This morning, we filed paperwork to cancel recognition of two of our subsidiaries in Delaware. For those who may not be aware, a legal entity such as a corporation or limited liability company needs to be recognized by a state’s laws in order to operate there. This is distinct from getting a business license, and the fees vary by state. In the case of Delaware, maintaining an LLC costs $300 per year.
$300 a year may not sound like much, but we have five separate entities: our parent cooperative and four operating subsidiaries. Each entity has to be registered in place where it is actually domiciled–Delaware for our handyman services company Paint and Patches, Virginia for the others–but it’s a big value to only register the others where they have enough revenue coming in to take it worth the registration, business licensing, and other fees associated with operations. Dropping these two companies from recognition in Delaware will save us $600 in registration per year.
There’s one twist: cancelling registration for an out-of-state LLC requires a filing fee. How much is that? It varies by state, but in Delaware, it’s $200. Delaware also has the indefensible practice of charging for processing priority, guaranteeing one-hour service for $1000 while 24-hour service costs $100. There is technically a no-fee “order of business” option. We have tried this before, and after six weeks of inaction, we paid the $100 fee for 24-hour service. It is effectively a non-negotiable part of the filing fee, branding aside. So, we’re paying $300 per company so we don’t have to pay $300 per company in January.
We have to do this because if we don’t file to cancel the LLCs in Delaware, we’ll be assessed the $300 franchise tax for each one every year for five years. At that point, they will be cancelled anyway, but if we ever need to renew the recognition, we’ll have to bring the accounts current, including paying any penalties and interest that have accrued. It’s not a good option.
How This Happened
We sought Delaware recognition for XENSHA Consulting in mid-2017. At the time, we had just split our consulting work off from our parent cooperative as part of a general restructuring that put each line of business into its own subsidiary. We did this to concentrate specific kinds of work in purpose-built companies, creating greater flexibility.
XENSHA Consulting’s revenues at the time included commissioned sales work in Delaware that accounted for tens of thousands of dollars of annual revenue, and paying $300 to keep that revenue in place made sense–or so it seemed at the time. Actually, that commissioned sales work went away in September, leaving us with no reason to have the subsidiary recognized outside of Virginia. As we pondered opportunities for new work in Delaware, January 1 arrived, and we received a $300 bill for 2018.
Two months later, we sought Delaware recognition for Co-Local, taking it beyond its Virginia origins based on enthusiasm expressed by one member. To date, precisely nothing has been done with Co-Local in Delaware.
Don’t get me wrong: our cooperative wouldn’t exist if we weren’t willing to tolerate some degree of business risk, and that means committing our accumulated capital to try things out. Those things don’t always work. I’m not advising against taking risk. Where you should be cautious is when your expansion takes you across state lines.
State lines are legal and regulatory boundaries. Beyond the simple costs of registration and licensing, a business that moves into another state may need to supplement existing insurance, increase or alter its wage structure to meet state minimums, establish new benefits such as paid sick leave, and take other steps that can transform the cost of doing business both directly and in terms of administrative overhead. We’ve actually been better than most businesses our size in addressing these challenges, but it’s costly to follow all of the rules, even if it’s a lot cheaper than breaking them.
We still have one investment in cross-state expansion that we’re maintaining as an experiment. Paint and Patches is licensed and insured to provide handyman services in Maryland as well as Delaware, and the hurdles we had to overcome to make that happen went far beyond simple filing fees. Whether that will turn out to be a smart bet remains to be seen. One thing is for sure: we will be watching carefully. No business gets ahead by pouring money down the drain.
This article explains we did and why. Please don’t interpret our choices or views as professional legal or financial advice. Your circumstances may be quite different than ours, or we may have made a bad choice that will come back to bite us later.