  • Do It Yourself: Generally finding a form operating agreement online and working to modify it to suit your needs
  • Working with an attorney: Finding a qualified attorney to help you draft an operating agreement that suits your needs

There is a huge spectrum across these two options and even within the two approaches, so we’ll try to explore each option in depth using thoughts and advice from qualified individuals we talked to

crossroads
The first fork in the road when you start your LLC – DIY or work with an attorney?

Option 1: DIY – or “I’m going to avoid an attorney and write something up myself”

As of writing, only 5 states in the US require that you have an operating agreement: California, Delaware, Maine, Missouri and New York. That being said, no state requires that you file your operating agreement with the state, just that you have one that’s been adopted internally as a business. Many business owners forgo drafting an operating agreement; but as we’re learning today – that’s certainly not a good idea. One measure that some business owners take is to draft their own operating agreement – either as a final document or as a document to take to an attorney. Generally this starts by finding a form agreement and either modifying for your business or filling in the blanks.

Using a Form Operating Agreement – the Risks and the Rewards

There are many examples of form operating agreements out there, but the basic idea is the same: A template with “fill in the blank” spaces to put in your specific company info. In some cases, these templates can be a little more customized based on the specific industry that you work on, but the customization is generally limited. There are a handful of companies that provide these services, like IncFile and LegalZoom, but the enterprising LLC owner can do a little bit of extra googling to find a free template to use.

At the end, you can print, save and sign your document. It’s as simple as that.

In many cases, this satisfies the *technical* legal requirement associated with the states that required an operating agreement, but it may also fall short of what you really need to protect your business and yourself from misfortune. Let’s review the benefits and risks of using a form/template operating agreement.

When I open a company “I pretty quickly set up an LLC, and I have a form operating agreement that I’m pretty comfortable with that I use.”

— Afif Ghannoum, CEO BIOHM Health and Forbes Contributor

Form Operating Agreement – Benefits

There are several benefits to using a form/template operating agreement

  • Cost: It is going to be less expensive than working with an attorney. The costs can range from Free to $150 for a company like LegalZoom to walk you through the template.
  • Speed: A form/template agreement can be filled out quickly – in under 30 minutes if all you’re doing is reading through the document and filling in the blanks.
  • Satisfies Technical Legal Requirement: The 5 states mentioned above that legally require an operating agreement have very light guidance on what is actually required in the agreement – most forms you can find online or pay for should satisfy the requirements.

As Afif Ghannoum, CEO of BIOHM Health and Forbes contributor tells us: “[When I open a company] I pretty quickly set up an LLC and I have a form operating agreement that I’m pretty comfortable with that I use.”  As an experienced business person, Afif is optimizing for speed for his LLCs so that he can quickly get the LLC off the ground.

Form Operating Agreement – Risks

There are several significant risks associated with using a form/template operating agreement.

  • Not Thorough: Depending on your specific business, the numbers of partners that you have and how you want to operate, it’s likely that a form template will not cover all of the cases or scenarios that might pop up.
  • Not Tailored: Different business types have different operational requirements, as does where you’re operating and how you’re conducting business. A form agreement may include items that are not relevant for your business and will confuse things. The language used may also be interpreted differently based on where you’re located and previous case law – that may not be accounted for in the form.
  • Lack of Understanding: Have you read through the operating agreement template? Do you fully understand what is being said and what agreements you’re adopting? Even if the answer is yes, do you now know how the agreements and language you’ve adopted in your operating agreement will be acted upon by the courts in a legal case (i.e. what precedents have been set and how your local courts react to certain cases)? The first rule of any contract is to make sure you understand what you’re signing; that’s the case here as well.

You may be asking yourself – what if I use a form operating agreement and ask an attorney to review it to make sure I did it right and everything looks good. We asked this to our panel of attorneys and the overall consensus was that it doesn’t really work that way. Michael Smith, Named Partner at Smith Rayl Law Office, LLC puts it well when he said:

A similar question I sometimes get from clients is something like, “I’ve already written the operating agreement. Will you just give it a quick review?” I’ve tried that before, and it doesn’t work very well. I have the same professional responsibility obligations if I “just give it a quick review” that I have if I write it entirely myself, and I will not do the work without doing a thorough review and, if necessary, an extensive revision. Moreover, it’s not likely to save the client any money because it often takes longer to review and revise another person’s document than it takes to write one using language that I’ve already developed and refined myself. In addition, some clients are offended to receive a marked-up document that looks as if it’s been bled all over. If the client has already written something, I may take a look at it for input, but I will still plan to start all over myself.

 Essentially what every attorney agrees on is that, if they are going to sign-off on a document as being “good to go”, they have a professional responsibility to really understand the document and make sure it fits the client’s expectations. As such, they almost always end up re-writing the document and the cost savings the client expects are not there.

Data Inspection

One thing to keep in mind – an operating agreement does not necessarily need to be a static document. In the end, a legal agreement is only as good as how well it works to serve you so you should review annually and make adjustments as necessary. Steve Shindler, CEO and Co-Founder of AngelRoot, a resource for startups to network and empower each other, believes that using a form operating agreement and making adjustments as the business grows is just fine. As someone who founded and sold 3 companies and took a company public, he sees no issue with form operating agreements. As your business grows and expands, you always have the ability to amend your operating agreement and tailor it to the vision and purpose of your company. The caveat here being that Steve, like Afif mentioned previously, is an experienced business owner and has been through and seen a lot so he may be able to head off problems before they sink a company. Both Afif and Steve use form operating agreements as an initial framework to get their LLCs kicked off quickly, but, in both cases, once they start working on the business in earnest and better understand what the business is and what challenges they may face, they, along with their attorney, tailor their operating agreements to suit the purpose of the business better.

“I also think an LLC operating agreement is something that the members should revisit at least on an annual basis. Circumstances sometimes change and companies pivot and what made sense a year ago might not make sense today. It is good practice for LLCs to hold an annual meeting, and that’s a great time to look over the operating agreement with the LLC’s attorney to see whether some revisions might be needed.”

