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hello everyone thank you for joining us today this is Michael Cooper with Harvard Business Services and our webinar today is making changes to your Delaware company I am joined today by our two speakers in this presentation Bret Melton and Jared Milton no coincidence that they have the same last name they are in fact brothers both working for us here at Harvard Business Services so we're excited to have them lead our discussion today and just a couple quick announcements before we get started the first being that we are recording the webinar today so the the recording will be available for your viewing starting tomorrow and you can watch anytime in your leisure if you want to go back and catch something that you might have missed I will also be distributing the slides that we're using today as a PDF so you can look through those as well whenever you need to we do welcome your questions during this presentation so if you have any questions about the things that you're hearing or something related that we're not covering feel free to chat it in we might be able to take some during the discussion and anything that we don't we will answer at the end so don't be shy just type in any questions that you might have and before I turn things over to Brett and Jared I just want to give a little bit of information about us as a company we are Harvard Business Services we're a family owned company that was founded in 1981 we're headquartered here to blue Estella we're right on the Atlantic coast while we're a formation agent for more than 200,000 companies worldwide that number is as of just this past month we hit 200,000 and we are a Delaware registered agent and we're rated four point nine out of five by our customers on Trustpilot comm which is a third-party reviews platform we're very proud of the feedback that we get from our clients so we do invite you to check that out if you want to see what people are saying about us it is important to note that we are not lawyers or accountants as a company and we're not affiliated with Harvard University none of the information that we're going to give you today should be taken as legal or accounting advice so with that being said here's a list of some of the common questions we can ask about changing companies and these are the things that I'm going to ask Brett and Jerry to cover for us today and help you understand the process for these so Brett would you like to jump in hello everyone thank you for attending we're excited to be able to present this to you we're going to go ahead and kick it off with how to change your Delaware company name changing the name of a Delaware company is a very straightforward process we're going to go ahead and check the name of the company to make sure it's available we're going to prepare a certificate of amendment and that's filed with the state of Delaware you know it's quite interesting you know right here on the right hand side we have an example of one that it's quite comical we have Brad's drink that was the original name of Pepsi actually then changed their name so it's not uncommon for clients to go ahead and originally choose a name that no longer suits the needs of the business so like we always say changes can be made to the name the stock the sky's the limit I think but it's important before we move on just to note that reserving the name or or checking the availability of the name with Delaware is not the same as anyway trademarking copyrighting or otherwise protecting any intellectual property and also it is not a checking a name for any purpose outside of the state of Delaware's availability so for instance website availability often you know a client or a company could have a name get a check from Delaware but then find out the the someone as a trademark or for instance the website using that names taken okay that's a great point so we're checking this name against Delaware division of corporations and their database only and if it's available we're able to move forward with that amendment so this amendments just one filing with the state it's traditionally just a one-page document that submitted to Delaware the certificate of amendment notifies the state of your current name and then the new name that you wish to use if this is filed through a registered agent such as ourselves we traditionally have this back stamp to prove from the state of Delaware in about three to five business days and we're able to email you that document once this is complete it is imperative to write down anybody and everybody to concerns the business you'll want to notify them that this name has in fact changed you'll want to make sure you notify the IRS vendors banks partners anybody and everybody that you do business with and most importantly it's a great idea to make sure you notify your customers that way when checks start coming in they're coming in to the correct name of the company know Britt won't were the topic of names I know there are certain limitations Delaware puts up names no vulgar terms and whatnot but with medical and recreational cannabis being as popular as it is as a new business entity what general restrictions are there with any use of drug related terms Delaware traditionally is not going to allow the use of names that have marijuana in the name if there are names that do somewhat seem like they may be dealing with marijuana the state may come back and ask for a purpose they're really looking to make sure that there's no THC involved so if you're dealing with for say CBD oil which doesn't have any sort of THC that's what Zeller wants to know hey we're dealing with a CBD oil product of this 4/20 creations Inc that we're wanting to move forward with will strictly deal in CBD and will not have any THC and as long as there's no THC involved the state of Delaware is typically a okay with that another the state of Delaware will not allow us to use words in a company name such a bank or any variation of the word bank it is a lesser actually registered in the back that's 100% correct so even words just be anca non-us words of bag the state of Delaware will not let us move forward with the next topic that - is how to change your business address if you're moving the location in your business you're going to one of that party's know of the change one of those important government agencies to notify is the IRS clients are going to report this change using form eight eight to two B so this is changing an address we're also changing information of the responsible party that the IRS has on file this form is going to notify the IRS of the change and any change to the contact information for the ein s responsible party that they have on file so dis responsible party it's going to be someone with control over the business entity by virtue of a title position or through ownerships or anything you'd like to add on enter that's right it read it generally has to be someone with control of the entity as you said title position or ownership well you don't have to supply any member or owner information to the state of Delaware or even dot its registered agent of you this is a way which the IRS does obtain a certain level of ownership information or or control information thank you so it's also important to make sure you notify your registered agents of this change one of the main functions of the registered agent is to accept any serve as a process lawsuit served on the company or notices from the division of corporations so these notices and they service the process we need to make sure they're going to the correct address and the correct information on file you're also going to want to make sure you update the banks the partners vendors and anyone else that you work with