Limited Liability Companies Now Account For 67% of All New Entities Formed
Filed Under: INC Knowledge, Limited Liability Company
Tags: Delaware, Limited Liability Company
Nowadays, the clear cut choice of business entities in the United States and in Delaware is the Limited Liability Company, or LLC. In 2008 alone, the Delaware Division of Corporations welcomed the formation of 121,628 new business entities, 67% of which were LLCs. A relatively new business type in comparison to that of its corporate brethren, the first limited liability company act did not make an appearance in the US until 1977, in Wyoming. Uncertainty over the IRS tax treatment of the new entity stunted the spread of LLC legislation throughout the country. It wasn’t until 1988, that the IRS ruled that a “Wyoming-style” LLC would be treated as a partnership for tax purposes. From that point it didn’t take long to spread the LLC law to every U.S. State.
Delaware introduced the “flexible” LLC statute in 1992 which soon replaced Wyoming’s “bulletproof” statute as the model. Instead of requiring the company agreement to specify certain IRS restrictions, Delaware made the LLC akin to its existing partnership laws. These laws, which have long been recognized as the most flexible yet secure entity laws allow “Freedom of Contract” and “Enforceability of Contract” as the basis of their structure. By 1996, almost every state in the nation had an LLC statute on the books. Now, less than fifteen years later the LLC is the #1 choice for new business entities in the U.S.
If you have ever considered forming a business entity you have probably heard that Delaware is the place to do it. Over half of the US publicly-traded companies including 63% of the Fortune 500 call Delaware their legal home. With the most advanced business formation laws in the nation and a 215 year old business court system (the Delaware Court of Chancery) credited with writing much of the U.S. corporate case law, its no wonder Delaware is #1 legal environment for corporations in the U.S.
Let’s make one thing clear, the LLC is not a corporation. However, both entities share a primary characteristic – limited liability. Couple this with the pass-through tax treatment available to partnerships and sole proprietors (depending on the number of members) and it is no wonder that the LLC is the entity of choice for entrepreneurs all around globe.
If you are forming an LLC, it is important to understand that limited liability does not mean full protection from personal liability. Courts can and do pierce the corporate veil of the LLC, but for many businesses the administrative and tax flexibilities afforded by the LLC are irreplaceable. Fewer formalities and paperwork mean that LLC owners get to spend more time managing their companies and less time having meetings and taking notes. If this is how you want to run your business then do yourself a favor and choose the #1 business entity in the #1 business legal environment in the country. Maximize your protection from personal liability by forming a Delaware LLC with Harvard Business Services. To form an LLC please call us at 800 345 2677 opt 1, we are here and ready to assist!
Limited Liability Company vs Limited Partnership
Filed Under: Delaware, INC Knowledge, Limited Liability Company
Tags: Delaware, Limited Liability Company, Limited Partnership
Clients often ask us to articulate the benefits and drawbacks of forming and operating a business as a limited liability company (abbreviated as LLC) as opposed to a limited partnership (abbreviated as LP). LLCs and limited partnerships share certain common features, however, they differ in a number of important ways. This posting describes some of the key similarities and differences.
LLCs and limited partnerships are similar in that they are, and were intended to be, flexible business forms. The terms governing an LLC or limited partnership’s operations can be tailored to the needs of a specific business. For instance, to provide only a few examples, investors in an LLC or limited partnership can provide for whatever voting or economic terms they desire, and can alter the standard of care and fiduciary duties which participants in the business owe to one another. Delaware law provides certain limited default terms that will govern in the event that the operating agreement of the entity is silent on an issue, but the LLC and limited partnership forms are each intended to give maximum effect to the participants’ freedom to contractually provide for terms they deem appropriate.
The LLC and limited partnership are also similar in a much more practical way: each provides its investors with pass-through tax treatment. Pass-through tax treatment means that the business itself is not subject to federal income tax, but each investor will be required to report separately on its income tax return for each year its distributive share of items of the business’s income, gain, loss and deduction, and will be taxed currently on that distributive share, regardless of whether the investor has received or will receive a distribution of cash or other assets from the fund.
The most important difference between the LLC and limited partnership form relate to personal liability of participants.