Option 2: Lawyer Up

While those who have started businesses before don’t mind using form operating agreements, it may be beneficial that new entrepreneurs hire a business attorney. New business owners don’t have the experience of starting multiple businesses and falling back on their intimate knowledge of the business world.

Starting an LLC with another founder is like a quasi-marriage and the operating agreement will establish resolutions for problems that might come up. For example – if there is a dispute among members, you will have established guidelines for how the company is going to be valued and what the exit will look like.
It’s potentially dangerous to start an LLC with another founder without having an operating agreement, but almost anything is better than a form. The operating agreement for an LLC is like the bylaws and shareholder agreement for a C-corp, but all in one; it’s complicated and detailed, so you have to make sure to get it right.

For this very reason, the vast majority of business lawyers recommend that LLC founders have a lawyer prepare an operating agreement. A LLC operating agreement is one of the most complex and in-depth documents that your LLC will be held responsible for, and, according to Dana Shultz, an attorney who specializes in Business and Start-Up Law in the San Francisco Bay Area, many founders “don’t know what should or should not be in the agreement.” Even if a client bring him an existing operating agreement for review, it is often “more efficient for me [Dana] to start over, taking the client’s specific needs into account than to fix the existing OA.

I consider it significantly better for LLC founders to have a lawyer prepare an operating agreement (OA) than for the founders to prepare one on their own:

They don’t know what should or should not be in the agreement.
If they use someone else’s form of agreement, they won’t know which provisions are well-drafted and which are not.
If someone does bring an existing OA to me, it invariably is more efficient for me to start over, taking the client’s specific needs into account, than to fix the existing OA.
In the course of working with the client, I make sure that the OA and other formation-related documents comply with the founders’ expectations. (For example, you would be amazed how frequently founders mess up whether the LLC will be member-managed or manager-managed.)

Nevertheless, I understand that many LLCs are on a tight budget and that legal services may not be the highest priority. So, when I work with an LLC (or a corporation) that has been in existence for a while, the first task, invariably, is what I call “clean-up”: Filling in any pieces that are missing, and fixing any problems, so then we are in a proper position to move the entity forward from a legal perspective.

Having a lawyer draft your operating agreement will also help save you headaches down the road. If you formed your LLC with multiple members, you will more than likely have some sort of disagreement about a financial decision or the direction of your business. A strong operating agreement, one prepared by an experienced business lawyer, can save both you and your business. Kevin Brick, a business lawyer for Brick Business Law who regularly advises LLCs and business owners on a variety of legal issues, cautions that:

“Business owners often visit an attorney once they realize they have a problem, but not before. The adage that an ounce of prevention is worth a pound of cure applies to business planning as much as anything else. In the early stages of a business, business owners may make initial representations, agreements or other promises to each other. After a disagreement arises amongst business owners in an LLC, the past agreements, words and actions – all of which may have consequence – cannot be undone. If a dispute later arises, and the Operating Agreement is not properly agreed upon, drafted, adopted and memorialized, the parties can find themselves in a difficult position with the business held hostage. Sometimes a worse situation arises if the parties have drafted their own documents without the help of an attorney, which can have unintended legal consequences.

The process of consulting with an attorney to draft an operating agreement forces the parties to consider and agree upon important issues in the early stages of an LLC. What happens if a member dies? Under what conditions can a member transfer their shares? What are each person’s responsibility? What matters will require unanimous decisions and which ones would require a majority vote? Making these determinations early on, and properly documenting them in an Operating Agreement, can go a long way in avoiding significant stress, expenses and difficulties as the LLC moves forward.”

With that, let’s go into the benefits of hiring experienced lawyers to help you draft an operating agreement.

Lawyer Written Operating Agreement – Benefits

  • Thorough: A good lawyer will be detail oriented and thorough when drafting your operating agreement. They will take the time to understand your business and ask you the difficult questions up front. They will make sure you’re turning every stone to cover as many bad case scenarios as is prudent ensure an upfront understanding of the process and specifics used to solve these issues.
  • Foresight: A good lawyer will be able to talk from their experience on the challenges and issues that they’ve seen come up from their legal experience working with similar companies. This will allow you to head off common situations and circumstances that may impact your business that you might not know exist.
  • Customized: Having an operating agreement customized for your business is helpful. It can help you make sure that the right terms and agreement are put in place for your business and no extraneous items that may confuse the agreement are left in.

An airtight Operating Agreement, one that is fully customized and tailored to your particular business and situation, can ensure the longevity and health of your business.

I recommend LLC owners hire an attorney who will work with them through the initial document process. Since an operating agreement protects the LLC’s members during an audit as well as during litigation why not leave those tasks to the experts? An entrepreneur should focus on filling a societal need. Additionally, a well written operating agreement will account for growth and evolution of a business.

Lawyer Written Operating Agreement – Risks

  • Cost: There’s no way around it. An operating agreement prepared by a lawyer will cost more than an operating agreement prepared using a template.

That being said, in many cases, you should think very carefully about the state of your business if you think you won’t be able to afford a lawyer to help draft your operating agreement. Chris Clark offers the point that “If an LLC can’t afford to hire an attorney to help with an operating agreement and other basic legal necessities, the company is likely underfunded.”

I know that lots of new business owners are strapped for cash, but it is usually money well spent for several different reasons. For example, a lawyer can help with some basic decisions that can affect the economics of the business from the very beginning, such as working through the decision of taxation as a partnership or under Subchapter S (or, theoretically, Subchapter C, although that is seldom the best choice). In addition, the lawyer will ask questions that will force the business owners to think about unpleasant possibilities, such as what happens upon the death of one of the business owners or when the owners disagree, and those things can happen even from the very beginning. A more technical reason for LLCs that are taxed as partnerships is that some provisions, in order to be effective under the Treasury Regulations, must be in the operating agreement from Day One.

