Listening to the myriad commercials on radio and television for the do-it-yourself incorporation services, one would think that forming a corporation is a simple matter of completing a form and paying a filing fee. While the paperwork required to form a corporation or other business entity actually is quite modest, the paperwork is only the tip of the iceberg in terms of the issues that must be addressed when incorporating. Here are some things to consider if you are thinking about forming a business entity:
Form of Entity: Careful consideration must be given to the appropriate form of business entity. Gone are the days when the choice was either a C-Corp or an S-Corp. Now, a person who wants to form a business entity can go with a limited liability company (LLC), a limited liability partnership (LLP), the traditional C-Corp, S-Corp and partnerships, as well as other more exotic entities. The choice of business entity can have significant tax implications as well as consequences to the ability to bring in new investors or partners down the road, so anyone thinking of incorporating MUST consult with a tax advisor before proceeding.
State of Formation: It used to be in vogue to incorporate in Delaware or Nevada, but incorporating in those states may not offer the small entity the same benefits as larger entities. And there can be significant tax consequences (again!!) and costs to incorporating in a state other than the state where business will be conducted.
Name: A suitable name should be chosen, and cleared both for corporate use and intellectual property issues. If a fictitious business name will be used, paperwork must be filed to register the fictitious business name.
Foreign Qualification: If the business entity is formed in a state other than where the entity has its offices and/or does business (i.e. a Delaware corporation doing business in California), the entity may need to qualify as a foreign corporation (which usually is very easy and just involves completing a form).
Agent for Service of Process: All business entities must make sure they designate a suitable agent for service of process to insure timely notice if legal proceedings are commenced against the entity.
Management: Careful consideration also must be given to the number and composition of the board of directors (for a corporation) or who will manage a LLC (i.e. will there be a managing member or joint management). Majority or controlling shareholders should make sure that a management structure is created that will allow the control to be maintained and exercised. The powers and duties of corporate officers should be clearly spelled out in the corporate documents.
Other Documents: All corporations must have appropriate bylaws. We also strongly recommend that all small corporations have a shareholders agreement which will address, among other things, share buy-back and what happens if a shareholder dies, gets divorced, files for bankruptcy, etc. We strongly recommend that all LLCs have a detailed operating agreement. Confidentiality agreements, non-compete agreements, and non-disclosure agreements should be put in place as appropriate. All entities with employees should have a detailed employee manual. It also may be appropriate and wise to enter into employment contracts and indemnification agreements with key executives and employees. All entities should get a federal Tax Identification Number (EIN).
These are just a few of the many important issues that should be considered when incorporating. This simply is not an area where people should be doing it themselves – the advice of a qualified legal professional really is invaluable and critical in this area.
Just about every business and individual has had to review and sign a contract. We often are consulted by clients who have regrets about signing a bad contract and are looking for a way out of the contract. Unfortunately, with some exceptions, it is very difficult to get out of a written contract or avoid enforcement of the contract’s terms once the contract is signed. Therefore, it is essential that any business or individual who is called upon to review and/or sign a contract consider the following things:
1. Make sure you are contracting with a reputable party who you have investigated before signing the contract.
2. Make sure the contract clearly and accurately describes the parties to the contract – if a business entity is a party to the contract, make sure the contract states the correct name and form of the entity (i.e. corporation, LLC, partnership, etc.) and identifies the state of formation (i.e. ABC Corporation, a California corporation).
3. Make sure the start date (often called the “effective date”), the end date and the term of the contract is clearly stated.
4. It is essential that the contract states all understandings, agreements and terms of the contract – it is extremely difficult to contradict the terms of a written contract with oral terms or documents outside the contract (this is called “extrinsic evidence”).
5. All financial terms of the contract (including payment terms, dates, amount of payment, currency if appropriate, manner and location of payment, and consequences for non-payment) must be clearly stated.
6. In contracts for purchase and sale of goods, the product(s) that are being purchased and sold must be specifically identified and terms such as the quantity, price, quality, and shipping terms must be stated.
7. The remedy for breach of the contract must be stated and it is critical to set forth the terms of a cure period for default, if agreed upon. Consider whether some form of alternative dispute resolution such as mediation or arbitration might be appropriate.
8. All other important terms should be stated. Consider whether to specifically a place for any lawsuits that might be filed (this is called a choice of venue or forum selection clause). Also consider which state’s law will govern, whether to include an attorneys’ fee clause, and how any required notice will be given. An address for each party to the contract should be provided for purposes of giving notice.
9. Finally, make sure the signature block is correct. If you are signing on behalf of a business entity, the contract should not be signed in the name of the individual officer or employee who signs, but rather the signature block should set forth the name of the entity, indicate that the signer is signing on behalf of the entity, and state the position of the signer. For example, “ABC Corporation by _______, its Treasurer.”
These are but a few of the many important things that should be considered before entering into a contract. And remember; it always is a cheaper and more effective business strategy to have a lawyer review a proposed contract before it is signed than to have to litigate about a contract after it is signed.