as well and most importantly don't forget your customers and I share that checks are mailed to the correct address and I would reiterate that point simply uh it also states that any contract of business has you really need to look at that agreement and it modifies the address on file there most contracts provide a designated address for notices and notices are only effective when provided to that address by certain means and the counterparty is able to rely on the accuracy of that address and the are you receiving those notices until they receive notice otherwise yes so now we're on to how to change your Delaware registered agent so you may not be satisfied with the current registered agent they may have promised you a fee to begin with and next thing you know that fees up over $200 they just simply might not be providing to you the level of service that you think they should be well Delaware allows you to go ahead and change the agent very quickly this filing takes about three to five business days it's key to make sure that you find a registered agent that's been in existence for a while with Harvard Business Services our annual agent for these fifty dollars a year guaranteed never to go up to the length of the company it's been fixed since 1981 and we offer stellar customer service so you know exactly what you're getting with this change traditionally the registered agent is going to go ahead and prepare the document to change the agent they're going to go ahead and email that to you for signature the agent makes the filing with the division of corporations to go ahead and enact a change in about the three to five business days Delaware is going to go ahead and stamp that document and return it and the agent term will go ahead and email you that document that's the evidence showing that the agent has been officially changed it's also a good idea to send a copy of that stamp document to the current registered agent even though they're notified through the state of Delaware's computer system it's not uncommon for them to continue to bill you until where they receive that notice so now we're off to a very interesting topic is converting a Delaware LLC to a Delaware corporation so let's go ahead and start with why would somebody want to go ahead and compress their company Jerry this is really in your wheelhouse Thank You Brad um there's a number of reasons why someone might want to convert to an elf from an LLC to a to a corporation the LLC is an extremely flexible business entity it allows you to do a lot of things that a corporation can't simply because a corporation is bound by certain rules that can't be waived or modified or bent beyond certain points and now we'll see of course we have complete freedom freedom of contract within the bounds of good faith to design your own terms so a lot of times people would say well why would I move from freedom of contract is something more rigid and the reason oftentimes is that professional investors sophisticated investors like venture capitalists and venture capital funds simply won't invest in a Delaware LLC because it has pasture tax treatment as its default generally this means that the member that the entity itself is not taxed but the members have to take in consideration in their taxes their distributive share of the gains and losses the the profit and loss of the companies that becomes a nightmare for these sophisticated investors essentially being the entity standing behind an LLC now you could elect corporate taxation with an LLC but even still a venture capitalists also will want to know that it has the predictability and at least the protections of corporate law there's a lot of ambiguity in drafting your own LLC agreement and the default rules of Delaware corporate law gives them some comfort and predictability they're accustomed to it and they know what's involved so with the corporation that would be converting to these three tiers of power the officers the directors the shareholders you mentioned these rigid tight formalities why would they want to go in and go to this type of structure would it be for those rigid formalities or would it also be for say the ability to go ahead and issue stock to the investors the shareholders now know exactly what to expect from a Delaware corporation well there's a number of reasons you might do that first of course the tax treatment if you need entity taxation if you want to be taxed as AC corporation which is effectively mean the corporation taxed as an entity as opposed to a pass-through like an corporation so first the tax treatment is one reason you might want to be a corporation secondly shareholders are often more comfortable with the corporation because there are those limits to what can be waived a lot of the things that are ordinarily waived by management are the duties that they oshare holders and then LLC you can entirely eliminate fiduciary duties however in a corporation there are times you can remove a director from X you can exculpate as they say a director from liability for certain breaches of duties but the corporation is still liable he still owes those duties to the shareholders so a lot of times the rigid formulations give shareholders a comfort that there's only bedrock or standing on in addition and lastly I think is an LLC when you're drafting your own language it becomes very ambiguous a judge or even attorneys looking at a corporate document generally know what they're looking at they know what the terms mean what the formulations are and their terms are however an LLC you can essentially draft anything you want and no one particularly knows what was intended by specific words phrases and provisions so as a matter of predictability really in a lot of ways interesting so dental or does make this conversion filing somewhat simple somewhat quick just needs to be done properly to complete your conversion you'll need to know how many shares of stock that the entity will need to have the stock is what's going to show the ownership in the company and will need to know if it's going to have you know 1500 shares if it's gonna have a million shares if it's gonna have 10 million shares and that really brings into play what you expect down the road from this company is it going to be bringing aboard investors what's the ultimate goal one thing to consider is the Delaware franchise tax when switching to a corporation there are fees paid for the writer privilege to have a Delaware corporation and this franchise tax is based on the number of shares of stock so once we get over a certain threshold every year you're going to need to pay to stay a Delaware there's tax on March 1st and it will depend on the number of gross and issue chairs once we go over the 10,000 share mark so every year you will need to go ahead and provide Delaware's figures in order to calculate the franchise tax and at the minimum the franchise tax is going to be $400 plus a $50 report and it's really important at the outset of a forming a corporation or switching to a corporation that you run through different calculations and scenarios for franchise tax purposes in my past life is a private practice attorney I would often see clients who formed their own entities put in certain numbers for the the par value in the number of shares and then they found they were paying an exorbitant franchise tax particularly with entities with a high book value of assets such as real estate but with very little actual liquid assets or cash that being said if a company just has 1 to 5 thousand shares of stock the franchise tax and that annual report is only $225 so it is just a flat fee so if you don't need more than a 5,000 shares stock to start many do tend to stay below that threshold to not incur any additional fees for