Conclusion

There are several ways that you can go about creating your LLC’s operating agreement. You can create one yourself using the multitude of incorporation services out there or you can hire an experienced business lawyer to draft a custom agreement for you. In the end, you need to decide what the best option is for you based on your budget, how much time you have and your risk tolerance. Remembering that an LLC operating agreement need not be a static agreement is important. Revisiting the agreement regularly can encourage you to make the necessary changes and modifications to evolve the written document as your business grows and evolves. At some point, an attorney will need to get involved, and working with a lawyer up front can help you think through and side step potentially large issues down the road – but the reality is that a lot of small businesses start off on a barebones budget. Whichever way you go, remember – work to understand the impact of your operating agreement and don’t be afraid to make modifications and changes as necessary to better support your business. 

Special thanks to:

Paul Miller, Dana Shultz, B. Mia Mota, Michael Margrave, Chris Clark, Mollie Schwam, Kevin O’Connor, Steve Shindler, Michael Ray Smith, Kevin Brick, Afif Ghannoum, Paul Chander

Without your help and the conversations we had, this article would not be anywhere near as complete, accurate or helpful.

Delaware Certificate of Good Standing

What is a Delaware Certificate of Good Standing?

What is a Delaware Certificate of Good Standing? A Delaware Certificate of Good Standing is a document provided by the Delaware Division of Corporations that declares that the company is in good standing with the State of Delaware. “Good Standing” means that the business entity, your business entity, has not been terminated either voluntarily or involuntarily. Your business could lose good standing if you fail to pay your taxes or declare yourself as a foreign entity in the state you operate.  

A Certificate of Good Standing is typically needed to open a corporate bank account, obtain a bank loan for your business, requesting a Certificate of Authority if you’re a foreign entity, or if you purchase any real-estate under the umbrella of your corporation.

You will know if you need a Certificate of Good Standing because you will be asked to provide it for certain legal documents. However, you should be mindful that you should only obtain one when you actually need it. Unlike other business documents, Certificates of Good Standing are time sensitive. Certificates are typically only valid for 30-60 days beyond the issue date. That means that if you are beyond the 60 day mark, you may need to request another one.

A Certificate of Good Standing can be obtained from the Division of Corporations in two formats: Short Form and Long Form. The short form certificate simply states that Delaware legally recognizes your entity and that you are current on your corporate or franchise taxes. The long form version states the same thing as the short form version, but it also lists all of the documents that you have submitted to the state of Delaware.

Obtaining a Certificate of Good Standing

A Certificate of Good Standing can be obtained by submitting a request to the Division of Corporations. However, be careful about knowing what you are requesting. The Division of Revenue does offer the ability to check a corporation’s status online for $10 but that’s all that is, a check of status. If you want the actual certificate, you can obtain a short-from certificate for $50.00 or a long-form certificate for $175.00. If you are in a hurry, you can expedite the request for an additional $50-$80 depending on the format. Keep in mind, that you will need to use Delaware’s Certification Request Memo or your corporate letterhead to formally request your certificate. You can check the fees for Good Standing Certificates and other document requests from the Division of Corporation on their website.

What is a Series LLC?

What is a Series LLC?  

You probably already know what an LLC is and the benefits of protecting your personal assets with a LLC designation. What you might not know is that depending on the state that you register in, you can incorporate multiple LLCs under a master or umbrella LLC. Each separate LLC is protected from every other LLC in the series and each LLC is only responsible for its own assets, debts and obligations.  One comparison to get a better concept of a series LLC would be a corporation with multiple subsidiaries. However, unlike a corporation, an LLC still offers all the benefits of a regular LLC without the additional paperwork and fees of a corporation.

What States Recognize Series LLCs?

There are only certain states that legally recognize series LLCs. Since Delaware first recognized this new business entity in 1996, many other states have also chosen to recognized series LLCs. Those states are:

  • Alabama
  • Delaware
  • District of Columbia
  • Illinois
  • Indiana
  • Iowa
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nevada
  • North Dakota
  • Oklahoma
  • Tennessee
  • Texas
  • Utah
  • Wisconsin
  • Puerto Rico

Benefits of a Series LLC:

There are many reasons why would would want to pursue a series LLC if you plan on opening up multiple businesses:

 

  • Asset Protection: Each LLC’s assets are protected from any negative judgement as a result of another LLC in the series. For example, if you are a business with several different product lines and each product is incorporated as a different LLC in a series LLC, each product and it’s assets are safe should a negative court judgement occur against one of your products.
  • Reduced Cost: When forming a series LLC, there is only one initial start up cost as opposed to paying the startup fee if you were to create multiple LLCs. Additionally, more often than not, there is no fee to add additional LLCs to your serial LLC. Additionally, only the parent LLC must be registered with a state and that also means that you only will need file only on annual fee for your series.
  • Less Paperwork: An LLC has less required paperwork and formal records that need to be kept in comparison to a corporation with subsidiaries. This benefit carries over to an LLC series entity as well.

 

Drawbacks of a Series LLC:

While forming a Series LLC might seem like a no brainer, there are a couple of things you should consider before pursuing this form of business entity.

 

  • Higher Initial Cost: The cost of forming a regular LLC compared to a series LLC is slightly cheaper in some states. States like Delaware and Texas, for example, don’t charge any additional fees for forming a series LLC. Illinois, on the other hand, charges $600 to form a regular LLC and $850 for a series LLC. Make sure you think about the long term vision for your company.
  • Uncharted Territory: As mentioned before, series LLCs haven’t been around for too long; only since 1996. There are still a lot of legal questions that need to be answered and precedents to be set.

 

Overall:

A series LLC makes sense if you plan on forming multiple LLCs that are going to be managed by one larger company. A series LLC provides similar asset protection to a regular LLC and lower costs and less paperwork. However, there is still some uncertainty with how the court systems in each state view and treat series LLCs. It’s best to review any past court decisions surrounding series LLCs in whatever state you choose to register in.

