Legal Question in Business Law in Delaware

software house, no employees?

I am planning to set up a corporation with 1-5 shareholders. The corporation would start out as a marketing and sales vehicle for software developed by the shareholders. The idea is to ''dress'' freelance software development in more respectable corporate ''attire''.

My goal is to initially avoid having salaried employees (or employees at all, if possible), and distribute profits via dividends.

The shareholders would also be directors and officers, but would not get paid salaries or bonuses. Work (software development) would be done privately by the shareholders, then donated to the corporation, who would then sell the products under the corporate name. Alternatively, instead of donating, the shareholders could work as volunteer employees. Sales would be done online -- with no brick-and-mortar store or sales staff.

Apart from the fact that I am maximizing taxes (double taxation), would the structure be legal ?

Some of the shareholders/developers might be non-resident aliens -- if that makes a difference.


Asked on 9/27/04, 11:51 am

4 Answers from Attorneys
Bruce W. McCullough Bodell, Bove', Grace & Van Horn. P.C.

Re: software house, no employees?

There are problems with the way you envision running this business. Right off the bat, you may have five people entitled as equal owners to equal divison of the profits but not making equal contributions. Besides, you seem to want just the appearance of a corporation, which would create its own problems.

An S-corp. or an LLC may meet your needs. You should discuss all these issues with an attorney. If you want to organize in Delaware, please feel free to contact me.

Read more
Answered on 9/28/04, 3:36 pm
Terry A. Nelson Nelson & Lawless

Re: software house, no employees?

You can set up a corporation that doesn't even double tax you. The rest of the issues are easily handled. Contact me if interested in doing so.

Read more
Answered on 9/27/04, 2:34 pm
Edward Hoffman Law Offices of Edward A. Hoffman

Re: software house, no employees?

The purpose of a corporation is to shield individual shareholders from liability for the corporation's debts. In order to accomplish this, the corporation and the shareholders cannot intermingle their assets or their businesses.

A corporation that obtains its products the way you describe violates this principle because the software is treated as an asset of both the shareholder who wrote it and the company itself. After all, nobody makes donations to a for-profit corporation; the reason you hope to do this is to create the appearance of a corporation without the inconveniences that a real corporation would create. Courts, taxing authorities, etc. will not be fooled by such a setup.

Aside from whatever other issues might get in the way of forming your proposed business, you need to understand that, if the company is ever unable to pay its bills or gets hit with a lawsuit, the courts are likely to disregard its purported status as a corporation and hold teh shareholders personally liable.

Read more
Answered on 9/27/04, 2:38 pm
Jonas Grant Law Office of Jonas M. Grant, A.P.C.

Re: software house, no employees?

You are likely better off setting up the corp. in a more traditional way -- i.e., having employees or independent contractors. While this does create some other issues, it will avoid the double taxation and more importantly the impropriety of the form you propose.

Please see my website to contact me if you are interested in retaining me to set up this corporation: www.incorporatecalifornia.com. Initial consultation without charge.

Read more
Answered on 9/27/04, 11:59 pm


Related Questions & Answers

More Business Law questions and answers in Delaware