Philanthropists often ask if an LLC can be a non-profit. What they are referring to is the 501c3 tax-exemption status. 501c3 status is a coveted designation because it exempts a company from federal, sales, and property taxes. These exemptions are crucial to the function of non-profit organizations. 

IRS regulations do not allow LLCs to be assigned tax-exempt status directly. However, you may operate an LLC as a wholly owned subsidiary of a non-profit corporation.

We discuss how non-profit corporations can best use LLCs to reduce their liability risk. 

What Is a 501(c)3 Organization?

501(c)3 is an IRS code section that defines what qualifies as a tax exempt organization under federal law. To receive a tax determination letter from the IRS, approving the 501(c)3 status, a non-stock corporation must submit a Form 1023 or Form 1023-EZ application with the Internal Revenue Service (IRS). A corporation must meet specific requirements to be eligible for 501(c)3. To receive 501(c)3 public charity or private foundation status, specific language must be included in the non-stock corporation’s Certificate of Incorporation.

Purpose
Acceptable charitable purposes include religion, charity, education, science, literature, testing for public safety, or promoting animal welfare.

Non-Profit Corporations (501c3s) vs. LLCs

Non-profit corporations with tax exempt status (also known as 501c3 status) are incorporated as non-stock corporations. This is a type of legal entity that does not have any stockholders. 

Traditional LLCs have beneficial owners who hold an economic interest in the company. This characteristic of LLCs makes them ineligible for obtaining 501c3 exemption status.  

A non-profit corporation can still use an LLC to hold certain assets. To do this, the LLC must be a qualified subsidiary with the non-profit corporation being its sole member. The LLC’s management is permitted only to engage in activities approved by the parent non-profit corporation. 

The directors and officers of the non-profit corporation must also control the member managed LLC (See IRC Reg. 301.7701-3 et seq. as interpreted by Ann. 99-62 1999-43 I.R.B. 545). Thus, if you, Bob and Sue are the three directors of a non-profit corporation, you three must also manage the subsidiary LLC. 

The LLC’s Operating Agreement must specify that the LLC cannot violate the bylaws or restrictions of its member non-profit corporation. A subsidiary LLC cannot do something unless it is a permissible activity of the parent non-profit corporation.

How To Use a Subsidiary LLC for a Non Profit Corporation (501c3)

One way non-profits use subsidiary LLCs is as land-holding entities for real estate. This is especially common if the property is a brownfield with toxic contamination. Holding the property under an LLC keeps the non-profit corporation out of the chain of title. This can protect the corporation from superfund liability.

Non-profits corporations may operate service vans or other vehicles. A non-profit can title vehicles in the name of a subsidiary LLC in order to provide a degree of insulation for the corporation.

 For example, a breast cancer charity purchasing a mobile mammography van can set up an LLC subsidiary to hold title to the van. This can help protect the non-profit if the vehicle incurs any uninsured liabilities.

What Is A Low-Profit LLC?

Some states offer the L3C, which is a low-profit LLC. However, even these are not eligible for 501c3 status and have few practical purposes. Attorneys often advise clients to avoid the L3C because it only offers disadvantages compared to a traditional LLC. Members of an LLC can already agree to keep profits low in order to contribute to public benefit causes. Very few states have adopted low-profit LLC statutes.

How to Form a Non-Profit Corporation (501c3)

To create a Non-Profit that is 501c3 qualified, follow the following steps

1.  Form a non-stock corporation.
2. Complete IRS Form 1023 or IRS Form 1023EZ to apply for recognition of tax exemption status under section 501c3.
3. Obtain a tax determination letter from the IRS.

Once you receive the letter, your donors can deduct their contributions to your company as charitable contributions on their personal tax returns. Note that this can be done retroactively.

Can You Convert an LLC to a Nonprofit?

To become a non-profit in its own right, an LLC would first need to convert to a non-stock corporation. This involves the LLC members giving up their ownership interest before converting to remain eligible for 501c3 status. 

Owners are typically hesitant to forfeit their economic rights in an LLC. It is more common for LLC members who want to start a nonprofit to incorporate a new entity in the form of a non-stock corporation which has a nonprofit mission statement from its inception.

Why form a 501c3?

A 501(c)(3) provides not-for-profits with the tax relief that they are due based on the good they provide the community they are servicing. Without a 501(c)(3) tax exemption, the not-for-profit is defaulted to a taxable entity status and this will take away valuable funds from the cause that the not-for-profit is supporting.

Can a 501(c)(3) Be an LLC?

Only very recently has the IRS started allowing LLCs to apply for tax exempt status directly. The reason very few LLCs seek tax exempt status is because for an LLC to submit the IRS Form 1023 and obtain a tax determination letter from the LLC, the LLC must be structured in such a way as to mimic a non-stock corporation, such that the LLC’s members are non-equity owners. Plus the LLC must provide for a board of directors and officers, rather than just a manager or managing member. That complex structure may be the reason that it is so rare for LLCs to request and obtain tax exempt status directly.

Instead, more common is for an LLC to be a wholly owned subsidiary of a 501(c)(3) exempt corporation. The IRS has provided guidance to make it clear that if the LLC subsidiary is limited to the purposes of its parent and entirely controlled by its parent 501(c)(3) then the LLC would also be exempt under that umbrella without needing to apply to the IRS. One example of why a 501(c)(3) corporation would setup an LLC as a subsidiary is to take title to an asset that may have contingent liabilities, such as a vehicle or a piece of land with possible environmental contamination. That subsidiary structure helps keep the liabilities at the child level to avoid giving those possible creditors access to the assets of the parent company.

Do 501(c)3s Pay Taxes?

If a corporation receives 501(c)3 status from the IRS, it is considered tax-exempt and therefore is not required to pay taxes to the federal government on its exempt income. This status also incentivizes individuals to donate money to their cause because all charitable contributions donated to a 501(c)3 are tax-deductible for the donor.

MORE: How to Form a Non-Profit Corporation

The post Can I Form a Non-Profit LLC, 501c3? appeared first on IncNow.

Every year, there are new opportunities to grow your business. For many small business owners, now is the perfect time to consider forming a Limited Liability Company (LLC). The LLC has quickly become the most popular business structure for small business owners. According to the Delaware Division of Corporations, over 1.5 million LLCs are registered in Delaware alone as of 2024.

LLCs provide business owners with many significant benefits, from protecting their personal assets to potential tax savings. In this article, we give you 23 reasons why forming an LLC could be the smartest business move you make in 2023.

#1) Personal Asset Protection:

The primary reason why business owners form LLCs is to protect their personal assets. When you form an LLC, it establishes your business as a separate legal entity, which protects your personal assets – like your home, car, and personal bank accounts – from business-related debts and liabilities. Forming an LLC can keep the creditors of your business from reaching into your own pocket.

#2) Pass-Through Taxation:

The IRS treats LLCs as pass-through entities for federal tax purposes. Profits and losses pass through the business to the owners who report this information on their personal tax returns.

Pass-through taxation prevents the “double taxation” issue that some corporations experience, as it taxes profits only once, either at the corporate level or the shareholder level, but not both.

Pass-through taxation can help simplify business taxes for small business owners. According to the Tax Foundation, pass-through businesses, including LLCs, account for more than 60% of all business income in the U.S.

#3) Flexible Management:

LLCs allow for flexible management structures. As an LLC owner, you can choose to manage the company yourself, appoint a manager, or even have multiple managers. With an LLC, small business owners can tailor their company’s management structure to meet the needs of their business.

A study published by the Society for Human Resources Management suggests that businesses with flexible management structures are better equipped to respond to changing business environments and may experience higher levels of growth.

#4) Easy Formation Process:

Creating an LLC is a relatively simple and straightforward process. In most states, all you need to do is file an LLC formation document with the Secretary of State’s office and pay a filing fee. There is no requirement to complete complicated legal forms, making LLCs an attractive option for busy entrepreneurs and small business owners.

An online incorporation service, like IncNow, can complete the whole LLC formation process for you. They can also provide you with the necessary internal documents, like an LLC Operating Agreement, so that you can run your LLC properly. Delaware business lawyers prepare IncNow’s LLC Operating Agreements, and they come ready to sign.

#5) Credibility:

Forming an LLC can potentially give your business more credibility. Having “LLC” in your company’s name shows customers, vendors, and partners that you are serious about your business and have taken the necessary steps to protect it legally.

#6) Flexible Profit Distribution:

LLCs offer flexibility when it comes to distributing profits. In an LLC, Members can choose to distribute company profits in any way they prefer, while corporations typically require profit distribution based on the number of shares each shareholder owns. Flexible profit distribution can help small business owners implement more effective financial planning and facilitate growth.