A limited partnership is managed by one or more general partners that control the day-to-day operations of the business. These general partners have unlimited personal liability for the debts and obligations of the limited partnership, meaning that they can be held personally liable for those debts and obligations. A limited partner does not have personal liability for partnership obligations, but is not permitted to participate extensively in the day-to-day management of the limited partnership. If a limited partner participates in a significant way in management, a court may treat that limited partner as though it were a general partner if the limited partnership is sued, and impose personal liability upon the investor. To avoid this personal liability, an entity such as a corporation (or, as described below, an LLC) may serve as the general partner of a limited partnership. However, creating a separate entity to serve as general partner adds additional cost and complexity, and could have adverse tax consequences.
The LLC was created by the Delaware legislature to provide the flexibility of a partnership while providing corporation-like protection against personal liability. An LLC can be managed by one or more of its members. Unlike in a limited partnership, however, a participant engaged in the management of the business is not personally responsible for the liabilities of the entity.
Given the personal liability applied in a limited partnership, many clients ask why a person would choose the limited partnership form. As noted above, the LLC is a relatively new type of business form (since 1992) and, as a result, the case law regarding LLCs is far less robust and settled than that applicable to limited partnerships. The predictability that a settled body of case law provides leads some to select the limited partnership form. However, the LLC has gained a lot of ground in popularity. Last year, 67% of the State of Delaware’s new formations were LLC’s while around 6 % are LP’s.
To form a Limited Partnership or Limited Liability Company please call us at 800 345 2677 opt 1, we are here and ready to assist!
A Little History on The Hague and The Apostille de La Haye
Filed Under: INC Knowledge
Tags: Delaware, Limited Liability Company
Self proclaimed “The World Organization for Cross-border Cooperation in Civil and Commercial Matters” the Hague Conference on Private International Law has been a major influence on the international legal community since its inception in 1893. Its name comes from the city in the Netherlands where it is convened, La Haye or anglicized, The Hague. With nearly 70 member states (including Regional Economic Organizations), this global body works to unify differences in personal, family and commercial laws between legal systems in more than one country. Meeting in principle every four years, The Hague Convention became a permanent inter-governmental organization in 1955 and has adopted 38 international Conventions over the years, one of the most notable being the elimination of a process called legalization. More commonly known as an Apostille de la Hague, the Convention abolishing the requirement of legalization for foreign public documents was adopted by the Hague Convention on October 5, 1961.
The purpose of the Apostille de la Hague Convention is to aid the flow or distribution of public documents executed in one nation party to the Convention for use in another party nation. It replaces what is known as “legalization”, the often expensive and burdensome process of chain certification between nations. What this means for international incorporations and LLC businesses is that with the issuance of an Apostille (or also called Certificate of Apostille) your publicly filed formation documents are ready for legal use in member countries and have proven useful in parts of the world that do not require the process of legalizing foreign public documents in their domestic law. By facilitating the legalization process, an Apostille can make opening an international bank account or obtaining required licensing in member nations a much smoother and simpler process.
If you need a Certificate of Apostille for your Delaware company or if you’re wondering if you may need one for doing business in a particular part of the world follow the link below for the answer. You will find ordering information and a full list of the Hague member nations here, http://www.delawareinc.com/ourservices/apostille.cfm
Document Confusion
Filed Under: Delaware, INC Knowledge
Tags: Delaware, Documents
Unless you have incorporated a LLC or Corporation in Delaware before; there may be some confusion regarding recognizing just which documents are which. In fact, we experience many clients who call after filing; inquiring as to where the “articles” are or why their LLC has no Certificate of Incorporation?
We hope to minimize future confusion by offering some pointers and guidance pertaining to the documentation of your Delaware corporate entity.
First, we will start with the General Corporation. The document of filing is known as the Certificate of Incorporation and the articles are known as the Articles of Incorporation. The Certificate of Incorporation is the document that Delaware issues to prove a corporation’s filing has occurred. The Articles of Incorporation are defined as the basic charter of a corporation which indicates the name, basic purpose, people incorporating, amount and types of stock which may be issued, and any special characteristics such as being non-profit. Where the confusion typically begins is when the client fails to realize that these documents are one in the same. The Articles of Incorporation are contained in the Certificate of Incorporation and are numbered. Many people who incorporate look for two separate documents and feel they may be lacking one or the other. Harvard Business Services, Inc. will typically issue a standard Delaware Certificate of Incorporation with ten numbered Articles of Incorporation upon it. However, we can file custom articles as well – so long as we receive them prior to the filing.