The Delaware Department Of Revenue – What the Heck Does It Do?

You’ve read everything there is to read about incorporating in the state of Delaware and have decided to begin the journey of being an entrepreneur. Well, one government entity that you need to be intimately familiar with is the Delaware Department of Revenue. The Delaware Department of Revenue is responsible for collecting all the tax revenue for the state of Delaware.

What Services Are Offered?

The Delaware Department of Revenue does more than just collect taxes. It also offers the following services:

  • ID Theft and Victim Assistance: We have all know someone that has been the victim of identify theft. In today’s digital world, we have grown in the habit of sharing more and more data online than ever before. However, this convenience has also turned into a liability. With over 500,000 tax returns every year, the Delaware Department of Revenue unfortunately receives fraudulent tax returns. The Division of Revenue offers fraud auditors to help victims of identify theft.
  • Gross Receipts and Tax Rates: One of the responsibilities of the Division of Revenue is to determine tax rates and license fees for business entities that operate in the state of Delaware. The detailed list on their website will list the license fee, tax rate, additional location rate and exclusion rate for your business category. Make sure to check out the list so you can begin planning for those expenses and understand when to file your returns. If you have questions about the information on this list, ask your Registered Agent or call the Division of Revenue directly.

 

  • Unclaimed Property: Believe it or not, “unclaimed property” is more common than you think. In the last 3 years, Delaware has returned over $300 million to owners. If you believe that you may have unclaimed bank accounts or insurance benefits in Delaware, it’s worth checking out.

 

 

  • Filing and Paying your Taxes: The Division of Revenue also makes it simple for you to file and pay your personal taxes or any delinquent person or business taxes. Everything is handled online through their Online ACH Debit Payment System.

 

 

  • Business Licensing and Registration: In order to operate a business in the state of Delaware, you must register with the Delaware Department of Revenue, the Office of Workers Compensation and the Division of Unemployment Insurance. You can purchase a license and register with Delaware’s Open Stop Licensing and Registration System. There, you can select what type of corporation you want to register, apply for an FEIN if you don’t have one and pay the necessary fees.

 

Some Quick Info:

Address:

Carvel State Office Building

820 North French Street

Wilmington, DE 19801

Phone: 302.577.8200

Fax: 302.577.8202

 

Tax Forms Needed:

Delaware Corporations: Form 1100

Delaware S-Corporations: Form 1100S S

Partnerships: Form 300

Individual Non-Resident: Form 200-2

What is the Corporate Tax Rate?

Every domestic or foreign corporation doing business in Delaware is required to file a corporate income tax return and pay a tax rate of 8.7%.

What is a Corporate Resolution?

A corporation has a duty to its shareholders to not only make decisions in the best interest of the shareholders, but also to keep them informed of major decisions that are made by the board of directors. While decisions can be communicated in a multitude of ways, such as emails or newsletters to shareholders and investors, a more formal way of documenting the major decisions of board of directors is through a Corporate Resolution.

Before we begin discussing corporate resolutions, let’s quickly review what a corporate charter is. While doing your initial LLC research, you may have stumbled across the term “articles of incorporation”. Well, the corporate charter and the articles of incorporation are interchangeable terms to describe the same thing.

Corporate charters are the birth of a business entity. They include the corporation’s name, its purpose, it’s for-profit or nonprofit designation location, number of shares to be issued (only for S and C Corps), names of the founders and names of the company’s directors. This document is then filed with the state where you will incorporate in. The corporate charter is filed with the Secretary of State in whatever state you are incorporating. If your charter meets the criteria set forth by the state, your business entity legally exists. A word of caution though – you must have your Corporate Charter finalized and approved. If you begin conducting business without an approved Corporate Charter, you and your personal property are not protected against any sort of litigation that might occur.

Types of Resolutions

There are three types of resolutions that can be passed:

  • Ordinary Resolutions: 50% of the directors/shareholders were present at the meeting
  • Special Resolutions: at least 75% of the directors/shareholders were present at the meeting
  • Unanimous Resolutions: 100% of the directors/shareholders present at the meeting.

If you are a sole owner and shareholder of your LLC, you can pass a resolution just by signing the resolution document. You can then keep record of that as to inform future shareholders and investors about previous decisions you have made.

Types of Decisions and Communication:

It’s important to remember that your company does not need to call the Board of Directors for every decision that needs to be made. However, any major decision that affects the overall all objective of the company needs to go through the corporate resolution process. Types of decisions that should go through the process are:

  • Hire and appoint officers of the corporation
  • Hire and dismiss employees
  • Refer a matter to a subcommittee
  • Approve a merger with another company
  • Approve the company to take on debt
    • New land
    • Purchase of equipment
    • New Facilities
  • Sale of company assets
  • Issuing of stock and class of stock
  • Alter the ownership structure of the corporation

All of the corporate resolutions that have been passed need to be filed with the appropriate regulatory body in which the corporation is registered with. That means that if you are a loan and accounting firm, you need to file your resolution with whatever banking institutions you work with if the resolution is to bring on new employees that can make transactions on behalf of your company. Additionally, all resolutions must be shared with all shareholders and also presented at the yearly All General Meeting of the corporation. During this meeting, your Board of Directors need to be present to answer any questions about the resolutions that have been passed.

The Big Picture

You don’t need a corporate resolution for everything, but you definitely need to maintain records of decisions that have been made by the board of directors. These high level decisions should be shared with shareholders and investors and any regulatory body that you may do business with or are required to report to. Corporate resolutions are not only there to communicate and record changes within a company, but it allows for a look back on how previous decisions were made and who made them.

 

8 Things to Consider Before Starting your Business – Pt 3 of 3

Plan for the business that you want

Welcome to part 3 of 8 Things to Consider Before Starting your Business.

Parts 1 and Part 2  discussed marketing, startup costs, the lifestyle change and how to find out if there is a market for your product. We continue now with the last 4 things to consider before taking the leap into entrepreneurship.