#7) Scalability and Growth Potential:

An LLC is an ideal choice for businesses expecting growth and expansion.. It is easy to make changes in an LLC, like adding new members or adjusting ownership percentages. This flexibility can make it easier to adapt to changes in the business environment and accommodate future growth. According to the Tax Foundation, LLCs outpace corporations when it comes to net income.

#8) No Ownership Restrictions:

In comparison, U.S. corporations face some restrictions over who can have ownership in the company. For example, S-corporations have strict limits on the number of shareholders the company can have. In addition, non-US residents are not allowed to be shareholders in an S-corp.

#9) Increased Privacy:

Some state laws provide LLC owners with more privacy than others. For example, Delaware does not require any information about the Members or Managers of an LLC to be made public. Business owners find this level of privacy increasingly attractive as instances of fraud become more prevalent.

#10) Customizable Operating Agreements:

The LLC Operating Agreement outlines the roles, responsibilities, and decision-making processes within a Limited Liability Company. LLC Members can customize the Operating Agreement to best suit the needs of their business. A well-prepared LLC Operating Agreement provides Members with clarity on how the business is to be run and can help prevent business disputes.

#11) Establish a Business Credit Profile:

An LLC can obtain a DUNs number and establish its own business credit profile. A strong business credit profile can make it easier for a business to obtain loans and credit lines without relying solely on the owner’s personal credit. The Federal Reserve reports that small businesses with a strong credit profile are more likely to access financing and receive favorable loan terms.

#12) Continuity of Business:

An LLC has perpetual existence, meaning the business entity continues to exist even if the owner dies or leaves the business. Perpetual existence provides stability and continuity for an LLC, aiding its ongoing success. An article published by the George Washington Law Review found that businesses with a perpetual existence were more likely to experience long-term success by surviving economic downturns and better navigating ownership changes.

#13) Access to State Incentives and Grants:

Many states offer incentives and grants to businesses that operate as LLCs. These incentives can include tax breaks, access to financing programs, and other resources designed to support small businesses. By forming an LLC, you may be eligible for specific benefits meant to help your business grow.

#14) Easier Transfer of Ownership:

Transferring ownership in an LLC can be simpler than in other business structures. Members can join or leave an LLC by simply updating the company’s Operating Agreement. However, all LLC Members typically have to approve any transfer or sale of Membership interest.

Many LLC Operating Agreements include provisions, like Pick Your Partner or Right of First Refusal, that are meant to prevent unwanted individuals from buying their way into an LLC. The LLC Operating Agreement may give the company the right to buy back any membership interest before it can be offered to someone else. In addition, the remaining Members may be able to vote to reject an ownership sale.

#15) Less Ongoing Paperwork:

LLCs typically have less ongoing paperwork and administrative requirements than corporations. For example, Delaware does not require LLCs to hold an Annual Meeting or complete an Annual Report. This can save small business owners precious time and resources, allowing them to focus more on growing their business.

#16) Enhanced Collaboration Opportunities:

An LLC’s flexible ownership and management structure can make it easier to collaborate with other businesses, professionals, or entrepreneurs. This can lead to new partnerships, joint ventures, or other growth opportunities for your business.

#17) Easier Succession Planning:

LLCs make transferring ownership simple, which is an advantage when it comes to succession planning. The LLC Operating Agreement can outline the process for transferring ownership interests, making it easier to pass a business on to the owner’s heirs in the future. According to Harvard Business Review, businesses with clear succession plans are more likely to successfully navigate generational transitions and maintain long-term success.

#18) Simplified Annual Requirements:

In many states, LLCs have simpler annual reporting requirements compared to corporations. For example, in Delaware, LLCs only need to pay an annual fee in order to remain compliant. In contrast, Delaware corporations must hold an Annual Meeting of shareholders, file an Annual Report, and pay an annual Franchise Tax.

Maintaining an LLC is easy and can save you time and resources, allowing you to focus on running and growing your business instead of dealing with extensive paperwork.

#19) Better Business Record-Keeping:

Operating as an LLC can encourage better record-keeping practices, as there are certain legal requirements regarding the documentation and maintenance of business records. This can help you stay organized and make informed decisions about your business. Better record-keeping practices enable small business owners to accurately assess their financial health and make better-informed decisions for the business.

#20) Legal Compliance:

Forming an LLC ensures that your business is operating in compliance with state laws and regulations. This can help you avoid potential legal issues and protect your business in the long run.

#21) Flexible Tax Treatment:

The IRS enables business owners to select the taxation method for their LLC based on the most beneficial structure for their business. The IRS “Check-The-Box” provisions let LLCs to choose whether they prefer S-corporation or C-corporation treatment for federal tax purposes.

LLCs are taxed as pass-through entities by default. However, LLC Members can choose to make a different tax election that is more advantageous to the company’s current situation. For example, an LLC can select S-corp or C-corp treatment for federal tax purposes by completing a straightforward tax election form.

IncNow LLC Tax Tips

This flexibility allows LLC owners to select the tax treatment that best suits their business needs and financial goals. Businesses with flexible tax treatment options are able to better optimize their tax strategies and reduce their overall tax burden.

#22) Branding Opportunities:

Incorporating “LLC” into your business name can provide additional branding opportunities, leading to increased customer trust and loyalty. A strong brand identity is important for any business that is looking to attract and retain new customers to achieve higher growth and revenue.

#23) Limited Liability for Members:

As the name suggests, an LLC provides its Members and Managers with limited liability protection. This means Member’s personal assets are generally protected from business debts and liabilities. Limited liability provides business owners with the protection and peace of mind that they need to commit to growing their business.

From personal asset protection and tax advantages to management flexibility and scalability, there are many reasons to consider forming an LLC for your business. By understanding the advantages of an LLC structure, you can make an informed decision about what’s best for your business and set yourself up for success in 2023 and beyond.

What is the Best State to Form an LLC?

Legal professionals and savvy entrepreneurs consider Delaware to be the best state to form an LLC. Delaware’s well developed business laws and dedicated business court are known for providing LLCs and their owners with the strongest legal protections anywhere in the world.

Top 5 Benefits of Forming a Delaware LLC

There are numerous benefits to forming an LLC in Delaware. Here are five of the most important benefits for small business owners.

Benefit #1: Versatility

Delaware LLCs are versatile and work well for many types of business. From solo consulting ventures to multi-million-dollar properties, small time entrepreneurs and large conglomerates alike use Delaware LLCs for a variety of business purposes. Delaware LLCs are ideal for safeguarding tangible assets like real estate, as well as intangible assets like intellectual property or trademarks.

Benefit #2: Accessibility

Almost anyone (excluding individuals from certain restricted countries) can establish a Delaware LLC without living in or visiting the state. There is no residency requirement to open a Delaware LLC. All you need is to appoint a Delaware registered agent to represent your company. Delaware LLCs are widely recognized and can do business in any state or country.

Benefit #3: Low Startup Cost

Delaware has some of the lowest filing fees for LLCs. IncNow’s Delaware LLC packages start at just $9 plus state fees.

Benefit #4: Business Friendly Legal Environment

Delaware has a separate court, the Court of Chancery, dedicated to resolving business disputes. Judges in the Court of Chancery are experts in business law and are known for settling disputes efficiently and fairly.

Benefit #5: Privacy for Owners

Delaware does not require LLC owners’ names or addresses to be displayed on the state’s public database. The formation document for a Delaware LLC only needs to include the name and address of the company’s Delaware registered agent.

When to Form a Corporation

Incorporating a corporation, as opposed to forming an LLC, depends on several factors related to your business plans. While Delaware law makes it relatively easy to convert from an LLC to a corporation if you need that form in the future, here are three key considerations where you may want to start with a corporation from the outset:

1. Raising capital from outside sources can be accomplished with an LLC, but it is a but more investor friendly to use a corporation because the default laws for corporations have more built-in protections for investors. For example shareholders can more easily transfer their shares to other investors, in the absence of a shareholder agreement. Also corporations have certain fiduciary duties that are un-waivable, like the duty of loyalty, to better protect investors from self-dealing managers.

2. Every corporation has a board of directors that run the company. This is not typically found in an LLC, which usually just has members and managers.

3.Corporations are often used by high growth startups that anticipate multiple rounds of investment from an angel inventor round to the A-round and B-round. Many different types of venture capitalists and institutional investors are more comfortable investing in the corporate form.

You should consider forming a corporation when your business is: experiencing significant growth, planning to raise capital through stock issuance (where you should consult with a lawyer with securities law experience to avoid early regulatory problems), and comfortable naming individuals to the board of directors and is not merely wholly owned by a larger holding company.