the entity to items the franchise tax must be filed with Delaware to complete the conversion we're going to go ahead and file a certificate of verb of conversion more or less officially changes the entity type and this is also done in conjunction with the certificate of incorporation more or less creating the actual entity and then also the franchise tax for the LLC needs to be current I also wanted to come back to one point on par value before we go further it's a concept that's largely updated except for purchases of franchise or purposes of the franchise tax but I would want to note that usually par value is something extremely low shares can't be sold for less than the par value it's often a hundredth or thousandth of a cent you can also in elaware and some other states have no assigned par value now I will argue to my dying day and I've been made fun of quite a bit for this that having no assigned par value is different than having a zero par value I can't find an area where that distinction is important but I will argue it until I die okay thanks Jared so when converting from a Delaware LLC to a Delaware corporation you're going to need to go ahead and pay the franchise tax for the prior and the current tax year so that LLC's franchise tax is $300 so this example up here we have if you convert your Dell your LLC to a corporation in 2020 you must pay your $300 TAC $3.00 tax for 2019 that's traditionally not due until June 1st of 2020 however that needs to be paid to convert along with the $300 tax for 2020 which is not due until June 1st of 2021 now you might think okay let's say we're gonna do this now then we're not going to prorate that 2021 tax unfortunately once we go into one day into 2020 they're going to want their money in order to go ahead and make that conversion so it's the full $300 if you've already paid your franchise tax so for instance if you've already paid your franchise tax for the 2019 year it would only be the 2020 franchise tax that would need to be paid in order to convert from this LLC to the corporation you know I think there's one last point for me on converting a Delaware LLC to a to a Delaware speed Corp a Geller corporation of course C Corp is just the tax status um as I said before the Delaware LLC is extremely flexible so in transferring from a Delaware LLC to a Delaware corporation where there are more rigid rules outside of which you simply can't go you'll need to reassess a lot of the terms of your operating agreement for the LLC there are provisions waivers of fiduciary duty other terms which simply may not be permitted in the Delaware corporation you'll need to look through and consult with an attorney to figure out how to reframe some of the deal terms you've reached with the members founders and investors and one last note on this topic for instance the type of company that would be changing from an LLC to a Delaware corporation you know what would you say is the the type the situation what you see would just be a fast word toy company is that what you would usually say this change being made that's right bred and I think you know I should have mentioned this earlier when I was talking about the investors coming into a company preferring a c-corp a Delaware corporation you know if you own an ice-cream shop and you're raising just working capital from investors they're generally probably not going to care they may prefer a corporation but it's not nearly as imperative if you're a fast growth tech company for instance if you anticipate fast growth trying to disrupt an industry you're going to draw a lot of attention from professional investors if you have the right idea and that's the kind of company that really needs to make sure their corporation by the time they've left so the friends-and-family rather financing and they've gone to what is referred to is to their first round their Series a round of venture capital financing great explanation thank you so now we're going to go to the flip side and we're going to go ahead and talk how about how to convert a corporation to an LM cig the process is extremely similar instead of filing a certificate of incorporation in along with the certificate of conversion we'll be filing a certificate of formation along with the franchise tax as well now we mentioned some of the reasons why someone would think about going from an LLC to a corporation but switch that around in your experience what have you seen from clients when they're looking to to make this type of change you know I would say it's less common in my practice in my 15 years in private practice to go from a corporation to an LLC but the reasons you might do it is you simply find that the the rules of the corporate form the the bedrock principles that you cannot waive or modify are simply to restrict it where the investors are willing to your friends and family investors or your members in the case of the small business are willing to take more broad or creatively defined terms or let's say the agreement you reach with your founder partner is such that you just can't you can't draft and manifest those terms under corporate law you certainly can dect of an LLC in addition the LLC receives pass through taxation it may have fined halfway through your your first three or four years of operation suddenly the pass through taxation is much more beneficial given the way your business has grown and developed so go here your correctly it's more or less a freedom contract the ability to customize this LLC to suit the individual entity needs is why why you would think stead of client would change to the LLC from the C chord that's right and that's that freedom contract is very attractive it's one of the main reasons why something a precise number but around 70 percent of of new formations are LLC so intensely that form has come out it's been seen explosive growth you can you get partnership taxation you get free freedom of conduct freedom of contract to design your own terms and also no member has a limited liability everyone has limited liability even the manager of the entity unlike a limited partnership very good next we're off to what's known as the s status nickname escort who can go in select it the subchapter S the aka S Corp status is is reserved for small business corporations and refers to only a company's federal taxation so for instance we can't file an escort with the state of Delaware simply isn't that type of entity this is a tax classification on how your corporation or LLC is taxed by the IRS this tax status is traditionally obtained after the companies formed and then after the tax ID number is obtained as well an escort doesn't have to pay federal income taxes Jerry you want to go ahead and discuss the benefits of this s tax status one of the benefits especially before the LLC came about is that you could use the corporate form while still receiving a similar pass through taxation that you would get in a partnership or an LLC here you're able to take advantage of the core form with its interesting provisions its protections its fiduciary duties its guidance in case law and what can and can't be done the predictability of operating at the corporation now an S corp there are certain differences between the type of pass through taxation that it offers versus the pass through taxation of an LLC offers and those are refined distinctions but they can be important in tax planning and estate planning purposes so for instance in an LLC income that is gained the LLC that if taxes capital gains will be passed through and the member will also be taxed on that income as the cash capital gains the character of the income flows through in an S corp and one of the advantages of the S corp is that distributions from an S corp the nature of the income