Practice Areas

Corporate Formation Basics

To start a business, all you need to do is hang up a shingle. You can operate by yourself as a sole proprietor, with others as a partnership, or in a formal entity such as a corporation or Limited Liability Company (LLC). As a sole proprietor, there are few legal formalities - if operating under an assumed name, you may need to register (usually at the county level.)

Partnerships are also easy to create. You need to draft a partnership agreement which is the agreement (basically your own private law) which governs the relationship between the parties - who gets what percentage, who makes the decisions, etc. Again, there are few legal formalities. General partnerships usually do not need to register anywhere except maybe at the county level. Limited partnerships are more like corporations and usually require registration at the state level and the services of a registered agent. Click here to find out more about the role of an RA.

OK, so corporations and LLCs require more work and are a little more expensive - why should I bother?

Personal liability! When a corporation enters into a transaction, it is the corporation and not the shareholders who is responsible. When starting up, a bank may require a personal guaranty since your company doesn't yet have a credit history but, as a rule, a shareholder's liability is limited to the amount invested into the company. Creditors cannot reach beyond the assets of the company in normal circumstances. The same is true with lawsuits. It is the corporation not you who will be sued (assuming the lack of unusual circumstances such as fraudulent undercapitalization.)

Tax Considerations! It's true that the potential exists for double taxation (see What is "pass-through taxation?) However, you can avoid this with the use of a LLC or by electing to be treated as an S Corporation. With the corporate form of ownership, you can usually elect to implement various tax-free benefits such as life and health insurace and retirement plans

Transferring ownership and raising capital are usually easier through the use of stock. Corporations usually have a perpetual life as well, distinct from that of the shareholders.

The quick answer is - usually in your own home state. Why? It's simple - cost. The cost to incorporate as you'll see is usually only several hundred dollars including state fees. However, if you incorporate in a state other than your own and do business in your own state, you must then "qualify" or file for authority to do business in your home state.

Why? Remember that a corporation is an artifical legal entity which can do almost anything a person can do, such as enter into contracts, open a business, own real property, etc. Each state has a valid interest in protecting their citizens. This is one of the reasons why they require you to appoint a registered agent when you incorporate - to ensure that there is a valid address where a state's citizens can serve process if they are harmed and need to take legal action. A state needs the same assurance from a corporation formed out of state. It needs to know that the entity was properly formed (the state may require a "Certificate of Good Standing" from the home jurisdiction) and who the registered agent is. This information is disclosed in your Application for Authority to Do Business (usually called the "qualification" process.)

Bottom line - if you incorporate in a state other than your home state, it will cost you an extra few hundred dollars because you'll then have to qualify in your home state (assuming you do business there.) Of course, the extra few hundred may not mean much to you or you may have a strategic reason for choosing to incorporate in a particular state.

For example, certain states, such as Delaware, require less information about the founders of a corporation than other states and the added privacy may be important to you. Delaware (more than 50% of the Fortune 500 are incorporated in Delaware) is attractive for other reasons as well. Delaware has an extremely well established body of law, does not seek to tax income earned in other jurisdictions, has an excellent, informed business court in its Court of Chancery and is very pro-business. For all these reasons, Delaware corporations are a known commodity in business circles (particularly banking) and are always well received.

If you choose to incorporate in a state other than your home state - no problem. We can draft and file your qualification papers at the same time you incorporate.

WHAT IS A REGISTERED AGENT

Each state has adopted its own statute which regulates the formation and governing of entities such as corporations and Limited Liability Companies (LLCs.) It's usually called the Business Corporation Act (BCA) or Business Corporation Law (BCL.) These acts are usually based on (and very similar to) the Revised Model Business Corporation Act (RMBCA.)

Section 5.01 of the RMBCA says that " ... each corporation must continuously maintain ... (1) a registered office ... and (2) a registered agent." In general, failure to maintain a registered agent results in the loss of the "good standing" of the corporation with the state. This affects your ability to do business in the state, can result in corporate contracts being deemed void or voidable, and can possibly result in personal penalties or fines on the officers and directors of the corporation.

NOTE: We can serve as your Registered agent whether or not we originally formed your company! At $149.00 per year, we are probably considerably more cost-effective than your current RA. Call us today to ask how we can help you change your Registered Agent to us.

Almost every state has enacted similar provisions in their own Business Corporation Act which require a Registered Agent or Office for every corporation, LLC, or Limited Partnership which does business in their state. The purpose of these provisions is to ensure that each company has an office where it may be found, and a person at that office on whom service can be effected for any notice or process in connection with litigation. The Secretary of State and other government agencies usually send any other official communications such as annual reports and tax notices to this address.

NOTE: For Limited Liability Companies, many states require that your registered office be the same as the one where you house your record keeping; in these states, we cannot serve as your RA. See Limited Liability Company State Fees.

One notable exception is the state of New York which requires you to appoint the NY Secretary of State as Registered Agent. However, you may still designate NRAI as the address to which process is forwarded (we will complete the forms to accomplish this if you choose Registered Agent services in New York.)