If you do not plan to raise capital right away, many businesses start with a small number of authorized shares of just one common class. This is “going private before you go public.” You can always amend the number of shares later when needed for a round in investments. Starting with a small number of authorized shares, like 1500 shares, can also avoid a large franchise tax bill early on, when you are not yet in full swing.

The post 23 Reasons to Form an LLC in 2025 appeared first on IncNow.

Are there shareholders in an LLC?

Limited Liability Companies do not have stock or bylaws. In fact, LLCs have almost no features of corporations. LLCs are known in legal circles as “unincorporated entities” because they are creatures of contract, rather than corporations which are creatures of statute.

But what does it mean to be a “creature of contract”? Are not LLCs authorized by the Delaware LLC Act? Does that not make them statutory?

The general answer is that corporations have statutory formalities and hierarchies they must follow and cannot waive. Corporations have “default rules”, many of which cannot be changed.

How is an LLC structured?

In the Delaware LLC there is not a default rule to establish the LLC framework. Instead, the entire framework for an LLC can be established by its Operating Agreement. After a general notice filing with the formation jurisdiction, called a Certificate of Formation in Delaware, the LLC private Operating Agreement takes over to set forth the ownership structure and management structure. It may provide for a broad purpose or a single purpose. It can give managers broad powers or narrow powers. It can provide for member liability or limit member liability for capital calls and other obligations.

Who Owns the LLC?

The LLC does not have stock or stockholders. Instead, the Operating Agreement has membership interests, which are not usually certificated. It’s all about the rights set forth in the Operating Agreement.

Delaware allows for maximum flexibility of contract when entering into an Operating Agreement. In exceedingly rare situations, LLC members use this freedom to “opt into” the Delaware General Corporation Law and establish members to establish rights of corporate stockholders who vote for directors who appoint officers. That anomalous situation is far from the norm. Most Delaware LLCs have owners called members and operators called managers whose power and duties are set forth in the Operating Agreement. This structure is much less bureaucratic than the corporate formalities which makes LLCs more popular.

The post Do LLCs Have Stock or Shareholders? appeared first on IncNow.

You may have seen the “Circle B” logo, but what does it mean? The logo can only be displayed by a Certified B Corporation. These are companies that have achieved a minimum score on an evaluation of their corporate governance, community, employee, and environmental benefits. Here’s what you need to know about this entity.

What Is a Certified B Corporation?

Certified B Corporations are for-profit entities that exhibit world-class standards for sustainability, transparency and accountability. These standards are audited periodically by the independent industry standard organization, B Lab. 

B Corp Certification can be likened to Fairtrade or USDA organic certification for products such as bananas or milk. The difference is that the certification looks at a company as a whole rather than just a single product. According to Juan Pablo Larenas, Executive Director of B Lab Global, “The B Corp Certification does not just evaluate a product or service; it assesses the overall positive impact of the company that stands behind it”. 

B Lab issues the B Impact Assessment, a free online tool that any company can use to assess its social and environmental performance. The assessment is scored out of 200 points. The average score for companies who complete the assessment is between 40 and 60 points. Certified B Corporations however are required to maintain a minimum verified score of 80 or above. Companies are able to compare their scores and share resources to help improve their score over time. 

The B Impact Assessment is a strict evaluation assessing a company’s overall impact on their workers, community, customers and environment. This holistic look at a company certifies a certain level of compassionate capitalism. Certified B Corps signal to potential customers and partners that they value stakeholder primacy over profit maximization. Increasing numbers of investors and customers now seek out companies that demonstrate sustainable business practices. 

B Corporation Requirements

1. Verified social and environmental performance. By maintaining their minimum B Impact score of 80 and submitting triennial assessments, Certified B Corps undergo a rigorous process to have their standards independently verified. 
2. Transparency. Certified B Corporations are required to share their B Impact Score publicly on bcorporation.net. 
3. Accountability. Many Certified B Corporations have adopted various legal structures which require them to consider their impact on all stakeholders of the company. These structures include traditional LLCs and corporations, as well as public benefit corporations and public benefit LLCs. 

How to Form a B Corporation

The first step of the B Corp application is to complete the B Impact assessment. Companies are required to have a minimum score of 80 in order to achieve certification. Companies must then maintain their passing B Impact score and recertify every three years. 

Becoming a B Corp is not simply a “participation trophy”. B Lab audits an applicant’s business practices, which is often a seven month process. It entails the initial 216 question application, the production of corporate documents and a series of interviews. Certification requires a company to open its books, goals and overall purpose for complete assessment based on standards set by the trained professionals at B Lab. Certified B Corps need to prioritize and disclose their impact to ensure continued progress toward their social, environmental and governance goals.

The rigor associated with B Corp certification distinguishes companies that make a real impact from those just with good marketing. Applying for B Corp status may not result in more business initially. Companies pursuing this certification look to legitimize their commitments to sustainability. 

The New “B Economy”

As the number and popularity of Certified B Corps has grown, so has their influence over other companies. The “B Economy” represents the greater community surrounding B Corps. This includes the more than 40,000 companies that have used the B Impact Assessment to improve their social and environmental performance, the millions of customers who buy from and support sustainable businesses, and the increasing number of investors seeking to invest in Certified B Corps. 

According to B Lab, over 120 venture capital firms have invested more than $2 billion in Certified B Corporations. The prevailing theory amongst these firms is that producing stakeholder value will produce the best financial returns. 

Although the B Corp movement started in the United States, it has spread all over the globe. There are now more Certified B Corps based outside of the United States than inside. Large multinational companies are beginning to adopt and promote B Lab standards throughout their global operations. In 2017, the French multinational Danone announced its intention to become the first Fortune 500 company to achieve B Corp certification. The company has already helped several of its subsidiaries achieve B Corp status. As of 2018, Danone has nine subsidiaries that are now Certified B Corps. 

The emergence of the B Economy is an exciting development. It means that anyone can participate in the broader movement to conduct business in a way that is best for profits and for the world. Certified B Corps represent a global community of leaders that benefit from increased credibility and trust. This enables them to attract more talent and promote better employee engagement.

IncNow: Delaware’s First B Corp

In May 2019, IncNow became the first incorporation service worldwide to be a Certified B Corp, and the first Certified B Corp in the State of Delaware. IncNow’s shareholders and directors approved an amendment to its corporate charter to declare its public benefit purposes, making them part of its governance structure. The company dedicates five percent (5%) of annual gross profits to support the environment, education, entrepreneurship and the arts in the greater Delaware Valley.

Examples of IncNow’s involvement in preserving and remediating the environment include its commitment pro bono clean water advocacy. The company is also involved in the leadership structures of the Delaware Natural Areas Advisory Council and the Christina Conservancy. It has also sponsored watershed cleanup initiatives and conservation in Delaware’s nature preserves. 

IncNow stands out even amongst Certified B Corps, earning the Best for the World award in corporate governance. Companies receiving the Best for the World honor rank in the top 5% of all B Corps worldwide for their impact in specific areas included in the B Impact assessment. Examples of IncNow’s award-winning governance include sponsoring athletic competitions for employees and company sponsored trips to destinations such as Portugal, Hawaii, Iceland, and Netherlands.

Pros and Cons of Forming a B Corporation

Forming a B Corporation also known as a Public Benefit Corporation (PBC) offers a unique business structure that allows the management to take into consideration stakeholder interests in the mission locked public benefit purpose that may not maximize the value to stockholders. To customers, employees, community and investors, it shows a commitment to certain social and environmental objectives. However, like any business decision, there are both pros and cons to consider. Here’s a breakdown:

Pros of Forming a B Corporation

1. Credibility and Trust:

Beyond simply incorporating as a PBC (or public benefit LLC), often these businesses seek out third party validation that they really are doing good. For example the gold-standard of this certification process is by a third party service, known as B-Lab at BCorporation.Net. B Corp certification is widely recognized as a symbol of commitment to social and environmental performance, making it easier for customers and investors to trust your business.

2. Attracting Purpose-Driven Customers:

Many consumers prefer to support businesses that are socially and environmentally responsible. Being a B Corp helps your company appeal to this growing market of conscious consumers.

3. Access to a Like-minded Network:

As a certified B Corp, your business joins a global community of purpose-driven companies, providing opportunities for collaboration, partnerships, and sharing best practices.

4. Employee Satisfaction and Retention:

Companies that focus on a broader mission than profit often attract employees who are passionate about making a positive impact. This can lead to higher employee engagement, satisfaction, and retention.

