Exclusive Q&A on Company Formation with Richard H. Bell

What is the procedure for foreign investors setting up a company in your jurisdiction?
 
Foreign investors can invest anywhere in the world through a Delaware entity. The entity of choice for such investment is a Delaware Limited Liability Company (LLC). The procedure is relatively simple, just contact a Delaware Registered Agent and they will prepare and file all the necessary documents for a few hundred dollars. There is no difference or special requirements for foreign investors setting up a Delaware entity vs. U.S. Citizens.
 
Have there been any recent regulatory changes or interesting developments?
 
For about 6 years now the Obama administration has been negotiating with the National Association of Secretaries of State (NASS) to make formation on entities more transparent and give law enforcement agencies certainty as to whom to come after in cases of fraud or other criminal activity. They have recently come to an agreement to require all new entities to file an SS-4 form to apply for an Employers Identification Number which must be signed by the “Responsible Tax Party” under penalty of law. (not an agent or attorney). These regulations are now in the drafting stage and have not been released for public comment as of this writing. They mandate to draft these new regulations will also bring company formation agents under the “Know Your Customer” regulations that Banks must currently follow.
 
Are you noticing any new or innovative investment strategies being formed?
 
Over the past 10 years, Angel investing is becoming organized thanks to the rise of angel investor groups sprouting up all around the country (and abroad). The premier Angel Investor Group, the New York Angels (NYA) is a group of 150+ enthusiastic angel investors who meet several times a month to screen new opportunities and invest in an organized and coordinated fashion. They are capable of controlling deals upwards of $250,000 and their participation brings the interest of other angel groups who will often come in on deals along with the NYA group. These groups perform their processes on sophisticated custom-built software platforms that allow the individuals in the group to remotely screen hundreds of new deals a month and communicate among themselves as to the strengths and weaknesses of each one. The composite intelligence and expertise of these groups has greatly improved the odds of making good investments and maintaining control of the developments of their investments. The result is that Angel investment is beginning to be recognized as a legitimate asset class heretofore thought of as high risk investments not worthy of credibility and institutional money. It is only a matter of time before major Early Stage Funds will be organized to specialize in these investments.
 
Can you detail the various funding options for early stage companies?
 
Historically, individual Angel investors (AKA Early State Investors) often invested directly in stock: Common Stock, Preferred Stock or Convertible Preferred Stock. But the most sophisticated early stage Investors now prefer to invest via Discounted Convertible Notes (DCNs). The main advantage of using DCNs at the earliest stages of an enterprise is that it maintains the security of a full payback, even if the company goes into bankruptcy, coupled with the potential of a 10X or better return if the company becomes wildly successful. But the primary motivating factor for using DCNs at the earliest stages is the minimal legal costs compared to documenting an equity round given all the regulatory requirements in the USA today.
 
Can you outline the strategic benefit from choosing a specific location for company formation?
 
Delaware offers the most robust strategic benefits for an investment vehicles including:
·         U.S. Federal Pass-Through Tax Treatment Availability: the company pays no tax but rather passes the gain or loss through to the members in their pro-rata share.
·         Tough protection against judgement creditors: The maximum personal liability a member of a Delaware LLC has is limited to his investment in the LLC.
·         Freedom of Contract: The governing document of a Delaware LLC is the “Operating Agreement” which can be drafted with flexibility to suit the situation regarding voting rights, distribution rights, liquidation procedures and other prime considerations.
·         Low fixed maintenance costs: All Delaware LLCs pay a fixed franchise tax of $300 per year to the State of Delaware and there is NO Delaware income tax, asset tax, inventory tax or inheritance tax on Delaware LLCs operating outside of the state.
·         Efficient Governmental Office: The office of the Delaware Division of Corporations will file and produce documents within a couple of days of the request and priority service can be purchased for as fast as 1-hour service if required for your transaction.
·         Venture Capitalists almost always insist of investing only in Delaware C Corporations due to their flexible legal structures and predictable dispute procedures.
·         Directors of Delaware corporations may put any price on stock offerings and do not need to justify the price to regulatory authorities.
Are there governmental restrictions on who can be an owner of the company?
 
Delaware law only requires that members of a Delaware LLC be either natural persons or other legal entities. There is no age, residency or citizenship requirement. Directors of a Delaware corporation must be able to fulfil the duties of Delaware directors so they must be able to make informed independent decisions.
 
The U.S. Federal Government prohibits Delaware Registered Agents from forming entities for people from certain countries and from people listed on the various OFAC and SDN lists maintained by the U. S. Department of The Treasury.
Are there any other regulatory or compliance issues investors need to consider?
 
Entities raising money from U.S. investors above the amount of $400,000 is regulated by the U.S. government but investors are generally not regulated as to their investments in legitimate U.S. enterprises.
 
How can business formation planning be utilised to present alternative solutions to potential problems?
Delaware entities may convert from one entity type to another relatively easily if the situation calls for it. However entities on track to raise venture capital will save time and money – and look smarter – if they start as Delaware a General Corporation with one class of common stock and one class of “Delaware Blank Check” preferred stock.
 
What role do shelf companies play in your jurisdiction?
 
Shelf companies are not in favour in Delaware and are not generally availably any more, but they are not specifically forbidden by Delaware law.
 
What key trends do you expect to see over the coming year and in an ideal world what would you like to see implemented or changed?
 
The Federal Government will move to make the formation process more transparent in the near future. When the regulations are announced we will see what they will entail but they are likely to require all newly formed entities to file an application for a Federal Tax Identification Number and will surely require company formation companies to require and maintain positive identification of an entity’s beneficial owners.
 
What are the different methods of restoring a company?

Delaware corporations are relatively easy to restore. Simply file a Certificate of Renewal and Revival with the Delaware Division of Corporations and pay all back Franchise taxes, penalties and accrued interest. The document must be signed by the last known Officer. (Cannot be a Director)
Delaware LLCs which have filed a Certificate of Cancellation cannot be revived until a revocation of the cancellation is approved by the State and all back franchise taxes, penalties and assured interest is paid.
 
What are the most common reasons for restoring a company?

If a company owns a bank account or real estate (or any other titled asset) the company must be in good standing to sell or transfer it.

Richard H. (Rick) Bell, II founded Harvard Business Services, Inc. in 1981 and has grown it into the preeminent Delaware Formation and Registered Agent Service with over 60,000 current clients. Harvard is active in filing and maintaining Delaware entities for international accountants, fiduciaries, attorneys and entrepreneurs. Rick has been an active member of the Governor’s International Marketing Committee and has travelled extensively promoting the “Delaware Advantage”. Rick has served as an elected official in the state of Delaware as Recorder of Deeds from 1998 until 2002. He is trustee emeritus of Franklin College in Lugano Switzerland. He lives in Lewes Delaware with his wife of 44 years, has four grown children and 6 grandchildren.

Richard can be contacted on 1-302-645-7400 or by email at info@delawareinc.com