does not pass through which a corporation is always what's referred to as a blocker it blocked the character of the income so that the members when they receive their pass-through distributions they're considered dividends from the S corp which receive a very favorable tax rate around fifteen percent okay so when the shareholders go ahead and receive the distribution okay that's right and the issue would pass through taxation is that you often have phantom income which is why there are distributions when you have to take the income the gains and losses of an LLC into account or a escort you know you you may be taxed on gains in the in the LLC that you never actually receive its distributions and that's what's called phantom income phantom income is also covered by tax distributions which are made yearly just to allow members to to account for the tax burden of the LLC or the escort now this sounds great the taxation however there are some limitations as far as who can go ahead and select it some of the limitations out there are going to be a vital part of making a decision so for instance what I'm trying to get out here is that non-us clients for instance can't be a shareholder can't be an owner within the company that's right bread as you mentioned earlier this is a tax that we reserved for small businesses the escort status the requirement to rest status fundamentally limit the size and the ability of a company to take in a broad number of shareholders and eventually go public if it can't be done with an S corp it's limited to fewer than 100 shares it no US non-us persons are as these as shareholders in fact no entities at all is share in an S corp every shareholder has to be a natural person and individuals holding shares in their own name so that's really going to limit you mentioned that it can't be other entities so a shareholder can see another fund that wants to go ahead and come into this company so clients that are looking to raise funds are funding and different rounds of fundings they're going to stare clear of the s status and they're going to go with the traditional I pick all of a c-corp cheek or brow that's right it's you know another point on the S corp and it's a strange point is that an LLC can actually elect S Corp status in addition to a corporation now an LLC might do that to get that fine distinction that I mentioned earlier about the character of the income so an LLC which has its own path through taxation as a partnership is the default taxation would elect S Corp status and rather than having that character being come passed through it would get that S corp sort of eccentric sees that the the blocker still applies for the character of the income and again that's that's not often important but it can be for tax planning purposes a lot of times people here in LLC electing S corp status and think why would pass your entity go through all this and go through actually subject itself to the limitations of that score status so we did then get passed through taxation but as I said this is difference there so they would like to the taxation aspect that you speak of but then again we're coming back around to the LLC's flexibility and its freedom a contract so that keeps bringing people to it it's not often that we hear from our clients that want to go ahead and file an LLC with the S election it does come up we do have information on our sites and blogs so it's a topic to hit on a lot of people think oh you know the term Corp has got to be a corporation but no the s status can go ahead and be obtained for the corporation it could be obtained for the LLC so there's the sky's the limit changes can be made elections can go ahead and be made whether it's a sorta C for both the LLC and the corporation I wouldn't know - you really need to watch the requirement for S Corp status if you fall outside of those and they're not cure than a sufficient time which which I don't recall off the top of my head - time and you will immediately be taxed at the C corporation it's up at some point and switching from an escort to at C Corp without planning for it can have extremely bad consequences in the corporation a C Corp is double taxed it's taxed as an entity and then the shareholders are taxed on any distributions that are made and that's going to segue into the next couple lines here is you know how do you go ahead and apply for this chapter s tax status the companies form the tax ID numbers obtained what we're going to do after that is file the form two five five three with the IRS to go ahead and make that election for the corporation where for the LLC a we're going to file that eighty three to inform - five five three often - that election may be something that a client is having their their accountant assist with an appliance that that we work with that when they're looking to do this election they're making they're making sure to send that that two five five three Foreman's certified so therefore they know the IRS actually received it when it's mailed in we're going to go ahead and transition here to how to change a corporation's officers and this is something that will be an internal matter within the company we're not going to need to know about it as a registered agent the state doesn't need to know about each and every change but it's very important that this is done properly I know you've had a lot of experience in your private practice time of updating officers that's right credits it's very important because you can lead to lawsuits employment law violations if you don't terminate an officer correctly you could cost yourself a great deal of money under an employment agreement in how options are treated whether there's accelerated vesting of unnecessary thing will vary based on whether a terminations for cause whether cause was found and documented so let me go through the process here as Brett said that it's an internal corporate matter the firewalls generally say how officers are appointed and removed generally speaking however the board appoints the officers and has the power to remove them the board the board can appoint any officers that it finds necessary there's no requirement that someone have a CEO Aras or you know CFO you do need someone to act as a treasurer or CFO and a financial capacity and you'll definitely want a secretary someone to help maintain the the files to sign certain certificates they're required of secretaries but one person can hold all these offices that they choose now to effect the removal and replacement of an officer generally speaking a board would need to review the bylaws for the required process they would need to review employment and other agreements with officers for instance they'd be looking for sort of Just Cause provisions can the person be fired was or without caused what are the effects of firing with cause versus without cause although those distinctions are made an executive employment agreement there may be notice periods there may be all sorts of requirements the next bullet point here talks about you'll need to review the treatment of vested and invested options warrants or restricted stocks that may have been given to that officer there are agreements that say if they're terminated under various circumstances how those unvested options vested options and restricted stock will be treated if it's for college for instance many corporate documents will say are employment agreements I mean we'll simply say the person receives zero value for those it's for cause for something moral turpitude that's something like that however otherwise there's all of an accelerated vesting the person's options which technically we're not theirs to exercise at that point will suddenly all become exercisable and into stopped or restricted stock