5. Legal Protection for Mission:

B Corps are legally able to consider the impact of decisions on stakeholders (not just shareholders), which helps protect the company’s social mission, even if owners think that decision is wasting potential corporate profits.

6. Attracting Impact Investors:

B Corps often have access to a broader pool of investors who are looking to make a positive impact, in addition to earning a financial return.

7. Marketing and Brand Differentiation:

B Corp certification can serve as a unique selling point, helping to differentiate your company in a competitive market and appeal to consumers who prioritize social and environmental responsibility.

Cons of Forming a B Corporation:

1. Costs and Time Commitment:

Certification involves application fees and costs for the required assessments. It can also be time-consuming to gather the necessary documentation, which may involve dedicating significant internal resources.

2. Rigorous Standards:

B Corps must meet high standards across various aspects of the business, including governance, workers’ rights, environmental impact, and community engagement. Maintaining compliance with these standards requires continuous effort.

3. Ongoing Reporting and Recertification:

B Corps must complete recertification every three years, which requires ongoing transparency and updating of practices. This can be a significant administrative burden. Additionally a Delaware PBC must report to its shareholders every other year on how it is advancing the public benefit mission.

4. Potential for Public Scrutiny:

Because B Corps are committed to transparency, they can face public scrutiny if they fail to live up to their standards, which can damage the company’s reputation.

5. Limited Focus on Financial Performance:

While B Corps balance social impact and financial performance, some investors may prefer a stricter focus on profitability, potentially making it harder to attract traditional venture capital or certain financial backing.

6. Complex Governance Structure:

Companies must integrate social and environmental goals into their legal structure. This may require changes to the company’s bylaws, governance documents, or operating procedures, which can be complex and challenging to implement. For example the B Corp must consider their Greenhouse Gas emissions through direct and indirect activities. This is not just a smokestack that emits carbon dioxide, but also considers the commute of employees to an office.

7. Limited Global Recognition:

While B Corp certification is growing, it is not universally recognized across all regions or industries. In some markets, it may not carry as much weight or may be less relevant to customers who just want to get the lowest price without concern about negative externalities, built into the products and services being consumed.

The post What Is a Certified B Corporation? appeared first on IncNow.

Do LLCs have stock?

Typically, “stock” is not the term used for LLC ownership shares. In most LLCs, the LLC Agreement designates a certain number of what it calls “membership units” or “member interests” and may break them down further into a certain number of Voting Units and Nonvoting Units. This bifurcation is similar to how corporations can authorize voting and nonvoting stock, usually called “common” and “preferred” shares, respectively.

Stock, in the context of a corporation, means units of ownership that give its holders rights to a percentage of ownership, a certain number of votes, and possibly a certain dividend. Membership is used in the context of an LLC because in addition to the rights stockholders possess, LLC members more often manage the day to day business of an LLC, which in a corporation is a right usually left to the Directors.

The simpler structure of vesting the rights of shareholders, directors and managers all in one type of person is one reason many people choose to form an LLC instead of a corporation. 

What Is Stock, Exactly?

A stock certificate is a fancy piece of paper signed by the president and the secretary of a corporation that lists the name of a shareholder, the certificate number, and the number of shares held. The list of stockholders who own a corporation’s issued shares appears on the corporation’s stock ledger.

Stock may also be uncertificated. That means the shareholders do not receive those fancy certificates. Instead the shareholder names, number of issued shares and date of issuance just show up on a capitalization table, known as a cap table. This may also be stored virtually through blockchain technology or otherwise.

Stock gives a person a certain amount of rights in voting and economic interests depending on the number of shares and class of those shares. Shares can be voting and convoying. They can also be common and preferred.

The number of shares issued to shareholders cannot exceed the number of authorized shares set forth in the Certificate of Incorporation. In turn these shareholders elect the directors that in turn appoint officers to run the corporation.

Unlike an LLC, changing ownership in a corporation is fairly straightforward and simple. While a stockholder agreement may add restrictions to the transfer of shares, otherwise the shares of stock are freely transferable which can be accomplished through an endorsement on the back of the certificate.

Are there shareholders in an LLC?

Because LLCs do not issue stock, there are not “shareholders” or “stockholders” in LLCs. LLCs do have “members,” which hold ownership units in the LLC. There can be different classes of membership units with different rights and duties.  For example, an LLC can designate Voting and Non-Voting membership units.

Limited Liability Companies do not have stock or bylaws. In fact, LLCs have almost no features of corporations. Legal professionals refer to LLCs as “unincorporated entities” because they are creatures of contract, rather than corporations, which are creatures of statute.

But what does it mean to be a “creature of contract”? Doesn’t the Delaware LLC Act authorize LLCs? Does that not make them statutory?

The general answer is that corporations have statutory formalities and hierarchies they must follow and cannot waive. Corporations have “default rules”, many of which the owners cannot change.

How do you Structure an LLC?

In the Delaware LLC, there is not a default rule to establish the LLC framework. Instead, its internal contract can establish the entire framework for an LLC. This contract is called its “Operating Agreement.” After a general notice filing with the formation jurisdiction, called a Certificate of Formation in Delaware, the LLC’s private Operating Agreement takes over to set forth the ownership structure and management structure. It may provide for a broad business purpose or a single business purpose. The Agreement can give managers broad powers or narrow powers. It can provide for member liability or limit member liability for capital calls and other obligations.

Who Owns the LLC?

The LLC does not have stock or stockholders. Instead, the Operating Agreement has membership interests. The Operating Agreement lists the membership interests of each member rather than in separate member certificates. The Operating Agreement determines the rights of each type of membership interest.

Delaware allows for maximum flexibility of contract when entering into an Operating Agreement. In exceedingly rare situations, LLC members use this freedom to “opt into” the Delaware General Corporation Law and establish members to establish rights of corporate stockholders who vote for directors who appoint officers. That anomalous situation is far from the norm. Most Delaware LLCs have owners called members and operators called managers. The Operating Agreement sets forth their powers and duties. This structure is much less bureaucratic than the corporate formalities which makes LLCs more popular.

How to Add Owners to an LLC

The owners, also known as “members”, of a Delaware LLC are like parties to a contract. The Operating Agreement sets forth the names of the members and managers. You can either become an owner at the outset at the time of formation, or later by being transferred membership interests. The operating agreement controls the transfer of ownership interests. We often see this documented in an amended and restated Operating Agreement, as well Members Resolutions approving the new members and transfer of interests. Sometimes one can also become a member by gift or inheritance, but because of the contractual nature of the LLC, those new members should be required to sign the operating agreement. Operating Agreements in Delaware do not need to be in writing. They can also be oral or implied. Every LLC in Delaware has an operating agreement whether or not the members know they do. It may just be a series of emails, a handshake or a course of performance. Of course the best practice is to have a written and signed operating agreement. The operating agreement is not on file with the secretary of state. It is a private document between the LLC’s members. Even single member LLCs have operating agreements listing just one person as an owner.

The post Do LLCs Have Stock or Shareholders? appeared first on IncNow.

Before doing business or owning assets through a single-member Florida LLC, you should consider either adding a nominal partner or using a Delaware single-member LLC instead. Florida is the most popular state for business formation. Florida has more active business entities than even the state of Delaware. More than 2.6 million entities are active in the state of Florida.

Starting a Florida LLC is a popular way to protect investments in real estate, boats, and businesses. Unfortunately, there is a peculiar vulnerability for single-member Florida LLCs. The good news is that Multi-Member Florida LLCs and Delaware single-member LLCs qualified to do business in Florida do not have this vulnerability.

Most states do not limit a creditor of an LLC Member to a charging order. In fact, most states are not very friendly to creditor rights. That is why entrepreneurs should “forum shop” for the most business-friendly state when starting an LLC. It may be convenient to form a Florida LLC as a single owner, but it may not be advisable. Better would be to be aware of “the charging order being the exclusive remedy of a creditor” under the Delaware LLC Act. Then be aware that under the “Internal Affairs Doctrine” that a Florida court typically applies the Delaware LLC Act instead of local judgment creditor law when determining the remedy available to a judgment creditor of a member. It is important that this planning be done before any liability is foreseeable. If you form a company after a contract breach or an accident, all planning may be reversed through local fraudulent transfer laws. You want to avoid transferring assets in defraud of a creditor. Instead, plan and structure your company in advance before problems arise.