5. Get some Legal Advice

LLCs, S-Corps, & C-Corps: We cover these various business entities in more detail in other articles but you should be familiar with each entity and the benefits and drawbacks of each one.

  • LLC: A limited liability corporation is one of the most common business entities created in the United States due to the protection that it offers. With an LLC, the members of the LLC are not held liable for any debts of the company. That means that in most cases, things like personal accounts, homes and personal assets are protected in case of bankruptcy. LLCs also allow “pass through” taxation that allows members of the LLC to claim profits on personal tax returns, thus avoiding double taxation by avoiding corporate taxes.
  • S-Corp: S-Corps, much like LLCs, offer liability protection to members and “pass through taxation” but also offers the ability to attract investors through the selling or promise of shares. The drawbacks are that membership requirements are more strict, only U.S. Residents and Citizens may apply for S-Corp designation, and S-Corps are capped at having no more than 100 shareholders. Additionally, S-Corp designation also comes with a little bit more scrutiny.
  • C-Corp: C-Corps are the bigger brother of S-Corps. They offer limited liability protection and the ability to attract shareholders, but there is no cap on shareholders and there is the ability to differentiate voting rights for shareholders. The drawback is that there is no pass through taxation and a C-Corporation is also a “victim” of corporate income tax.

Intellectual Property: Intellectual property rights allow individuals to copyright and benefit from the creation of their creation. This may seems like something for you to consider when your company is well under way, but it’s important to think about all the small things in your company that could be protected under IP rights. Things like

  • Contracts
  • Ideas that were formed by team-members for the benefit of your business
  • Tools and resources created to aid team-members

It’s best to discuss things with a lawyer to see what can be protected. If a team-member leaves for a rival business, wouldn’t you sleep better knowing that the ideas they developed are going to stay with your business?

6. Surround Yourself with the Right People

In a CB Insight’s study of 232 company post-mortems, the number 3 reason why companies say they fail is because they didn’t have the right team. When starting out a business and seeking out a partner, you shouldn’t be selecting your business partner out of convenience, but on what they can bring to the company. Forming the right team is sometimes more important than the initial product or service you offer. There is  chance that your company’s business plan may pivot more than once, so having a team that can adapt to your company’s needs are important. You may be a first time CEO, but that doesn’t mean that your team members or partners need to be as well.

7. Focus on What Matters

We all want to feel like we are doing something for our business. Unfortunately, that “something” may not be the best thing and can hurt your business in the long run. 74% of business owners say that the time they spend reconciling business expenses keeps them from tackling more important business tasks. In one survey, 40% of respondents admitted that they spend time on tasks that weren’t growing their company. Let’s not forget the companies that like to over-polish and focus on presence but lack sound business practices and policies. Yes, a cool logo and a great business card is a great conversation starter at a party but it won’t get you anywhere with growing your business.

Work on avoiding things like:

  • Administrative Tasks
  • Accounting (if you have no experience)
  • Travel Planning
  • Payroll
  • Paperwork
  • Responding to every email
  • Focusing on critics
  • Focusing just on raising funding

Some of these things you will feel a need to personally handle and just because they are on this list doesn’t mean they are important, but your main focus should be on growing the company. Think about strategies on how to tackle these tasks and maximize your time.

8. How Many Startups Succeed and Fail

Lastly, you should consider the success and fail rate or businesses and understand the risks. The bitter truth is that 90% of startups fail. It’s a harsh reality that many new entrepreneurs face when starting their business. Reasons for failure range from having a product with no market to getting out-competed to simply running out of cash. So what are some things that separate those who fail from those who succeed? Here are a couple of things:

  • They Have A Strong Team: The team that has been build is versatile and resilient. They know how to pivot when the market deems it necessary and they know how to take a blow and work together to overcome it. A new business must be able to change at a moments notice and adopt new marketing plans, new compensation breakdowns or even develop a whole new product or service at a moment’s notice.
  • Nothing Falls Through the Cracks: In the early stages of a startup, you may think that assigning certain roles and responsibilities to your team is important. It is, but you need to make sure that especially early on, nothing falls through the cracks because team members were staying “in their lane”. Everything is the responsibility of everyone. It may sound like a cliche but stopping small things from turning into big things may be the difference between your company succeeding or failing.
  • They Actually Have a Product People Want: It may be fun to create a product that you’ve always dreamt about, but if people don’t have a need for it then they won’t buy it. Make sure to do your market research (Hint: Go back and read number 4!) and determine if there is even a need for your market. If there is, and you have a great team, a strong leader and a phenomenal product, the rest will be cake. Well, not really, but you get the point!

 

8 Things to Consider Before Starting your Business – Pt. 2 of 3

Welcome to part 2 of “8 Things to Consider Before Starting your Business.”

Parts 1  talks about the lifestyle change you should expect and what your start-up costs may look like. 

3. Is There A Market For Your Business?

This question may be silly but you’ll be surprised at how many companies fail because the founders didn’t ask themselves this question before hitting the ground running. Yes, the ultimate reason for why startups fail is due to running out of money, but a major factor for running out of money is that consumers don’t have an interest or need in your product.

CB Insights’s study of hundreds of company Post-Mortems, a letter from the company about why they are shutting down, concluded that the number one self-identified reason for failure, ranking above running out of money, was a lack of market need for their product. In 42% of cases, the startups tackled an interesting problem that didn’t really have a market need. When determining if there is a need for your product, take the following steps:

  • Conduct market research – There is so much information readily available on the internet. View this step as an investment in the future of your company. Great market research will give you an idea of the health of your industry, helps shape your product based on the segment of the market you are targeting and it will give your company an identity.
  • Talk to your prospective clients – Markets are conversations and dialogue is key. One of the worst things you can do when getting an idea is running into a cave and work on your product in a rush to get it to market. Why? Because you need to really understand your clients and their needs. No, you can’t just send out a tweet or a quick poll, you actually need to sit down and have real and deep conversations. Your targeted customers will tell you what they want or don’t want in a product. Would you rather talk to them now and adjust your platform as needed or would you rather talk to them 6 months from now when you’ve already put in thousands of dollars and hundreds of hours into a misaligned product?
  • Ask an Expert: If you’re fortunate to have some sort of mentor or know someone personally that is already in a similar field, reach out! You truly can’t do enough research before starting your business so reach out to anyone you know who can give you any information.