glad to be cashed out often through a note a debt obligation that the corporation would issue the employer and would pay out over time so you need to deal with those other agreements in addition to just the bylaws now unless the bylaws state otherwise the board would want to adopt a resolution at a meeting of the board or more often and more easily you need a unanimous written consent of the directors a board can act by meeting and resolution or it can act without a meeting simply by a signed consent by all of the board members notably however certain actions may require only say a majority of the board but in a resolution vote but if you're going for a consent you need the unanimous written consent of directors that's a corporate law provision that can't be modified so that you'll be documenting it with a resolution or consent and lastly if you want to replace that officer you would need a resolution appointing a new officer and approving of the form of employment and other agreements that that person will enter into with the company as well as granting that person's signatory and other Authority now none of this needs to be filed as you mentioned there's no need to file a change in officers you don't need file the resolutions or anything but you will want to make sure for instance that if that person is our contact person as registered agents you change that that name and contact information that's something to keep in mind fantastic s if the company is required to file an annual report with the division of corporations these are due by March 1st it will need to go ahead and risk officer and director of information so it doesn't need to be reflecting each and every change it simply needs to be reflecting the information at that particular time the reports file and your registered agent is traditionally sending you notice about its annual report that needs to be filed also can help you complete that in a report as well so now we're on to the next topic in regards to change of a corporation's directors so this is not pertaining to an LLC since the LLC doesn't have officers directors or shareholders is traditionally going to have the members managers this is strictly for corporations so let's go ahead and talk about the steps to go ahead and remove or replace a director enumeration at the outset though building on your point about LLC's I will know that many times LLC's will adopt some of the corporate forms you know pointing and removing officers an LLC may still have officers just as a corporation even though it is required to it's generally managed by a manager but the officers are the people that actually affect the day-to-day operation of the business now when an elephant aches on those those formalities it can bury them however it wants you can for instance not require unanimous consent of directors when using a written consent it could simply have the normal board quorum and voting requirements whatever then they are off the agreement that's right it's completely flexible however the same principles apply so if you're looking at an LLC look to that slide again if you're removing an officer of an LLC now removing a director is far more regimented by corporate law because the director is fundamentally responsible for the general oversight of the company they have a fiduciary duty to oversee the company and to maximize the value of the company to shareholders a fiduciary duty which is a very high standard now removing a directory can be instigated by the other members of the board or by shareholders normally a director is elected for a term however you can provide that a director it serves until removed so the only way to remove a director is by a shareholder approval by no less than the affirmative vote or consent of more than 50% of the shares entitled to vote at that time so you need at least at least a majority 50.000 0 0 1 percent of shares have to vote in favor of removal and that can't be modified you can't condition that on cause you can't change the percentage requirement directors cannot be allowed to appoint other directors except in the instance of a vacancy caused by a death or removal or some other unforeseen vacancy on the board you'd want to consult the bylaws on how to call a shareholder vote or as with the dress there's written consent you can seek a written consent of shareholders you could approach just those shareholders that represent the majority and then you simply have to notify the remaining shareholders the change approved by that majority either one or more shareholders generally you want to adopt a resolution reflecting the removal and approving the tasks that the officers have to take to implement it you know terminating indemnification agreements removing the director from any dno and directors and officers insurance policy removing access to corporate systems and records and whatnot now the bylaws will address how replacements are selected where directors taken prior to the expiration of the term if there is a term somehow shareholders elect the new director and in some cases the bylaws can provide the board can appoint a temporary director until the next election the end of that directors not to term now again as with the change in officers you don't have to file this change with the state of Delaware or your registers registered agent it's all done through internal documentation resolutions consents for minutes and I believe the you know as Brett mentioned the company's annual report will need to list the names and addresses of the current directors and at least one officer so while you don't have to file changes you do need to file a snapshot at a certain point of listing the directors in at least one officer okay that's it so we're off to how to change a corporation shareholders so the shareholders are more or less the owners of the entity and this is a very important top hmm don't mind the land expand on this that's right credit it's an important topic but it's also very murky about diving in brackish water here because what happens is getting a shareholder out of a corporation particularly minority shareholders is a very touchy subject it's almost bearish it's a very frequently leads to lawsuits and dispute now I need to make a distinction at the outset between documenting a change in shareholders such as through sale of shares something like that versus trying to remove a shareholder now when you're trying to remove a shareholder generally that will be documented and governed by your shareholder agreement which is an agreement among sand shareholders to act or not act in a certain way that provides penalties including the ways to remove a share or force a cash out of a shareholder for instance there's something called drag along rights where a majority if they decide they want to sell a portion of shares or all the shares and actually merge the company with another energy they can drag along the minority shareholders to sell their interests at the same price as the majority whether they want to come along or not conversely there's also a tag-along right where where a majority decides to sell shares the minority investor can sell a proportionate number of those shares essentially being able to tag along on the coattails of majority shareholder sale so again the shareholder agreement is where you're going to find how to remove a shareholder generally perhaps the investor rights agreement both of these are not the corporations documents these are agreements among the shareholders and they can provide a wide range of terms so that's why it's murky it's difficult to say how to kick out a shareholder because it will vary now when you're talking about documenting a change in the shareholder for instance and shareholder sell shares to another say the