The Vulnerability

In Olmstead v. FTC 44 So. 3d 76, 83 (Fla. 2010), the Florida Supreme Court reduced the asset protection abilities of single-member Florida LLCs and by extension, the question was whether this case would also in peril Multi-Member Florida LLCs. Olmstead fundamentally altered the legal protections from creditors of the member in a Florida LLC. Stemming from a fraudulent credit card scheme, the case questioned the extent of creditor rights against which the debtor was the Florida LLC’s member. The Florida Supreme Court ultimately ruled that creditors could potentially seize the entire LLC interest in a foreclosure to satisfy the debt of the member rather than being limited to a “charging order”. A “charging order” is a type of lien on distributions from a company to a debtor and is addressed below.

This decision cast doubt on the exclusive nature of charging orders for single-member Florida LLCs and potentially multi-member Florida LLCs. In response, the Florida legislature enacted the “Olmstead Patch”, which patched the hole for Multi-Member Florida LLCs but not single-member Florida LLCs. To this day, if a creditor can prove that receiving payments from a charging order would take too long to satisfy a debt, a court can order the sale of the entire single-member Florida LLC interest. These new subsections in Florida Statutes §608.433 are designed to equip courts with the authority to address situations where a judgment creditor faces obstacles in collecting a judgment against the sole member of a single-member Florida LLC. Under specific circumstances and upon a judgment creditor’s motion, courts may impose remedies exceeding the limited distribution right if sufficient evidence exists to justify such action.

What Is A Charging Order?

The origins of charging orders can be traced back to 19th-century English partnership law. The Partnership Act of 1890 in England provided that rather than obtaining a writ of execution against assets held by a partnership to satisfy a judgment debt for one of the partners, a creditor of a partner must obtain an order from a court charging the partner’s economic interest in the partnership. The modern-day, U.S. version of a charging order allows a creditor to collect distributions from a company owned by a debtor, similar to wage garnishment. Charging orders do not provide management and voting rights of a typical LLC membership interest. Jay D. Adkisson, in Asset Protection: Concepts & Strategies for Protecting Your Wealth, describes a charging order as, “simply a court document that directs the managers of the LLC to divert distributions that would otherwise go to the debtor member to the creditor unless the judgment is paid.”

What Does A Charging Order Do For Creditors?

A charging order is often a less-than-ideal remedy for creditors as it only grants a lien on future distributions from the LLC rather than ownership of the debtor’s interest. A creditor may face significant delays in recovering its funds, especially if the LLC’s operating agreement limits distributions or allows for discretionary management fees to be paid to its member or members.

What Is An Example Of This?

It might help to use an example of someone named Donald who owns a private jet in the name of “Art of the Deal LLC” that is stored at the Palm Beach International Airport. Some might recommend that Melania owns 1% of his jet rather than have Donald own 100%, in case he has civil liability that is not ensured and his personal creditors start to look for his assets to collect on their judgment. The question is can the personal creditor foreclose on his LLC interest and take possession of his jet or is the creditor limited to a charging order where Donald may be able to continue to use his jet and not pay the creditor anything, because the jet has no income, just expenses.

How Can A Single-Member LLC In Florida Reduce Risks From Creditors?

One method a single-member LLC may use to reduce the risks to creditors is to grant a membership interest to a nominal member, such as a 1% non-voting interest. This ensures that the nominal owner is not going to reap the benefits of significant ownership interest in the Florida LLC but still classifies as a Multi-Member Florida LLC.

Another option is using a Delaware single-member LLC. Delaware offers superior asset protection for single-member LLCs compared to Florida. Unlike Florida, Delaware extends charging order protection to single-member LLCs, shielding owners from personal creditor interference. To do this the business owner should form a Delaware LLC and then qualify it as a foreign LLC in Florida. This method is a strategic option for business owners seeking to maximize liability protection while benefiting from Delaware’s business-friendly legal environment.

The post Watch Out For This Vulnerability When Forming A Florida LLC appeared first on IncNow.

The term “subsidiary” is used often in business, however, you might not know exactly what it means. Subsidiaries are an important part of the legal structure of nearly every large company.

In this article, we discuss what subsidiary companies are, how they are used, and the best way to structure them. 

What Is A Subsidiary Company?

A “subsidiary company” refers to a business that is wholly or majority owned by another company. The company that owns a subsidiary is often called a “parent” or “holding” company.

A subsidiary company is typically a separate business with its own team in charge of daily operations. However, the parent company may still have voting-control over the subsidiary and can make big decisions for the company. 

Businesses use subsidiaries as tools to protect valuable business assets from liabilities associated with daily business activities. Subsidiaries act like firewalls keeping the liabilities and obligations of one business separate from the assets of any other related businesses. 

A large company with multiple subsidiaries is like its own business ecosystem. Each individual company can operate independently and have its own assets and liabilities. Meanwhile, the parent company maintains ownership of these businesses under one entity while overseeing how they are being run. 

Are Subsidiary Companies LLCs?

Most subsidiary companies are set up as limited liability companies, or “LLCs”. This is because LLCs are more flexible, cost effective and simpler to manage compared to corporations. LLCs are the most popular entity type and represent three quarters of new businesses formed. Many of these new LLCs are subsidiary companies for big and small businesses alike. 

Are Subsidiary Companies Corporations?

Subsidiary companies are rarely set up as corporations. Instead, most subsidiaries are formed as Limited Liability Companies, or “LLCs”. LLCs are chosen because they are more flexible, cheaper, and easier to manage. Big and small businesses alike prefer using LLCs for their subsidiaries because of these benefits.

So, to put it simply: No, a subsidiary company is usually not a corporation. The LLC structure is the more popular choice for subsidiaries.

Examples of Subsidiary Companies

Companies of all sizes use subsidiaries as part of their corporate structure. Some of the world’s largest corporations use subsidiaries as a necessary strategy for protecting their diverse business interests. 

Here are some examples of companies that you might be familiar with who use subsidiaries:

• Google and YouTube as subsidiaries of Alphabet Inc;
• Instagram as a subsidiary of Meta Platforms, Inc., (formerly Facebook, Inc.);
• American Broadcasting Company (ABC Network) and ESPN as subsidiaries of the Walt Disney Company;

Alphabet, Inc. uses subsidiaries to successfully manage its different business lines. Alphabet, Inc. “dropped down” the Google search engine cash cow into a subsidiary to keep the business separate from the company’s other ventures. 

What Is A Wholly Owned Subsidiary?

A wholly owned subsidiary is owned 100% by its parent company. Wholly owned subsidiaries are typically used to protect particularly valuable assets that the parent company wants to keep legally separated from its business activities. Examples of this would be a summer camp forming a wholly owned subsidiary to hold title to a boat or a business forming one to own its private aircraft.

Pros and Cons Of Subsidiary Companies

There are some pros and cons associated with using subsidiary companies. Here are some points to consider when deciding whether to set up a subsidiary for your business: 

• Pros: Multiple Layers Of Legal Protection

Having subsidiaries helps companies limit liability risks across a business organization. For example, one company may file for bankruptcy without dragging the other related businesses through the process. Using a subsidiary also allows you to bring outside partners into new ventures without giving them a slice of the bigger “pie” from other businesses. 

• Cons: Extra Costs

Operating and maintaining multiple subsidiary companies can become costly. Forming an LLC often requires paying an annual fee to keep the company in good standing, in addition to the one time filing fees. For example, Delaware requires all LLCs in the state to pay a $300 Annual Franchise Tax each year. 

Additionally, subsidiary LLCs must maintain separate books, records and bank accounts in order to avoid mixing assets between businesses. This can add to the operating costs of each subsidiary company. 

How Much Do Subsidiary Companies Cost?

The most cost effective way to set up a subsidiary company is to form an LLC. The total cost of forming and maintaining a subsidiary LLC will depend on which state it is formed in. Between state annual franchise taxes and annual registered agent fees, an LLC typically costs $400 per year to maintain.

Why Delaware Is The Best State For Subsidiary Companies:

Both large companies and entrepreneurs prefer Delaware as the premier location for forming LLCs. This is because Delaware’s business laws provide protections for business owners that are unmatched by any other state. 

Google is likely the most recognized Delaware LLC in the world. General Motors is another well known company which has formed over 1,500 subsidiaries in Delaware. Entrepreneurs form thousands of Delaware LLC subsidiaries every month, each with discrete purposes and assets of their own. 

How Are Subsidiary Companies Taxed ?

Many subsidiary companies are “single-Member LLCs”. This is the case when the parent company is the sole owner of the subsidiary. The IRS disregards single-member LLCs for tax purposes. This means subsidiary LLCs do not need to file a separate tax return. Profits and losses of subsidiaries can be accounted for on the parent company’s books.

What Is a Subsidiary Agreement?