4. How to Reach your Customers

You also need to begin thinking about how you plan on reaching your customers and informing them that not only that you have have a product to cell, but also on why they need it. Business that start off with a lot of money can usually hire a marketing manager or marketing team to take care of their brand awareness and customer acquisition. However, if you are keen on doing this yourself, you need to consider how you plan on reaching your customers. The decision you make will impact the time and capital you allocate to your marketing strategy. Here are some strategies to get your company to the forefront of your customer’s mind:

Are you going to try and reach your customers online? It’s harder than it seems…
  • Email Lists: Email lists have been around for a long time and can be effective if done right. You can either buy an email list or rent one, meaning you won’t know what specific emails are, from multiple services. However, the best strategy is to build your own and here’s why. Building your own email list may take a little bit of work, but you will know that the emails you send out will go directly to customers who actually want to receive an email from your business. Buying an email list or renting one doesn’t guarantee that those who receive your email even are in the market for your service or product.
  • Start a Blog: One way to help out your marketing is to start a blog that informs and educates your target audience. By consistently posting relevant information, you are building trust with your target audience. You are exhibiting expertise in your area and your audience will value that. Moreover, you also have the chance of bringing in customers who you weren’t even targeting. Lastly, search engines are constantly grading your website and generating traffic, whether through a blog or by direct search, will only grow your online presence and visibility.
  • Encourage Reviews: If you have satisfied customers, you should definitely be asking for reviews on any major platform. And there is definitely a ways to encourage your customers to take the extra time to leave a review on not just popular sites like Google and Yelp, but also on industry specific sites. Also, it’s important that you also manage your reviews and address any negative reviews you may have gotten.
  • Host a Contest: This may seem silly at first, but hosting a social media or online contest can help spread brand awareness while simultaneously gaining rich data on your customers. Social platforms like Twitter of Facebook have built in analytics tool to help you analyze your followers and those who have entered your contests and giveaways. This can give you insightful data on who your marketing is reaching and who is interested in your product.

Read on with Part 3!

 

8 Things to Consider Before Starting your Business – Pt. 1 of 3

Starting a business is not easy – a little planning will go a long way

You’ve done it! You have come up with an idea for a business that will revolutionize how we do something – interact with others, drink our coffee, paint our houses, etc. You believe that if you can start a business, the money will start pouring in and you’ll be living the high life. Unfortunately, starting a business is not as easy as Hollywood or those “Get Rich Quick” books make it out to be. What they often fail to mention are the countless hours spent sweating the small stuff in order to make the business a success. Before you spend all of your money and deplete your savings account, run through this checklist as your due diligence before you take the plunge into entrepreneurship

Welcome to our 3 part series on things to consider before starting a business! We hope it’s informative and you get a new perspective and some help on getting that business off the ground.

Are Your Ready for the Lifestyle Change?

Starting a business takes a lot of time and dedication to get off the ground. Enea Gjoka, founder of App development company Unlimapps warns, “I spent countless hours not just writing code but actually doing market research. I practically had no social life for the first two years of my business.” When breaking into a new market or an already established one, you have to work harder and smarter than the next entrepreneur. It’s this lifestyle change that catches a lot of new business owners by surprise.

Simon Yu, creator of the YuCan education app, shared his experience leaving the world of investment banking in New York and starting his own app. “I was already used to working long hours in my previous position as an investment banker, but I don’t think I fully knew what I was getting myself into when I started my own thing. I wanted to start my business because I had something I was passionate about and I wanted more freedom for myself as an owner. I’m still passionate but i’m still waiting on the ‘freedom’ part.”

Before committing all of your money and resources into your new business idea, think about if you have the ability to devote the time you need to. If you’re married with a wife and kids and already have a full time-job, then this is the first question you should ask yourself.

How Much Money Do I Need?

You can have the greatest idea, but if you don’t have the the funds to start your business, then you’re out of luck. So how much money do you really need? The Kauffman Foundation found that the average startup uses about $30,000 to get off the ground. However, not every startup is the same and in a recent survey by financial software company Intuit, 64% of business start with less than $10,000 of capital. Yes, having more money when you start will definitely make your life a little easier, especially in the first couple of months where you feel like all you are doing is spending. Moreover, 68% of small business owners regret they didn’t spend more time learning about financial management. Here are some things to  begin thinking about when it comes to the financial health of your business:

You’ll need to plan your finances carefully

Initial Start-up Costs:

In order to get your business of the ground, you’ll need to make some basic investments and depending on what type of business you start, that could be very substantial – usually a business with a physical location will have a higher upfront cost than a software company. In addition to physical space, you will also need to purchase things like a business license and incorporation fees. It definitely important that you take some time to think about your expected costs could be.

Capital Expenditures

These expenditures can be lumped in with your initial costs but it’s great to think about it separately. Your capital expenditures can range from buying machinery for your new home building business or purchasing office furniture for your new accounting firm. It’s best to shop around and find a vendor that is willing to work with you to get your business the best deal possible. Your capital expenditures will also be determined by what type of business you plan on starting. If you envision your company as a luxury brand then perhaps you are going to consider spending more on furnishing were a technology company may spend more money on state-of-the-art computers and an innovative online presence. Some examples of capital expenditures:

  • Business Cards
  • Computers or Software
  • Office Equipment
  • Heavy Machinery/Vehicles
  • Office furniture and supplies
  • Signage
  • Website Development
  • Office leases
  • Utilities

Operating Expenses

In the most basic form, your operating expenses are the cost of keeping your doors open to your customers. In an ideal world, you begin having sales from day one and you have more orders than you can handle. A more realistic scenario, however, is that it may take a couple of months before you actually get any sales. During those crucial first months, you will more than likely be focused on building brand recognition with your prospective clients. During this time, make sure you keep track of everything that you spend your money on so that you can begin forecasting your month to month expenses. It also helps to talk to other business owners who have opened up a similar business. You’ll be surprised how willing business owners can are to share their stories.