shareholder complied with whatever restrictions the corporation has on resale in its bylaws and it also complied with whatever securities law regulations apply to the resale of shares then a properly drafted by laws and other documents should mean that you don't need to amend corporate documents you should be able to simply to amend the schedule of shareholders the shareholder ledger effectively that's maintained by a corporation and that should not require any vote of the shareholders but again various things can be provided for these agreements subject to the corporate law boundaries so as I mentioned either there's the difference between forcing a shareholder out and documenting a change now you may say what if the change is caused by death what if she / dies the general provision there you'll find in corporate law and in corporate is that the person the state will take on the interest it may be transferred pursuant to an estate plan generally not for consideration not for value meaning that there's no securities law requirement needed usually corporate documents carve out a transfer for a state purpose purposes from any transfer restrictions so generally when someone dies fairly easy to move their interest to someone else or the estate itself can stand in the shoes of the share with the debt shareholder for economic purposes but not for purposes of voting or other or other powers other than receiving distributions and the same is true about somebody who sees the shares by a state as I said it's easy to transfer shares but that person will only receive economic value until the corporation admits that of the shareholder officially which generally just requires the completion of a simple form a share purchase representation making certain representations to the company generously now in regards to any restrictions or transfers and with a corporation we have our closed corporation for instance which is meant for a small tight-knit group of investors it does have restrictions on shares stock right of first refusal to help keep those shares of stock within the family itself you mind just talking about that just a little bit sure yeah the closed corporations are a very special type of Delaware corporation governed by specific provisions in the Delaware General Corporation law that deals solely with closed corporations and as Bret said they're meant to be small I believe the requirement is no more than 30 shareholders it's a tight-knit family owned kind of company and the restrictions on transfer may be pre-approval the board it may be pre approval of other shareholders shareholders will often have a right of first refusal meaning the shares have to be offered in whole or in part to share other shareholders before they can be sold to a third party if the other shareholders turn down the right of first refusal then you can go ahead and sell them to a third part get permitted and there's other types of restrictions on transfer again without getting into it because it's a total morass is getting into the securities law exemptions consult an attorney and look to that anytime you hear transfer of shares think about consulting attorney because there are federal requirements on the offered sale of securities and resale securities thank you we're going to move on to how to change the number of authorized shares in your corporation this is a relatively straightforward type filing we file a stock amendment and the stock amendment doesn't necessarily need to increase shares it can also go ahead and decrease the number of authorized shares that the company has to issue you can remove or add classes of stock a rare type of stock amendment may be to modify the par value that's not traditionally done too often but it could be done now in order to go ahead and make the stock amendment the companies are traditionally holding an internal company meeting and having any changes approved by holders of a majority of the stock how is that typically done well I wouldn't know a meeting is certainly a possibility however in today's world getting everyone together in a room or even getting everyone together on a conference call all the owners of shares or at least a quorum usually a majority or or perhaps higher which is required to take action it's difficult a lot of times - it's very time-consuming you know there are notice periods that are that are required by statute if notice is not properly given then the shareholder is under no obligation to show up and the boat really can't go forward so what you often do is what I said before where its shareholder consent you'll simply go out for the requisite number of shareholders or all shareholders if you're being particularly democratic and you'll seek their written consent they'll sign a consent and it's as good as a vote without holding a meeting that's a way you often see this sort of thing done fantastic so we won't need to know or we the state of Delaware won't need know anything about the devotes there is a certificate of amendment that's prepared and executed by an officer and that's been submitted to Delaware division of corporations they'll stamp it approve it and have it back in about three to five business days and that company now has a new stock structure that's ready they can provide you know the different classes of stock can have different rights different privileges relative to other shares you'll often see in venture capital investments but by professional investors or funds you'll see certain very specific favorable terms that those investors will demand you know a right of future participation than any offers to keep their percentage ownership as well as a most favored nation meaning any better terms given to another investor accepted in say another round because that would be covered by by the ability to participate you know will be given to that shareholder so they will get the best terms possible fantastic the next step is or the next slide how to change the LLC's members the the process is very straightforward and the members are not filed or on record traditionally with the state of Delaware they don't need to be filed they're not provided in the annual report the LLC's don't have an annual report as a flat $300 a year franchise tax and Delaware doesn't need to know anything about the managers either so usually the change is just done internally within this operating agreement or the schedule of the members if you'd like to expand on the change sure sure you know if in the corporate contact I've is in a swamp now I'm in the Old West I'm just shooting from the hip bullets are flying jumping on the horse and rod now because the LLC is even more creature contract as I said so the terms are very specific to every LLC adding and removing members is very really anything under an LLC is very company specific there are no bound requirements or rules subject to law fiduciary duties and and the good faith obligation that applies to any agreement including an operating agreement so again if you're right it's internal and it's not filed with the state or registered agent now if we're talking about removing a manager I'll just hit on that really quickly some an LLC LLC's are managed by an external manager doesn't have any ownership control they're just simply a manager within the entity itself that's right oftentimes the manager role will be referenced in the operating agreement and discussed but the actual terms of a specific managers engagement will be provided for in a separate agreement now termination stripping a manager of its role or even stripping what's called a managing member a member who's also a manager of its role is again all involved in the terms of the LLC agreement and in the case of the external manager that second agreement which