A “subsidiary agreement” is a term that business owners sometimes use to describe the LLC Operating Agreement of a subsidiary company. An LLC Operating Agreement is the company document that outlines how an LLC is structured. The LLC Operating Agreement provides details about a company’s ownership and management. One unique aspect of a subsidiary’s LLC Operating Agreement is that the parent company is typically the only Member of the LLC. 

What Is A Delaware Series LLC?

Delaware Series LLCs offer a simpler and more affordable way to protect multiple businesses under one company. A Delaware Series LLC is able to create an unlimited number of business cells called “protected series”. Each protected series is able to have its own business purpose, assets and liabilities. 

A Delaware Series LLC provides internal asset shields. This means the business assets of each protected series are off limits to creditors of any other protected series or the parent LLC.

Delaware requires Series LLCs to pay only one filing fee and one annual franchise tax no matter how many protected series they form. The Series LLC enables you to operate an unlimited amount of businesses under the ownership of one company without multiplying the costs. 

What Is a Foreign Subsidiary?

Businesses based outside the United States often want access to the large consumer markets in the United States to sell their products or services. When deciding to do business in the United States a business will often establish a separate entity to do business in the United States. That foreign business often decides to establish a corporation in the United States where its one stockholder is the foreign entity. Then the newly formed US based entity will often be known as a foreign subsidiary.

The business outside the United States may also choose to establish an LLC in the United States. For tax reasons, often tax advisors suggest that LLC make a “C-Corporation” tax election on IRS Form 8832 within 75 days of formation. That is because the foreign entity does not want to be taxed on its worldwide income in the United States. In some situations the foreign company may set up a “blocker” company in the Cayman Islands to be the owner of the US based LLC. The idea behind the blocker company would be to be an intermediate owner between the US subsidiary and the foreign company to block the foreign company from being taxed on its worldwide income in the United States. Before deciding what tax elections to make, the foreign company should consult with a US Certified Public Accountant. It may not be necessary to set up a blocker company if the new US subsidiary is taxed as a C-corporation, either by being started as a corporation or forming an LLC with a timely C-corporation tax election.

The foreign based company will also need to decide in which US state to file its corporation. Some foreign companies wrongly think that decision should be based on where the largest markets are or where they will actually have their US operational headquarters. Instead most well-informed foreign companies will decide to start a Delaware entity, because the laws of Delaware will govern the internal affairs of the company. Then that Delaware company can do business in any state, by filing a certificate of authority to do business in states where it has employees or offices.

When deciding whether to incorporate or form an LLC, another consideration is whether you want human beings to be put in a role as fiduciary. A corporation must have humans named as officers and directors. In contrast an LLC can have an entity serve as the Manager, and bypass the formalities of a corporation’s requirement of a “three layer cake” with a stockholder that elects directors who appoint officers annually in meetings.

What Is the Purpose of a Subsidiary Company?

Companies often decide to set up multiple subsidiaries to ringfence assets and operations into small fortresses that prevent cross liability in the event of a judgment creditor or other business problem. This avoids all assets being in one basket. It can turn the deep pockets into many tiny pockets, where the creditor of one property cannot collect against the assets of another entity. It can be adding another layer to the onion, which is known as a corporate veil where there is a holding company on top and multiple portfolio entities underneath to better shield assets.

What Is a Qualified Subchapter S Subsidiary?

A Qualified Subchapter S Subsidiary is when a corporation has established a corporate subsidiary. Normally a corporation subsidiary would be taxed as a C-corporation by default. However, for simplicity of accounting, often business owners want to have all of their portfolio companies “roll-up” into one tax return at the holding company level. That allows the parent company to offset losses from one subsidiary against the profits from another subsidiary to lower its effective tax rate. You may think why not just make an IRS Form 2553 tax election to simply have the subsidiaries taxes as S-corporations. The reason is because of restrictions on who can file an S-election. Having a corporation owned by a non-natural person entity would usually disqualify the S-election. So in order to have those subsidiaries “roll up” the subs would need to be established as single member LLCs or have the corporation subs make “Qualified Subchapter S Elections” to be treated as a “Q-Sub”.

The post What Is A Subsidiary Company? appeared first on IncNow.

The solar energy industry has been experiencing remarkable growth, driven by increasing demand for renewable energy solutions. As solar companies expand and navigate the complexities of the market, selecting the right business structure becomes a crucial decision. 

Forming a Delaware Limited Liability Company (LLC) offers many benefits for solar companies. This article explores why Delaware LLCs are a popular choice among solar businesses and the specific advantages they provide.

What Benefits Are There to Solar Companies Forming a Delaware LLC?

Delaware LLCs provide real legal benefits to all types of businesses, including solar companies. Here are the top five benefits of Delaware LLCs for solar businesses:

Benefit #1: Limited Liability Protection

Delaware LLCs offer limited liability protection, which shields business owners’ personal assets from the company’s debts and liabilities. This protection is especially valuable for owners of solar energy businesses, as they face risks such as equipment malfunctions, installation errors, or contractual disputes.

For example, if a solar panel installation leads to property damage and a lawsuit, the business owner’s personal assets—like their home or personal savings—can be protected from legal claims. Limited liability protection allows solar entrepreneurs to focus on expanding their business without the constant fear of losing their personal wealth.

Benefit #2: Credibility

Operating as a Delaware LLC can give a solar company added credibility. Potential customers, partners, and investors often view Delaware LLCs as being more established and reliable businesses. Credibility can lead to more business opportunities and attract higher paying clients and investment in the competitive solar industry.

For example, a solar installation company structured as a Delaware LLC may be perceived as more professional and trustworthy. This may make it easier to secure large contracts and partnerships with major corporations and government entities.

Benefit #3: Tax Advantages

Delaware LLCs provide tax flexibility that can be particularly beneficial for solar companies. Owners of Delaware LLCs can choose to have their businesses taxed in various ways, including as a disregarded entity, a partnership, a C-Corporation, or an S-Corporation. 

Under the Check-The-Box rules, the IRS allows LLCs to choose a tax election based on which structure benefits their business the most.

Solar businesses often have varying levels of income and expenses due to the project-based nature of their work. Being able to choose the most favorable tax treatment can help optimize a company’s finances and lead to big savings.

Benefit #4: Easy to Set Up And Maintain

Setting up a Delaware LLC is relatively easy and there are minimal requirements to maintain a Delaware LLC. Solar entrepreneurs can benefit from this simplicity when they need to focus on their projects and clients rather than navigating complex legal or administrative tasks. 

A Delaware Registered Agent, like IncNow, can handle the entire LLC formation process for you. The only Annual Requirement for Delaware LLCs is paying the $300 Delaware Annual Franchise Tax.

Benefit #5: Easy to Transfer Ownership

As solar companies grow and evolve, they may need to bring in new partners or transfer ownership. Delaware LLCs make it easy to transfer ownership of a business or change management. All you need to do is amend the company’s private LLC Operating Agreement. 

What Is A Delaware Limited Liability Company (LLC)?

A Delaware limited liability company, or “LLC”, is a legal business structure that offers limited liability protection for its owners. Delaware LLCs can protect a business owner’s personal assets from the company’s liabilities and financial obligations. Owners of an LLC are called “Members.” 

Delaware LLCs are flexible business entities used for various purposes, from small-scale consulting businesses to large enterprises. Solar companies utilize Delaware LLCs to protect both tangible assets, like solar panels and installation equipment, and intangible assets like intellectual property and customer contracts.

Why Form An LLC In Delaware? Top Benefits

Delaware provides many benefits to entrepreneurs who choose to form legal entities in the state. These include:

• Business-friendly legal climate, low fees, fast filing,
• A dedicated business court for dispute resolution, and
• No residency requirement for global entrepreneurs.

Read More –> Top Benefits Of A Delaware LLC

Delaware has become the preferred state for LLC formation due to its business-friendly laws, affordable fees, and quick filing process. According to the Delaware Division of Corporations, 1.3 million Delaware LLCs were created in 2021 alone. Delaware’s business laws are renowned for providing robust protections for managers and owners.

Delaware’s specialized business court, known as the “Court of Chancery,” efficiently resolves disputes while respecting the rights of business owners.

There is no residency requirement for creating a Delaware LLC. This allows entrepreneurs worldwide to benefit from Delaware’s laws. Additionally, there is no requirement for a Delaware office or even visiting the state to form an LLC.

Operating as a sole proprietor can be straightforward and cost-effective, but forming a Delaware LLC provides solar companies with improved protection, credibility, and potential tax benefits. Solar businesses should consider forming a Delaware LLC to enhance their operations and secure their growth in the competitive renewable energy market.

