Corporate Form; State Selection Docs

Major differences between company forms

Taxes:  The form you select will impact how you are taxed

Ownership:  You may have partners in your business and the corporate form you choose will affect how you and your partners “own” the business

Liability: One of the big wins about creating a company is that it shields you from liability for many actions that your business makes. For example, if your company signs a lease, and defaults on that lease, generally the land lord will be able to sue the company but not you for the back rent.

Side note and CMA (Cover My A**): This class lays out the broad principles of company form selection and this is a major decision that has long term implications so you should discuss it with an accountant and a lawyer to ensure that you and your co-founders fully understand the options and their implications for you so that you select the form that best meets your particular needs and objectives.

So what are the forms:  Here is a little on each form to help you get oriented (this content was pulled from the SBA so credit where credit is due 🙂

Sole Proprietorship: A sole proprietorship is the simplest and most common structure chosen to start a business. It is an unincorporated business owned and run by one individual with no distinction between the business and the owner. You are entitled to all profits and are responsible for all your business’s debts, losses and liabilities.

Partnership:  A partnership is a single business where two or more people share ownership. Each partner contributes to all aspects of the business, including money, property, labor or skill. In return, each partner shares in the profits and losses of the business.

Limited Liability Company (LLC): A limited liability company (LLC) is a hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership.

S Corp: An S corporation (also referred to as an S corp) is a special type of corporation created through an IRS tax election. An eligible domestic corporation can avoid double taxation (once to the corporation and again to the shareholders) by electing to be treated as an S corporation.

Corporation: A corporation (sometimes referred to as a C corporation) is an independent legal entity owned by shareholders. This means that the corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs.

CHOICE OF STATE

Which state to incorporate in:  Once upon a time Delaware had the market cornered on incorporation thanks to its progressive corporate and tax laws. However, the secret is out and many other states have caught up (or in Nevada’s case possibly surpassed…).

But my totally unofficial advice is to incorporate in the state where you expect to do the most work and/or the state where you as the CEO lives. If it is a close call between different states take a look at the links below to help you identify which state is best for you (one thing to remembers as you are reading the discussions below is that revenue is taxed in the state where it is generated- more on this in our class on Tax) :

The Best States to Incorporate

Best Business Tax Climate

How to Select a State for Incorporation

Getting the paperwork required for state incorporation:  Each state requires different docs and you can go to a lawyer to get these documents drafted but before spending the money consider reviewing the free, and nearly free, legal document services out there. One in particular that I like is: https://legaltemplates.net/

(FYI I have no relationship with them, other than having used their docs).

It is cheap, and allows you to find the documents you need and then customizing them to your state.

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