On July 8, 2014
Why Have An Attorney Incorporate Your Entity?
Whether you are starting a new business or expanding into new product lines, we regularly assist companies in making crucial decisions about when to incorporate, where to incorporate, and what type of entity would best address their business needs.
Clients routinely inquire about the difference between the services which we offer and those offered by online incorporation services. The main difference is that online incorporation services cannot give legal advice, so they leave you to figure out most of the details of your incorporation. By using an incorporation service, you are mostly paying for state incorporation fees, a corporate record binder, printed stock certificates, and fees for incorporating through their service.
But that is only part of the incorporation process. We have many clients come into our office (some of whom are attorneys) who still needed us to complete their incorporation because these services can only provide generic forms. These forms leave it to the incorporator to fill in scores of blanks, requiring decisions that many clients are not experienced in making. Without any guidance in how to proceed, many simply can’t complete the incorporation, and the very protection they were seeking is often severely compromised.
We take a different approach. We first want to understand what you intend to do with the business. We want to know:
♦ Where will you be operating from? Does it make sense to incorporate in California, or in another state? What factors should you take into consideration to properly make that decision?
♦ Have you consulted with your accountant about how the taxes for the new business will be prepared, and does your accountant have a preference for the state of incorporation that benefits the company from a tax perspective?
♦ What about the form of the entity? Have you considered the various entity types and tax elections that you can utilize, and which best fits your business model?
♦ Is a funding by investors on the horizon, and does a potential investment impact where you should incorporate and the type of entity you should form?
♦ Will separate classes of stock or membership interest be required, giving some investors preferred shares?
These and many other questions and considerations figure into our planning before we undertake to incorporate any entity for the business.
What Other Agreements Will You Need?
Next, we consider how you will operate the entity, and whether other agreements are going to be needed.
♦ Have you considered adding other shareholders or members? Are they going to come in at the beginning, or do you need documentation to add them later?
♦ Would any of those include key employees? Should you plan the formation of the entity so that a stock option plan can be easily incorporated and favorable to the employees from a tax perspective? Should the plan be created at the outset?
♦ If you are seeking investment from a seed round or angel investors, what types of documents should be prepared so you can present them to investors when the time is right?
♦ Will you need a subscription agreement, or are all the initial investors going to be founders and active in the company?
♦ If you are a closely-held entity, will you need a shareholder agreement that governs how shares can be transferred, and under what circumstances, including addressing common scenarios such as death, divorce, bankruptcy or disability of a shareholder?
♦ Do you need an agreement that resolves a deadlock in a company where the entity has an even number of shareholders with equal voting power?
♦ Do you need provisions that restrict the transfer of the stock to third parties, or which requires the repurchase of any shares upon the departure of a key shareholder or the termination of an employee who holds equity?
Maintaining The Entity’s Liability Protection
Forming a corporation or a limited liability company is only the first step. The entity needs to be maintained throughout its existence. Failure to maintain the entity properly will result in a loss of the very liability protection you probably sought when you formed the entity. Many of our clients ask us to help maintain the corporation or limited liability company after it is formed to ensure that it does not lose the nature of its limited liability.
We also have many clients that prefer to do this on their own, and we are here to assist them as well. You can review our publication on Maintaining Your Corporate Protection that educates you on how a corporation or limited liability company needs to be maintained, why these requirements are imposed, and contains common pitfalls that result in the loss of corporate protection. We also make available a Corporate Maintenance Checklist that can serve as a reminder of some of the events in the day-to-day operation of an entity that need to be formally acted upon by the Board of Directors and/or by the Shareholders, and then documented accordingly.