How To Form A Delaware LLC

Registering a Delaware LLC requires filing a formation document with the Secretary of State’s office called the Certificate of Formation. In Delaware, the only information required to complete this document is the LLC name and details about the company’s Delaware registered agent.

The post Why Solar Companies Should Form Delaware LLCs appeared first on IncNow.

Who owns and manages an LLC? If you’re thinking about setting up a Limited Liability Company (LLC), it’s helpful to understand the roles of LLC owners and how they’re involved in managing the business. LLCs offer the flexibility to create unique management structures, pick officer titles, distribute management responsibilities, and outline ownership interest.

In this article, we discuss common management and ownership structures for LLCs and explore the roles of LLC Members and Managers.

LLC Members: Who Owns an LLC?

The ownership of an LLC lies with its Members, who share the ownership interest in the company. The LLC Operating Agreement acts as a contract between LLC Members, outlining the rules and responsibilities for running the company. This agreement covers several crucial aspects that define the Members’ roles and their relationship with the company.

An LLC Operating Agreement should include:

• Ownership interest of each LLC Member
• Voting rights of each LLC Member
• Shares in profits and losses for LLC Members
• Arrangements for making distributions
• Management responsibilities (if any) of LLC Members

LLC Members: A Look at Ownership Structures

At a minimum, an LLC needs one Member, known as a “single-member LLC.” For this kind of LLC, the Operating Agreement says that the sole LLC Member owns and controls everything.

LLC Members can adopt various ownership structures, and the Operating Agreement allows them to be pretty flexible when it comes to naming LLC Members. For instance, one LLC could be the single-member of another LLC (often called a “subsidiary”) as part of a holding company structure. In this case, the holding company makes decisions for the subsidiary.

Other ownership structures involving LLC Members include:

• Two or more LLC Members owning a family business
• Two or more unrelated parties starting a business venture as LLC Members
• A single-purpose managing LLC Member with one or more other LLC Members

LLCs can create different classes of LLC Members in the Operating Agreement, with different voting rights based on factors like total ownership interest, capital contributions, or management responsibilities.

LLC Members vs. LLC Managers

It’s important to know the difference between “LLC Member” and “Manager” in an LLC. A “Manager” handles the company’s daily operations but usually isn’t part of the ownership structure or involved in significant company decisions involving LLC Members.

LLC Management Structures

When it comes to LLC Members, LLCs usually fall into one of two categories: Manager-Managed or Member-Managed.

     1.) What is a Manager-Managed LLC?

In a Manager-Managed LLC, LLC Members delegate day-to-day operations to a third-party manager, often an experienced, paid professional. The Operating Agreement outlines the manager’s authority and the rights kept by LLC Members.

     2.) What is a Member-Managed LLC?

In a Member-Managed LLC, the LLC Members also take on the role of Managers. They have ownership interest and manage the daily activities of the LLC.

How to Become an LLC Member

To become an LLC Member, existing LLC Members need to hold a vote on whether to admit the new member. If the new member is approved, an Amended and Restated LLC Operating Agreement must be drafted, which includes the new Member and details their ownership percentage. This ensures that the new Member’s role and responsibilities within the company are clearly defined and agreed upon by all existing LLC Members.

LLC Members: Is There a Maximum Number?

While there’s no limit to the number of LLC Members an LLC can have, it’s generally a good idea to keep the number as low as possible to avoid conflicts among LLC Members.

LLC Members: Is There A Minimum Number?

An LLC needs to have at least one Member or owner. LLCs with only one Member are referred to as “Single-Member LLCs”. The sole Member of a Single-Member LLC is both the owner and the Manager of the LLC.

What Titles do LLC Members Have?

LLCs can choose any officer titles they want. Common positions held by LLC Members in an LLC are President, Secretary, and Treasurer.

Do LLCs Have Directors?

LLCs can adopt management structures from corporate organizations, like establishing a “Board of Directors” or “Board of Managers” responsible for appointing officers. This structure can work well for family-owned businesses where siblings want to control the company by majority director vote.

Does an LLC Have a President?

Yes, an LLC can have a President, which is a popular title for the highest-ranking manager and often held by one of the LLC Members.

Does an LLC Have a CEO?

An LLC can also have a CEO. LLC Members can assign any titles they prefer to Managers or Managing-Members. While “President” is the most popular title for an LLC’s top manager, “CEO” is another option that can be held by an LLC Member if they wish.

Understanding the roles and responsibilities of LLC Members is crucial when setting up an LLC. By thoughtfully structuring the LLC’s management, ownership, and decision-making processes, business owners can create a flexible and efficient organization that caters to their specific needs. With a good understanding of the functions and limitations of LLC Members, you’ll be well-prepared to make informed decisions when forming your LLC.

Do I Need an LLC List of Partners?

No. Instead of having a list of partners, a multimember LLC would have an operating agreement naming its owners. Usually the ownership in an LLC is set forth in percentage ownership or units and those owners are called members. Governing documents should not refer to the LLC owners as partners, unless it is in the context of partnership taxation under subchapter K. For example, an LLC should designate a partnership representative who would be responsible for all dealings between the LLC and the IRS. That partnership representative does not even need to be an owner. The LLC is a contractual entity with an operating agreement that sets forth the ownership and management. Thus an LLC Agreement would list the members, but there is no separate official list of owners.

What is an LLC Membership?

An LLC membership refers to the ownership interest in an LLC. Members are the individuals or entities that own a portion of the LLC, similar to how shareholders who own stock in a corporation. Membership gives individuals or entities certain rights and responsibilities, depending on the LLC’s operating agreement and the specific state laws governing the LLC. Membership can be divided into percentage ownership or units of ownership, depending on how the operating agreement is written. It can also have multiple classes of membership interests, such as voting and non-voting. Membership is a hybrid concept that has some attributes of stock ownership and other aspects like a partner in a partnership.

Note that your LLC operating agreement membership interests typically do not name who inherits your interest upon your death. Instead that is typically handled through estate planning documents. It is possible to have a “transfer on death” provision added to your membership interest, but it is generally better to do that in other estate planning documents.

Also your membership interest rights and responsibilities are derived directly from what is written in the operating agreement, which can override the Delaware LLC Act, because LLC’s are “creatures of contract” more so than corporations, where stockholder rights are largely derived from statutory language.

Because your LLC Membership interest is derived from contractual rights, the interest is not usually “certificated” in the form of a membership certificate. To transfer your LLC membership interest to another person, trust or entity usually requires the consent of other members, under a principle of “pick your partner.”

Key Points About LLC Membership:

Who Can Be a Member?

• Individuals: A natural person can be a member of an LLC.
• Trusts: Often for estate planning reasons, your revocable trust may be named the members of an LLC to help avoid probate.
• Entities: Corporations, other LLCs, or trusts can also be members.
• Single-member LLC: An LLC can have just one member, which is called a “single-member LLC.”
• Multi-member LLC: An LLC can have multiple members, each of whom holds a share of the ownership.
• LLCs can be managed directly by its members, similar to a partnership. Or an LLC can be managed by a third party manager, known as manager managed. Often in Delaware the LLC has some hybrid of the two where some decisions are retained by the members, like deciding to sell substantially all of the company assets or deciding to replace the manager. Then the manager can be just delegated the day-to-day management responsibilities.

The LLC Operating Agreement sets forth the rights, responsibilities, and relationships between the owners and managers. This document outlines how the LLC is run, including:

• How profits and losses are divided.
• How decisions are made.
• The procedures for adding or removing members.
• The value of the LLC for buy-out purposes.
• Rights of first refusal before an interest is assigned to a third party outsider.
• How to replace managers and their powers and duties.
• Waiver of fiduciary duties.
• The process for dissolving the LLC.

The post LLC Members and Managers: Who Are LLC Owners? appeared first on IncNow.

As a business owner or entrepreneur, you may have come across the term “holding company.” Holding companies are a type of legal structure utilized by businesses across various industries. When set up correctly, a holding company can offer unique legal protections that a single business entity cannot achieve.

Many well-known corporations use holding companies as part of their legal structure. However, you might not fully understand what holding companies are and how they function.

In this article, we break down what holding companies are and how to set them up. We also explore whether forming a holding company might be beneficial for your business.

What Is A Holding Company, Exactly?

A holding company, also called a “parent company,” is a business entity used for the sole purpose of owning and managing other companies. The point of a holding company is to keep valuable company assets legally separated from daily business activities.

Holding companies typically do not have any business operations. They do not manufacture products or sell any services. A holding company simply owns a majority interest in all the related businesses operating underneath it. These operating businesses are called “subsidiary companies”.

For companies with multiple streams of income coming from different businesses, a holding company can provide additional layers of legal protection for both the business and its owners.

