A. COMPLIANCES FOR INCORPORATION
Which are the steps and requirements that are needed to ensure legal compliance for incorporation?
When forming a business entity, there are a number of organizational structures to choose from. The most common organizational structures include: (1) Sole Proprietorships; (2) Partnerships (General & Limited); (3) Limited Liability Companies; and (4) Corporations. Which structure you choose will depend upon the level of responsibility and control versus the extent of liability offered under the law for a particular structure. For example, with a sole proprietorship, one person has complete control over the business. Consequently, this unfettered control subjects the owner to unlimited personal and professional liability. Partnerships, however, are business entities co-owned by two or more individuals. Partnerships are separated into two types: general, where partners collectively have absolute control, but unlimited liability for external obligations of the business; and limited, which require at least one or more general partners with unlimited liability and one or more limited partners who have less control and but enjoy limited liability. A limited liability company (LLC), functions as a hybrid structure that allows multiple owners to participate in responsibility and control while maintaining limited liability. Finally, corporations are entities whose ownership is shared among investors who own interest or shares in the business. Corporations are deemed separate from its owners, providing a veil of personal protection. Common types of corporations include: C corporations, S corporations, B corporations, and nonprofits.
In addition to considering the desired level of control and liability, each type of entity carries various tax implications. For that reason, it is always advisable to work with an accountant or other tax professional in determining which type of organizational structure would best benefit the individuals and business involved.
BUSINESS ORGANIZATION FORMATION REQUIREMENTS
To provide a broad overview, the types of organizational/governing documents for common business organizations are:
(1) Sole proprietorships do not have any formation requirements per se; however, if the sole proprietor will conduct his/her activities under an assumed business name, then an assumed name or “doing business as” (d/b/a) should be filed with the appropriate county or other agency.
(2) For partnerships, it is most common that a written partnership agreement be put in place. These entities may also be required to file a certificate of partnership with a county or other agency. If there are two or more owners who join together to conduct business activities, however, a legal partnership may be formed without a written partnership agreement (and sometimes unbeknownst to the participants). A limited partnership requires not only a partnership agreement, but also the filing of a certificate of limited partnership. Similar to LLCs, LPs may have other requirements to be addressed, such as the publication requirement (which in New York applies to LPs also).
(3) For limited liability companies, the initial step is the filing of formation articles. Again, the title may vary, but these are often referred to as articles of organization or certificates of formation. The main governance document for LLCs is an operating agreement. In some states, such as New York, an LLC is required to adopt a written operating agreement; in other states, such as Delaware, the adoption of a written operating agreement is not required (but it is recommended). [These differences can be important when the LLC seeks to set up a bank accounts, or if, for example, the LLC seeks financing.] LLCs are not legally required to have annual meetings, but it is recommended that the approval of significant events to codified in minutes. In some states, there may be additional steps to be taken, such as the requirement in New York that the LLC publish and file a certificate of publication with the New York Department of State (this is step is often overlooked and can result in unwanted delays with financing or other activities).
(4) For corporations (both business and not-for-profit), the initial step is the filing of a formation certificate. The exact title of these certificates varies based on state law, but they are often referred to as certificates of incorporation of articles or organization. In addition, the corporation must adopt bylaws, which are the principal governing documents, and have minutes approving the organization of the corporation and significant events, as well as documenting annual meetings of the shareholders and directors. If a corporation has more than two shareholders, it is strongly recommended that a shareholders’ agreement be put in place to address matters between the shareholders, such as any restrictions on the transfer of shares.
B. POST INCORPORATION REGISTRATIONS
Once formation of the particular entity has occurred, there are several post formation registrations or filings which are either necessary, or strongly recommended. The entity will need to apply to the IRS for an Employer Identification Number (“EIN”), in order to hire employees and open up a bank account. If the business intends to have employees it will need to register for unemployment insurance tax, employee withholding tax, and any other employment related taxes. Registration with the state tax collecting agency is also necessary if the entity intends to sell goods to customers. Depending on the nature of the business to be conducted, the entity may be required to obtain a license or permit (which is sometimes required prior to the actual formation).
Corporations are required to submit federal and state tax returns on an annual basis, while LLCs, LLPs and sole proprietorships are considered “pass-through” entities and normally do not pay federal or state taxes, but instead pass this burden to the owners of the entity. Some states, like New York, require LLC’s and LLPs generating income to pay an annual filing fee based on the number of members or partners in the entity. Other states, like Delaware have a flat annual Alternative Entity Tax which must be paid by all LLCs and LLPs. New York also requires business corporations and LLCs to file a biennial report (which includes a small fee), providing current information regarding the corporate name, address, officers, and address for service of process. Similarly, most states require not-for-profit corporations that are considered charitable, to register and provide information to the state agency regulating charitable not-for-profits (typically the Attorney General’s Office), on an annual basis.
Upon formation a corporation has certain formalities that it must comply with. The corporation must have an initial organizational meeting to adopt the bylaws and approve of directors. The corporation is required to keep the minutes of the proceedings of its shareholders, board of directors and any executive committees, with its corporate books and records. In addition, a shareholder meeting must be held annually for the election of directors and the transaction of other business. Although similar corporate formalities are not required for LLCs, LLPs or sole proprietorships, we recommend documenting important business decisions and maintaining them with the entity books.