Hired Services

You may think that you’re going to do it all in the beginning but you’ll soon realize that your time may better spent growing the business instead of dealing with state and federal reports. If you have a bookkeeper or accountant, a marketing manager, a janitor or any other service that you outsource, it’s important to think about how quickly costs can add up. Professionals are a great asset if you have the funds you need and can really give your business a boost, but think about if this is a need or just simply a want. When tackling hired services, it’s best to be frugal.

Personal Finances

Something that a lot of new business owners don’t think about is their own personal expenses. They focus on the expenses of their new business that they often underestimate how much money they need for their personal expenses. When starting a

Understand your operating costs – and leave room for error!

new business, it’s important that you have 6-12 months of living expenses set aside. Before you quit your job and take on entrepreneurship, take a look at your bank statements for the past couple of months and see what your expenses really are. Most business owners don’t pay themselves when starting their company, instead choosing to put everything back into their company. It’s best to think about your possible future expenses. Do you have monthly car payment or student debt payments to make? Do you owe association dues for your condo or expect a large car repair bill soon? It’s best to plan for the future by looking at past tendencies and habits. Yes, you will more than likely be tighter with your money when starting out but it’s best to be realistic.

Estimating How Much You Need

Every company that fails does so not necessarily because they didn’t have a great product or idea, but because they ran out of money. It’s important that you think about the above mentioned expenses when trying to determine how much money you not only need Day 1 but also Day 365. Track all of your expenses and analyze your monthly cash flow, reach out and talk to other business owners in your field, think about what outsourcing you will do, and determine how much you need for your own personal finances. The number that you can come up with may be $100,000 or $2,000, but regardless of the number you will be financially prepared to start your company.

 

Read on with Part 2

Professional vs. General Liability Insurance – Which one do you need?

Insurance can help pay for legal costs and fees – and can save your business from closing down

Making the decision of which incorporation designation to pursue, C-Corp, S-Corp or LLC is a relatively straightforward decision. If you still haven’t made up your mind, read our Types of Corporate Entities article to get a better idea of which designation is best for your business. However, one of the most important decisions you will make for your business, especially at the start, is what type of insurance is best for your company.

The Importance of Insurance

A 2005 study by the Small Business Administration [PDF] concluded that 63,000 businesses, both small and large, are involved in civil cases in any one year. Of those 63,000 businesses that are involved in a civil lawsuit, 36-53 percent are small business with fewer than 50 employees. The average legal cost for actual litigations for those businesses ranged from $3,000 to $150,000. Many owners surveyed by the SBA mentioned that payment of damages nearly put them out of business and effected the growth of their business for an extended period of time as they had to shift resources to rebuild the business and recoup their losses.

The important takeaway is that even if the state you operate in or if your clients don’t require your company to have some type of insurance, having a policy is still a good idea.  Depending on the type of policy you purchase, you can be protected from litigation costs, loss of company assets and personal injury or illness to yourself. Yes, you may see business insurance as an unneeded expense or luxury of an established business, but every business should have some form of insurance to protect it.

General Liability Insurance

General liability is one of the most basic forms of business insurance and is often considered the keystone of a business protection plan. If you own or plan on owning commercial property that is open to the public or perform a service on someone else’s property, you should get general liability insurance. In fact, you should have general liability insurance no matter what type of business you have due to litigious society we live in now.

What Does General Liability Cover?

General liability insurance will protect your company’s assets for any damages incurred from:

  • Bodily Injury
  • Property Damage
  • Medical Expenses
  • Libel
  • Slander
  • Defending Lawsuits
  • Settlements
  • Judgments

How Much and What Type of Coverage Do You Need?

General liability insurance premiums can range from $750 to $2,000 depending on your business and the coverage that you need. An insurance broker will be able to give you an accurate quote but if your company has a high-perceived risk, for example a lawn care service, you will need more coverage than an app developer. Your coverage needs are also state dependent. Some states have caps on how much can be awarded for bodily injury lawsuits while others have uncapped awards. It’s important that you talk to a licensed insurance broker in your state of operation to determine the type of policy you will need.

Professional Liability Insurance

Professional liability insurance, also known as Errors and Omissions insurance, is primarily used to cover claims resulting from financial damage to a client caused by negligence on the part of your services. The main difference between Professional Liability Insurance (E&O) and General Liability Insurance is that E&O insurance focuses more on the intellectual decisions you and your company make as a service rather than some form of tangible property.

Almost any company that offers some sort of service can cause a client to lose money and are potential victims of litigation and would be covered under E&O Insurance policies. For example, if you are a website developer and the website that you designed does not perform as promised, a client could take you to court claiming that your negligence caused financial loss. Just like a general insurance policy, E&O Insurance will cover some or all of your legal defense costs and any damaged awarded due to your lawsuit.

The most common professions that need professional liability insurance are:

  • Technology Companies
  • Finance Companies
  • Consultants
  • Brokers
  • Insurance Agents
  • Medical Professionals

Should you have both?

As a business owner, you want to make sure that you and your business are protected and that’s why, in most cases, you should have both types of insurance to adequately protect your business. At any moment, a dissatisfied customer, either yours or a 3rd party through your client, can bring a lawsuit against you.  When thinking about which insurance type you need, think about how much is out of your hands when it comes to client actions and the potential of being caught in a lawsuit. Moreover, more often than not, the clients you work with will more than likely require you to carry both types of insurances. They may even ask you to add them as an “additional insured” on your policy so that they feel protected as well in case of a lawsuit – often a $20 fee with your insurance broker to add a third party as additional insured. Regardless of what course you pursue, it’s important that like anything else, you find a broker who is willing to help you find the right insurance for your business. Just like purchasing homeowner or car insurance, various brokers can offer different rates and packages for your business. Shop around and get piece of mind that you and your business are protected from any litigation.