How Does A Holding Company Work?

A holding company acts like a buffer between a business’s daily operations and its valuable assets. Subsidiary companies owned by the holding company carry out typical business activities, like selling products or services, hiring employees and signing contracts with vendors.

The holding company owns the company’s valuable assets, like real estate, patents, or trademarks. A holding company structure can keep a company’s assets separate from any potential liabilities generated by the business activities of the subsidiaries.

Subsidiary companies typically have their own management in charge of the day to day operations of the business. However, the leadership of the holding company usually oversees how the subsidiaries are being run and can make major decisions on behalf of these companies.

How to Form a Holding Company: 3 Steps

Here are the steps you need to follow to set-up a holding company:

Step 1. Form At Least Two Business Entities (LLCs)

To set up the holding company structure, you will need to form at least two business entities. Delaware LLCs are the most popular type of business entity, especially for forming holding companies and subsidiaries.

Step 2. Set Up Ownership 

Ownership in an LLC is established in the company’s private Operating Agreement. The LLC Operating Agreement for a subsidiary company should name the holding company as the sole-Member and owner of LLC.

Step 3. Open Separate Business Bank Accounts

The holding company and its subsidiary LLCs should all open their own business bank accounts.

An important part of operating a holding company structure is keeping each business separate. Business income and assets should not be commingled between subsidiary companies or the holding company.

IncNow–> How to Open a Bank Account for an LLC

How Much Does An LLC Holding Company Cost?

The cost of an LLC holding company varies depending on the number of subsidiary companies it manages. Each LLC comes with its own set of startup and annual maintenance costs. 

Below is a breakdown of the typical expenses you can expect when operating an LLC holding company. Remember, these costs will apply to each subsidiary LLC:

• State Filing Fee: You will need to pay a filing fee for each LLC registered in your chosen state. This fee is paid to the Secretary of State.

• Registered Agent Fee:  If you use a Registered Agent service, you will need to pay a fee for each LLC.

• State Taxes: Most states, including Delaware, require companies to pay an Annual Franchise Tax each year.

• Administrative Costs: You will need to maintain separate bookkeeping records and open bank accounts for each company, which may require additional resources.

Who Uses A Holding Company?

Businesses of all sizes use holding companies and subsidiaries for a variety of reasons. Entrepreneurs primarily use holding companies to protect assets from liabilities generated by everyday business activities.

A good example is real estate and rental properties. In a holding company structure, each rental property is owned by a separate LLC. These individual LLCs are all wholly owned by the holding company.

The rental income generated by each property can flow up to the holding company, however, liabilities associated with each property are restricted to the LLC owning that property. If one property gets hit with a lawsuit, or some other type of legal action, the other properties may avoid being impacted.

Some of the largest companies in the world use holding companies to separate different lines of business. For example, Google and YouTube are wholly owned subsidiaries of their parent company, Alphabet, Inc.

Is A Holding Company An LLC?

Holding companies and subsidiaries are often set up as limited liability companies, or LLCs. This is because LLCs are easier to set up and maintain than corporations.

Starting an LLC requires less paperwork and administrative requirements compared to a corporation. For example, LLCs do not need to appoint a Board of Directors or hold Annual Meetings. In addition, transferring ownership in an LLC is a simpler process than transferring stock in a corporation.

Is A Holding Company a Corporation?

A holding company can be structured as a corporation, but it does not have to be.

A holding company is a run-of-the-mill business entity that owns passive assets or other operating companies, and it can be structured as a corporation, LLC, or other legal entity, but most often as an LLC.

Pros and Cons of Using A Holding Company

There are some important points to consider when deciding whether to set up a holding company for your business. Here are some pros and cons of using a holding company:

Pro: Legal Protections

A holding company can keep business assets legally separated from daily business activities. If you are running multiple businesses, or have separate streams of income, a holding company can provide limited liability protection for each business and their owners.

Con: Start-Up and Maintenance Costs

Starting a holding company involves creating and maintaining multiple business entities. This requires paying necessary state filing fees and any annual fees to keep each company in good standing.

For example, Delaware charges a filing fee to form an LLC in the state. In addition, Delaware LLCs need to pay the Delaware Annual Franchise Tax each year. The Delaware Annual Franchise Tax for LLCs is a flat fee of $300 that an LLC needs to pay to stay compliant in Delaware

Con: Complex Legal Structure

A holding company structure only works if you can properly maintain it. Keeping track of multiple business entities can be difficult. With multiple LLCs, you will need to keep accurate records to make sure business income and assets are not being mixed across multiple companies. This is called “commingling”.

If a holding company commingles funds across multiple businesses, the whole organization could lose its limited liability protection. This puts each business and all their respective owners at risk.

Should I Start a Holding Company for My Business?

Holding companies can provide many legal advantages. However, setting up a holding company may not be the best choice for every business. Here are some things you should consider when deciding whether to start a holding company:

1.) Assess Your Business Needs and Goals

Consider the long-term plans and immediate needs of your business before deciding to set up a holding company. Does your business need layers of legal protection? Will you be acquiring other businesses or assets in the future? Answering these questions can help you determine whether a holding company is in line with your business’ strategic goals.

2.) Evaluate Legal Risk and Protections

A holding company can provide a shield around your business assets and reduce your company’s exposure to liabilities. Think about the kind of legal risks your business faces. If your business engages in legally or financially risky activities, you might consider using a holding company to keep valuable assets separate from potential liabilities.

3.) Consider Complexity and Costs

Setting up a holding company can be costly. In addition, a holding company needs to be well managed in order to maintain its legal protections. Are you prepared to handle multiple business entities? Be sure to understand the costs, along with time and resources, of operating a holding company.

4.) Explore Alternatives

Before committing to a holding company, explore and research other legal structures, like the Delaware Series LLC. A Delaware Series LLC can provide similar benefits as a holding company, without much of the costs or administrative hassle.

Does a Holding Company Have an Operating Agreement?

If an LLC is used as a parent company to hold other interests in other entities, the Delaware LLC Act requires it to have an operating agreement. That is because every LLC in Delaware has an operating agreement, whether that is written, oral or implied. Of course the best practice is to have a written operating agreement that is signed by its members. The operating agreement will also outline management and ownership structure, including the member’s rights.

This article describes holding companies in the context of parent companies that have no assets or ownership interests aside from interests in operating or portfolio companies. This article does not describe holding companies under a provision of Delaware tax law that is set up for tax reasons and which have additional requirements.

The state tax exemption under Delaware Law is set forth in Section 1902(b)(8) of the Delaware Code. It provides an exemption from taxation for entities, “whose activities within this state are confined to the maintenance and management of their intangible investments or of the intangible investments of corporations or business trusts registered as investment companies under the Investment Company Act of 1940, as amended (15 U.S.C. 80a-1 et seq.) and the collection and distribution of the income from such investments or from tangible property physically located outside this state.” In this context ‘intangible investments’ include, investments in stocks, bonds, notes, and other debt obligations, patents, patent applications, trademarks, trade names, and similar types of intangible assets.” One example of this is Home Depot that owns their trademarks through Delaware and charges affiliated stores in other states license fees that are deductible expenses elsewhere, reducing state income tax obligations in other states where it operates.

Holding Company Structure

The Holding Company is the top level on an organizational chart. You and other owners would be the Members or Stockholders. Then, wholly owned portfolio companies would list the Holding Company as their only owner. One mistake to be avoided is to use the Holding Company to own assets directly or conduct operations. Adding assets and operations directly to the Holding Company can be a problem if those assets or operations attract liability. A judgment creditor of the Holding Company could gain access to the entire enterprise valve of all subsidiaries. That could have been avoided if the assets and activities were restricted to the portfolio company level. Again, the Holding Company should not own assets or conduct operations directly.

Series LLC vs. Holding Company

Series LLCs could be structured as a Holding Company with portfolio series. To do this the Mothership, the parent company, would be named as the single member associated with each protected series. In that way, a Series LLC can be a relatively simple way to structure a Holding Company.

Series LLC is a single juridical entity with multiple protected series associated with and created by the main LLC.

• The Delaware protected series can be more cost effective at ring-fencing assets that create separate firewalls.
• Can be used as an incubator for multiple business ideas, but most often used in
  real estate for multiple properties.
• Used for different divisions or locations of a business.
• Used to hold separate assets or equipment in a business.

Holding company is an LLC or corporation that is the sole owner of other portfolio LLCs.

• Will need to pay to form and maintain each entity separately with Registered Agent fees and franchise taxes.
• Because each business is a separate entity, just owned by the same holding
  company, liability is generally limited to the entity at issue in a contract or injury.

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