The Limited Liability Company has a different formation document called the Certificate of Formation and the two or three numbered articles upon it are known as the Articles of Organization. The Certified copy of the Certificate of Formation serves as proof of the LLC filing. The Articles of Organization will express the name of the LLC, the address of its registered office or agent of process and any other matters which the members decide to include therein. Again, as applies to the Certificate of Incorporation – these are contained on the one Certificate of Formation – or one document. The Delaware certificate offered by HBS will show two number articles of organization.
Lastly, the Delaware Limited Partnership has different filing document known as the Certificate of Limited Partnership. This certificate offers proof of the filing of the Limited Partnership and its articles are known as the Articles of Limited Partnership. These articles express the name of the LP, the address of its registered office or agent and the names and addresses of the general partners. The Delaware LP certificate offered by HBS has three numbered articles; found on the one certificate.
I would also like to take this opportunity to present a clear understanding of the two Delaware validation documents which are known as a Good Standing Certificate and a Certified Copy of the Certificate of (Incorporation / Formation / Limited Partnership). These can be tricky because from exterior perception they are very close in format and appearance; however they differ in the language. They each have the printed word “Delaware” at the top of each document in bold print. Each also has the name of the current Delaware Secretary of State – Jeffrey W. Bullock – in the first sentence. They are different in the wording: “do hereby certify the attached is a true and correct copy” reveals that this document is a Certified Copy. The Good Standing Certificate states – “do hereby certify (company name) is duly formed under the laws of the state of Delaware and is in Good Standing”. The trick is to look for the words Good Standing and you will soon realize whether you are looking at that document or a Certified Copy.
Incorporation documents can be a bit confusing – but with all the skilled professionals on staff at HBS to help you; there is no need to struggle with questions or concerns. Help is just a call or email away!
Are You in Good Standing?
Filed Under: INC Knowledge
Tags: Delaware, Good Standing, Secretary of State
Many clients have never heard this question until they incorporate their business or form a LLC. Even fewer know exactly what it means to be in Good Standing and why it is necessary. The legal definition is typically referring to the status of a corporate entity and can be applied to a personal level as well. Obviously, an individual who is in a state of favorable character or tendencies is viewed as being in good standing in his community. But what does it mean when a company is or is not in Good Standing?
Typically, there are specific requirements which apply to the maintenance of a legal entity to keep it alive and functioning. Generally, most states have taxation, laws or fees which should be maintained in order to stay in proper status. Those companies who fail to stay in proper or good status can face financial penalties and challenges which may adversely affect the success and future of the business. For example; Delaware mandates that every corporate entity filed within its jurisdiction have a valid registered agent and pay an annual Franchise Tax. Those who have allowed either issue to lapse are not in Good Standing and usually cannot obtain documented proof of their status from the state until they bring the company back into good status. This is achieved by paying any outstanding fees and penalties. Failure to maintain any corporate entity after filing will generally result in the company voiding over time and accruing tax, penalty and interest.
There is a specific document which is offered by the Secretary of State’s Office in each state which is a testimonial to the good status of the company. This is known as a Certificate of Good Standing, Certificate of Existence, Certificate of Status or Letter of Good Standing. It is required by more than 85% of all states for corporations and 75% of all states require the document for LLC’s. It is typically applied to banking and state qualification requirements. This document states that the entity has complied with all applicable laws and provisions of the state of filing and has the authorization to transact or conduct business affairs. Generally, most businesses need to show proof of their good standing in order to obtain financing, licenses and to legitimately enter into other business transactions in the state of filing or in other states. By offering the Good Standing Certificate, businesses prove their existence and that they are incorporated and authorized to do business. Many banks will not open an account for a company who does not prove their good standing.
From our experience, those with new formations sometimes question the validity of the request for the Good Standing since they just filed the company and it is of course in good status. However, the requests by banks and other states are valid and are the only way to confirm such validity. It does not matter if the company is ten years old or ten hours old if the Good Standing is required, it must be obtained. Many clients will obtain the document right at the time of filing to alleviate any time delay in achieving their essentials. We are always happy to inform as to which states require the document and which do not. Typically, business owners may check the status of their company at any time by contacting either the Secretary of States Office in the state of filing or their respective registered agent where applicable. The Delaware Good Standing Certificate can be obtained through Harvard Business Services, Inc.- within 24 hours. Are you in Good Standing?
For more information please click on this link: http://www.delawareinc.com/ourservices/goodstanding.cfm