What Is A Registered Agent

Example Paperwork for a Registered Agent
Registered Agent Paperwork

What is a Registered Agent?

First some background – why are so many companies registered in Delaware?

I was recently asked why so many Fortune 500 companies were incorporated in the tiny state of Delaware. To put it in perspective, half of U.S. publicly traded companies and over 60% percent of Fortune 500 companies are incorporated in Delaware.  Additionally, in 2012, more than 90% of IPOs launched as Delaware business entities.  So what is causing so many companies, companies like Twitter, Facebook, Yelp, AMC, or REMAX, to incorporate in a state that has a resident population of less than 1 million? And, most importantly, how can you do it as well?

Why Delaware?

The Court System – The quality of Delaware courts and judges are second to none when it comes to corporate law. The court system even has a special court called the Court of Chancery that specializes in corporate law disputes without juries. Instead of months and sometimes years of waiting for time on a judge’s docket due to non-corporate cases, the Court of Chancery offers businesses the expectation that corporate legal disputes are addressed promptly and by specialized judges.  It also helps that the Delaware’s Court of Chancery dates back to 1792, providing some predictability to potential rulings.

Up-to-date Legal Framework – Delaware prides itself on having up-to-date laws that spell out what companies can and cannot do in the 21st century. Delaware’s General Corporation Law provides guidance to business entities and Delaware’s tax law is kept up to date, with 4 tax legislation bills proposed and passed in June and July of 2017 alone!

How do I incorporate in Delaware?

Not just everyone can incorporate in Delaware.  In order to incorporate in Delaware, you need to have a physical location and address in the state of Delaware. So does that mean that the companies that were mentioned before, companies like Twitter, AMC, and Yelp all operate out of Delaware? Well, yes and no. Each of those companies has something called a registered agent. A registered agent is someone who is registered in the same state in which a business entity is established and is responsible for receiving correspondence on behalf of the incorporate company and forwarding it to the correct address.

Types of communication that will go to your registered agent –

 

  • Information regarding tax payments
  • Lawsuits
  • Judgements involving your business

    Example of legal paperwork
    You don’t want to receive all of this legal paperwork…
  • Subpoenas
  • Financial documents
  • Any other legal documents

What are the benefits of a Registered Agent?

A registered agent is more than just someone who forwards legal documents to the address you choose. A registered agent is piece of mind that all your legal documents will be handled with, depending on the service, with professionalism and discretion. A registered agent will promptly notify you when they have received any documents, remind you of important tax dates, notify you when your business’ annual reports are due to the state, and can even help walk you through business filings.  Moreover, since you will have someone worrying about accepting all of these documents during your business’ working hours, you can focus on growing your business and also avoid personally accepting any embarrassing legal documents in front of clients or family.

Do I Need a Registered Agent?

That depends – not every state requires that you have a registered agent. However, if you would like incorporate in Delaware, you will be legally obligated to have and maintain a registered address in Delaware which may, but need not be, the same place where you do business.  Creating an LLC, S-Corp, or a C-Corp in Delaware without obtaining a registered agent may result in losing good standing with the state and running the risk of the state agency dissolving your business entity. The paperwork and added fees of reinstating your business is not worth the added hassle. If you are serious about starting a business and incorporating in Delaware, here are some additional benefits to a registered agent:

No Desire for Extra Paperwork:

Registered Agents will track all of your official notices and annual report due dates with the state you are registered in. All of your important state compliance documents will be in one place and with someone who is familiar with the process and intricacies of that specific state’s business laws.

Odd Hours:

Not all businesses have working hours of 9-5. A registered agent will give you the flexibility to maintain whatever working hours you would like since they need to be available during regular business hours to accept official notices from the state or any service of process in event of a lawsuit.

Privacy:

If you’re someone who is just starting a business and doesn’t want to list their home address as the physical location of a business, a registered agent will solve that problem since their office will be your business address. When you list an address as a point of contact for a business, that address now becomes public record. This means that if anyone wanted to contact your business, they could look you up and get your home address – this includes companies who want to send you advertisements for their products and services, flooding your mail with unwanted junk mail. Moreover, in the digital age we live in now, there are thousands of companies that use public records to pull addresses and information on individuals to add to their “Big Data” that is then sold to the highest bidder. Setting your home address or a friend’s address as your point of contact for your business might not be the best idea.

Where can I get a Registered Agent and what makes a good one?

You can hire us as your registered agent right here!  The average cost of obtaining a registered agent in the state of Delaware is around $100-$300 per year, depending on the company and the services purchased. The list of Delaware Registered Agents is provided solely as a convenience and the state does not endorse any specific agents. In fact, Registered Agents aren’t even regulated by the state. Since the only legal requirement are that they have a physical address in Delaware and are open during normal business hours, any random person could sign up to be a registered agent.

That doesn’t mean that all registered agent services are created equal. Whether you choose Business Solution Services as your registered agent service or choose to go with any of the others listed on the Delaware Department of State website, here are some services to make sure your agent is doing everything they can for you and your business:

  • Obtaining a Federal Tax ID Number for your company
  • Filing a Foreign Qualification form in your home state. If you operate out of Michigan but you incorporated in Delaware, you will be considered as a foreign entity in the state you operate in.
  • Offer a mail forwarding service with a physical street address.
  • Handle any business on behalf of your company with the Secretary of State
  • Compliance reminders
  • Instant access to your documents. Some documents are time-sensitive and should be in your hands immediately.

Obtaining a registered agent in the state of Delaware is an easy and simple process that will save you the headache of paperwork and let you focus on the things you are truly passionate about. No one starts a company to do paperwork – let a Registered Agent take care of that for you.