normally says that it will terminate upon termination of the operators agreement the two happened hand-in-hand so from what I've gathered here what we've dealt with with clients in past it's a great idea from the onset of forming an LLC to make sure you think about these contingency situations the what if what could happen with the LLC when we're starting the LLC everything's going great but what if things start to break down between the partners a properly structured LLC agreement is going to spell out what happens if a member wants out of the company what happens if there's a death involved with one of the members what happens if there's a degree disagreement among the members and how does it get resolved so it's great idea to make sure that your agreements drafted properly that's right I mean under the definition there used to be no requirement you had a written operating agreement but it was a fool that didn't because it could be oral that's right it could be back in the day however is such a terrible idea if you go into court with to oral understandings of what was said what was meant and what was promised you're guaranteed to get to get conflicting interpretations I mean that's the nature of a dispute one person thinks they're owed something that the other thinks they do not or or should have a privilege that the other doesn't want extent and disagreements without an operating agreement even though the LLC acts the Enabling Act for LLC is does provide certain default rules if an operating agreement is in place those default rules just do not cover every possibility and they specifically don't cover something like a deadlock in management except to say you can go to the Chancery Court and effectively have your company dissolve by judicial mandate a Chancery Court you mentioned that we've not talked about it that that's the court that's specific here to Delaware to help expedite disputes between entities or that's right those are those quarter law experts the judges who are corporate law or corporate business entity law experts you know it's one of the best features of forming and Delaware's you have judges that are experts thy're not handling a you know a basic dispute as their next case they're not handling a family matter later that week they only handle business and any cases over and over and over with increasing of complex cases so the Delaware has essentially built up a road map of how to satisfy your fiduciary duties under broad range of circumstances and by because they're drafted by experts they're internally consistent with exceptions and to an extent but they're more consistent than you'll find elsewhere I mean Delaware simply has a cache a value in a certain amount of respect that you don't get with the Nevada or Wyoming paw all right so we're off now to converting a non Delaware company to a Delaware company and this is something that we do get we do hear from clients quite often they may have formed in California the idea is all of a sudden starting to take off and lo and behold se is going to try to get investors and the investors are mandating hey in order for us to go ahead and invest for this entity we're going to need to make sure this is a Delaware company first so we are able to go ahead and assist with making a change from a non Delaware company to a Delaware company and why would for say a client want to go ahead and become a Delaware corporation when bringable investor well you as I told you the investors prefer it and usually the management prefers being a Delaware company because there's so many management medics it's friendly terms and I don't need to imply that that it's a zero-sum game where management friendly means share or unfriendly but dead ler starts with the business judgment rule which is a presumption that officers and directors are trying their best and they're exercising their fiduciary duties with due care and loyalty the someone share holders suing these officers directors has to rebut that presumption before the case can even go forward so the business judgment rule and other features like that are great protections for management really all the reasons I've mentioned for incorporation apply here and you know simply the as I said the the the respect value the Delaware holds you know if you show up with a registered address that's Reno or Las Vegas people immediately think go-go dancers and Ponzi schemes involving physical gold or two-goal or something like that you know it's just not the same cash a value that Delaware has because shareholders want the predictability the reliability and the quality of judges in case wallet you get double so the conversion process this again is three to five business days it doesn't take too terribly long file there's going to be a filing of paperwork within the current state which the entity is formed the next step is filing a certificate of conversion and the certificate of incorporation to get with the state of Delaware to go ahead and create the entity and then convert it from the state words originally formed Delaware so in Delaware there's two filings that are made that are done more or less at the same time and that takes three to five business days no this is outside of the scope quite what we're talking about but it bears mentioning on this topic is that in some state a switch from a non Delaware company switching into Delaware from another state will require you to terminate the entity in the existing state and form an entity in Delaware so effectively it's determination and re-establishment of the cup and because that happier happens by operation of law it's meant to be very streamlined but it can create issues in fact your your terminating your former company you need to make sure your contracts account for that that counterparties to your contracts understand this is a merely a termination by operation of changing jurisdictions so just keep that in mind and pay attention to what the law in your jurisdiction says in many ways it's meant as a penalty for going to Delaware it's you have to terminate your company there and go through some level of inconvenience because you're leaving very good now we're going to go ahead and move on to how to convert an on we're going to talk about the do fireman's I don't really think this takes we won't spend much time on it right there the requirements needed in order to go ahead and make this change for now LLC also the requirements for the corporation really the hardest question coming up with a number of total authorized shares that you would need for a corporation now this is something interesting the making multiple changes simultaneously so we've talked about making amendments we've talked about making changes it's not uncommon for a client to call and need to go ahead and change their name need to go ahead and file the stock amendment for instance Ida gentleman the other day we weren't his registered agent he wanted to increase the shares he didn't like his name what we did is we went ahead and filed an amendment that we found one document that went ahead and changed the name of the entity with Delaware increased the shares to stock and then also imported Harvard Business Services as the registered agent so instead of paying three separate amendment fees we're able to get this done in just one one filing so they're very appreciative of that as well so a filing service such as ourselves can go ahead and inform you what type of filings can be made all at one time you know and it's not uncommon for us to see a client go ahead and change a non Delaware LLC and then convert into a corporation so we can make a filing with Delaware to go ahead and change the existing California LLC into a Delaware corporation so don't be afraid give us a call send us an email