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.