Now, alas, there are twice as many reasons to File the DE Franchise Tax on time.  Delaware is set to increase its LLC fees, including the Franchise Tax Late Penalty (along with sundry other corporation services, such as Certified Copies, Amendments, and Cancellations).  The fee is to increase from its present $100 figure, to $200.  This spike in fees is scheduled to take effect as of August 1, 2009, as described by House Substitute No. 1 for House Bill No. 267, which has been passed into law by the Delaware Legislature.

Many LLC’s are Formed in Delaware (as we’ve noted before, there is good reason to do so).  But in Delaware, should you fail to File your Annual Report and to submit your Franchise Tax payment by the Annual Delaware due date of June 1st, your LLC will incur a late penalty and monthly interest with the state.  Different states exact different late fees with different terms, but in Delaware late entities suffer an initial late penalty of $100, with 1.5% in compounding interest.

Now, if having become subject to late penalties and interest in Delaware, you then decide to pay just your $250 in Franchise Tax payment online, as you would regularly, it turns out Delaware just won’t let you!  Once an LLC has incurred late penalties and interest in Delaware, all of the amount owed must be payed before the state will accept the Annual Report, and thereby declare the entity as being in Good Standing.  It’s all or nothing.

Now here’s the tip: 

Delaware does accept partial payment on an account if it is submitted to the Secretary of State by postal mail.  So, if for whatever reason you wanted just to pay the $250 amount, you can send mail in this payment rather than paying it online, and Delaware will accept it.

There’s good news and bad news concerning this peculiarity with Delaware.  

The bad news is that Delaware won’t, upon receiving payment for just the Franchise Tax, thereby declare your LLC in Good Standing.  As long as the entity owes money, it will stay in Delinquent status.  So, in one sense, making partial payment is fruitless.

The good news is that the 1.5% interest applies just to whatever is owed.  So, by paying off part of the entity, you decrease the amount you will end up owing in interest.  So, broadly construed, if you can’t pay everything due to Delaware immediately, it’s not wholly fruitless to mail in what you can.

Almost all of the TIC Sponsors with whom Sabre works choose to Form LLC’s in Delaware.  The Delaware entities for a given TIC property are then Qualified to Do Business in the state jurisdiction where the property resides.  What’s the motivation for this?  Why not cut out the middle man and just Form the entities in the state of the property in the first place?

One reason often cited is that Delaware lets one Form entities anonymously.  This is something unique to Delaware, but what makes this so valuable?  Why would someone want anonymity anyway?

Apart from the usual unsavory reasons why one might desire anonymity, the biggest benefit to the anonymity one enjoys with a Delaware LLC is that it cuts out administrative and financial hassle.  Because Sponsors may Form anonymously if they wish, they are furthermore not obligated to Amend their entity’s filings.  With many other states, whenever there is a change in manager or member information (such as mailing address), the LLC must be Amended with the state to reflect this change.  This means more paperwork and more fees.  When dealing with hosts of investors altogether, such minor annoyances add up.  Forming in Delaware, however, provides one with genuine anonymity, the crowning perk of which is the avoidance of so much nasty bureaucratic red tape.
 
Also, when you consider the role LLC’s play in TIC investments, it becomes apparent how anonymity provides a Sponsor flexibility as they work to bring a TIC to market.  When a Sponsor puts together a TIC Investment, they are accomplishing a masterpiece of orchestration: they are gathering into a single investment up to 35 distinct investors, most of whom are working within their own 1031-exchange timeframes.  Things get complicated. 

So, it is beneficial to Sponsors to be able to create many LLC’s up front, before they even have investors who need them.  This way, the Single Purpose Entities are primed and ready as means for the investors to take hold of their interests in the TIC property.  But if to Form an LLC the Sponsor has to have all member information on hand, (i.e., the investor’s name and address) then this option just isn’t possible.

So, Forming entities anonymously helps (1) to sidestep bothersome forms and fees, and (2) affords Sponsors a way of creating entities up front and then assigning them to investors after the fact, which in turn works to make TIC investments more viable.

1. Formation

First, an LLC is Formed. The state jurisdiction in which the LLC is Formed is called its “Primary” or “Domestic” jurisdiction.

2. Qualification

Next, the LLC is immediately Qualified to Do Business in all the jurisdictions in which it will be operating. The jurisdictions in which the LLC is Qualified are called its “Secondary” or “Foreign” jurisdictions.

3. Registered Agent

As a part of the acts of Formation and Qualification, the LLC appoints its Registered Agents, who physically reside within the borders of each of its jurisdictions. Registered Agents are appointed to receive important documents such as Services of Process when the LLC is a party in a legal action such as a lawsuit.

4. Annual Maintenance

According to the requirements of each jurisdiction, the LLC must typically file Annual or Biennial Reports, and remit fees to the Secretaries of State in each of its jurisdictions.

5. Cancellation & Withdrawal

Finally, if an LLC is no longer to be used, it is Cancelled in its Domestic jurisdiction and Withdrawn in all of its Foreign jurisdictions.

If you are visiting our website and don’t quite seem to understand what’s going on or what it is exactly that we do, this post is for you. 

Sabre Forms and maintains the “Limited Liability Companies” used in a niche real estate industry. Below is a very brief introduction to this industry and an explanation of how our LLC services fit into the picture.

A “1031 exchange” provides a real estate owner with the opportunity to relinquish a property without having to pay capital gains taxes, if he or she acquires a property of like kind according to certain rules. 

These rules are laid out in IRC section 1031 (hence “1031 exchange”). 

“Tenant-in-Common” references a certain way of taking title to real estate in which multiple owners possess undivided interests in a single property. 

In 2002, the IRS declared that Tenant-in-Common properties are valid replacement properties for 1031 exchanges. 

Since then, certain real estate companies (called “Sponsors”) have begun purchasing institutional-grade properties in order to enhance their values and resell them to investors as Tenants-in-Common. 

“TIC” investments are valuable to real estate owners interested in getting rid of their current properties in exchange for investments that they do not have to manage themselves. TIC properties centralize the resources of their investors so that a property management company can be put in place. 

The rules by which TIC properties qualify for 1031 exchanges are laid out in Rev-Proc. 2002-22. 

Each investor takes title to his or her replacement property by way of a Limited Liability Company. The investor is the single member of this LLC, and the single purpose of the LLC is to hold his or her title to the TIC interest. 

This LLC mitigates the risk of the investor’s entire asset base becoming susceptible to litigation. Usually the LLC’s used in a given TIC property are set up beforehand, as a part of the whole investment package. 

TIC Sponsors contract with Sabre to Form these LLC’s and keep them compliant with state law. We focus entirely on the compliance of the LLC’s used in TIC offerings. We streamline all of the LLC Formation and maintenance processes such that a Sponsor company can painlessly integrate our services into its offering and receive a single invoice, and zero headaches.

Welcome to Sabre’s Corporate Compliance blog.  A big thanks goes out to the Coeur d’Alene blog designer who set this all up for us, as well as the Coeur d’Alene programmer who certified that our website is free from malicious programming, and the Coeur d’Alene webdesign and SEO group with whom we consult on a regular basis!  You have been a huge help.

This blog will be like Sabre’s newsletter - we will talk about Frequently Asked Questions, Corporate Compliance news, TIC/1031 Industry news, company news, and more.  You can subscribe to this bog with an RSS reader of any kind, or by email (please see the information in the bottom of the sidebar on the right).  Feel free to leave us questions or comments!