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In order to start a company, first choose your business type (such as an LLC) and your formation state, which doesn’t need to be where your business is located. Next, prepare and file formation documents (Articles of Incorporation or Formation) and appoint a registered agent. Once that’s done, get an Employer Identification Number (EIN) from the IRS; adopt governing documents (Bylaws or Operating Agreement); and issue ownership documents (shares of stock or membership interests).
Let’s expand on each of these requirements.
Most small business owners opt for an LLC (limited liability company), a regular corporation, or an S corporation. All three structures, when formed and operated correctly, will shield your personal assets from business debts and creditors. There is not a universal best “best choice” – the best structure depends upon your goals for your business.
You are free to form your LLC or corporation in any state that you choose—regardless of whether your business has an office or will operate in that state. Many publicly traded companies (and those who aspire to be publicly traded) will choose Delaware at their formation state. Delaware is a preferred state because it has very business friendly laws, a highly respected court system dedicated to hearing business cases, and a state-of-the-art secretary of state’s office.
However, smaller businesses and those who anticipate staying closely held often opt to form in the state where they are located. This is less cumbersome (and costly) because a business that forms in a state other than the one where it operates must immediately register with the state where it operates. This process, often called foreign qualification, involves filing documents, paying fees, and appointing a registered agent, doubling the cost and paperwork involved in starting up. Plus, there will be ongoing compliance requirements for both states.
Some businesses select their formation state because they want to operate using a structure that is not available in their home state. For example, not all states permit benefit corporations, series LLCs, or close corporations. If one of those structures makes sense for your business, you will need to incorporate or form your LLC in a state that allows it—and then foreign qualify in the states where you do business.
While states vary in the amount of information requested—and corporations generally must provide more than LLCs—all states require that you state the business name, the business address, and the name and address of the initial registered agent.
A registered agent can be an individual or a company approved to offer registered agent services in that state (such as CT), but in all cases, the registered agent must have a street address in the state. Many times, a business owner will want to list himself or herself as the initial registered agent. In most cases, it’s wise to resist that temptation. A professional registered agent knows how to process properly mission-critical documents—such as notice of a lawsuit against your company, a garnishment against an employee’s wages, or the state’s annual report. Failing to handle these communications correctly and in a timely manner can have serious repercussions. Privacy is another concern when an individual serves as a registered agent. Delivery of legal documents often is in person at the registered agent’s address—which can cause embarrassment if customers or clients are present. Plus, the registered agent’s address is a matter of public record. This leads to unsolicited, bulk mailings. A professional registered agent culls the important documents from the bulk mail, saving you the aggravation of doing so.
Every LLC and corporation must have a federal tax identification number. Although it’s called an Employer Identification Number, LLCs and corporations must have one even if they do not have employees. This number is required to file tax returns, but many banks, lenders, and vendors will ask for your EIN – and refuse to do business with you if you cannot provide it.
Another important post-formation duty is to adopt governing documents for the new entity: Bylaws for a corporation; an operating agreement for an LLC. State law generally requires corporations to adopt by-laws. LLCs are not required to have an operating agreement, but it is a best business practice to do so. Corporations are also required to hold a first meeting of shareholders, a first meeting of directors, and to issue shares of stock. Again, LLCs are seldom required to follow these formalities, but it is a wise idea to document formally all company decisions and transactions.
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