we'll be glad to go over what can be done or also can be done and this really is important when making changes it's great idea to to talk to you're turning your tax recessional about these type of ramifications that you might face by making the change making an entity change from an LLC to a corporation what are my tax ramifications going to be so it's good idea that spell things out and know exactly what you're getting into and one last point but you know we've talked about a lot of filing let's say you forget to authorize these shares you issue too many chairs you had a million authorize you issue 1.1 billion so you went ahead and for instance you only had a million shares to issue but you accidentally issue that's really hundred thousand shares too many that's right and that's you know that has Delaware has a little validation or well you know what I like to call it sure provision where you can go back and file a corrective action filing you have to adopt a resolution board you know providing details about the the issue that whatever wasn't filed or whatever wasn't properly documented with filings in the state if it requires a boat you need to take that boat and note it in the resolution you need to notify shareholders if it's something material that there was a failure to make the filing at the material issue for a company that shareholders need to know about and then you make the corrective filing you know the amendment you traditionally file a certificate of validation which describes the defective action or whatever action wasn't taking and you stay on making the filing after the fact now that doesn't necessarily cure issues that come under federal law it doesn't necessarily prevent shareholders from bringing a lawsuit if there were consequences of not making the filing but at least for state purposes you still can maintain good standing so is back dating a fire and what this does is this is acknowledging an error that was made and fixing it as of now for something that happened in the past that's right that's right I never back data piling yeah no I won't let you back good the cover-ups worse than the cried really enough just never back deep well fantastic alright well thank you guys that was a great presentation and certainly covered a lot of ground there we do have some time if you want to take some questions from the audience so if anyone's listening and need some clarification or has maybe a change that we haven't gotten to go ahead and type it in and we'll see what we can get get you for an answer while you're doing that just a quick note on why choose why to choose Harvard Business Services as some of us who mentioned earlier in the broadcast but we've been Delaware specialists since 1981 you probably noticed all the information that we covered in this presentation was Delaware specific for the most part and certainly there are changes you can make the cuts to companies and other states but this really is our specialty and is what we're great at so if you're working with a Delaware company where we're a great option for you the family owned and operated company we offer free lifetime customer support we file companies on the same day we receive them whatever we can we have very little formation prices and a very low $50 per year Delaware registered agent service and we have excellent customer ratings on Better Business Bureau Trustpilot and on Google we we invite you to search for us on any of those and you know reader people are saying you might also want to pull up some of our competitors that you might know of and see what they're saying about them and you know we're pretty confident that you'll see a good contrast there if you need to contact us we're available through a variety of channels obviously phone and email you can retouch whatever you want to we have a live chat feature on our website that you can use we're also available via Skype via whatsapp Facebook Messenger you know whatever platform you are most comfortable using feel free to go ahead and reach out to us using that and finally we do have a blog that we are updating regularly we have new clothes up there once or twice a week and we will email those out to you on once a week basis and that is all that we will you know you we don't spam you we don't sell your information to anyone we don't send any kind of unwanted content besides its coming up on our blog so if you're not subscribed already those little screen captures there we'll show you how you can do that and we'd love to have you be part of our list and with that being said we can jump into a couple questions here again if you have any last-minute questions now's the time to send them in before we end the broadcast for the day and let's just start with one quick question if you have a corporation you're going to file an annual an annual report each year with the information your franchise tax payment is there a way that you can make changes to an annual report that's already been filed Oh most definitely and we have a lot of clients that need to go this route they may have made an error as far as a current director of an entity so Delaware does allow for the amended in your report it's going to cost $50 to go ahead and get that file a service fee a company like such as ourselves will go ahead and offer a small service for you to go ahead and assist and file that amendment with Delaware but yes it most definitely can be changed or amended now this isn't necessary at all whatsoever with an annual with an LLC there's no annual report there's no information to go ahead and update or change it's just a flat $300 payment all right great we have one question just from in asking about a transfer of interest in an LLC and I think this is just clarifying an earlier point if you're changing interest or transferring interest in an LLC can you just modify the schedule to reflect the changes or anything else that you need to do yes that is a very important point a properly drafted LLC agreement should not require a vote at other you know formality necessary to modify the offering agreement and again modification the amendment it's all governed by the terms of the of the operative group itself but usually you'll see a boat required for amendments you should just be able to modify the schedule without changing the operating agreemen and without taking those formalities all right great and one more question and I think this is the last one that we have you spoke earlier about the event of a death for a shareholder in a corporation and just kind of transferring to these feet is there any other any statute or anything regarding a director passing away and how that might be replaced generally a director that passes away is simply treated as if the person resigned on a replacement can be appointed pursuant of the term pursuant to the terms and bylaws but it's generally just treated as a resignation now you'll look to need to look to other agreements that director may have had for any terms of fees they might be owned options they might have but generally in terms of just the role of director yeah it's treated of agency all right okay well I think that'll wrap it up for us today so um thank you both for your time and thank everyone for joining us today you are of course welcome to email us or contact us afterwards just if there are questions that you didn't think of and we'd be happy to get into you and just as a reminder this webinar was recorded so you will receive an email with a link to the recording as well as a link to the slides that you that you can download if you want to review those and we will welcome any questions that you may have so thanks again for joining us today and have a great rest of your take
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