There are countless online services – including LegalZoom, MyCorporation and The Company Corporation – that will help you form a corporation. The benefits are clear: A minimal investment of time and money.
But, based on the experiences of some of my clients before I began representing them, those benefits may come at a cost: Corporate documents that do not properly meet the entrepreneur’s needs, plus a lack of information about legal requirements to maintain the corporation on an ongoing basis. (Please see this blog’s Hall of Shame page.)
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Let’s assume that you are starting a new business in the San Francisco Bay Area (where I live and work). And let’s assume, further, that you have decided to form a corporation to establish limited personal liability and to provide an easy way to accept investment capital, if and when appropriate. Should you form the corporation in Delaware or in California?
Registered agents in Delaware cite a variety of reasons for incorporating there. Those reasons tend to fall into two categories:
- Delaware corporate law is well established, widely known, and quickly applied by Delaware courts.
- A registered agent can complete the incorporation process quickly.
Yet those benefits do not represent a huge difference from incorporating in California. California corporate law also is well established, and four-hour expedited incorporation is available.
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Small companies usually need to conserve cash, so they often turn to independent contractors rather than employees. The logic seems impeccable. If there is not enough work to justify a regular employee, the company can use an independent contractor when needed. That way the company avoids making unemployment and social security contributions and does not pay benefits such as health and life insurance, retirement plan contributions and personal time off.
There can be problems, however. If the individual really is doing the work of an employee, the Internal Revenue Service or the Employment Development Department might reclassify the individual as an employee, erasing the presumed financial benefits.
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When I prepare to negotiate an agreement for a client, I start by researching the other party so I can gain insights that might help me represent my client more effectively. The obvious starting point is the website for the other party, where I can quickly understand its business and see who its executives are. But I also look for legal information that typically is available only elsewhere.
Every state has a searchable database of the businesses that have registered with that state, either because the business was formed there or because it was formed elsewhere and registered to do business in the state. Each state includes in its database, at a minimum, information about the corporations and limited liability companies. Most states include information about other types of business entities, too.
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After a number of in-house legal positions, I started my own solo law practice in 2004. Most of my clients are startup or early-stage companies, typically technology-related.
For most of the time since then, I have published a well-received monthly e-mail on various legal topics for clients, colleagues and friends.
Now, having received encouragement from a number of people, I am starting my first blog. The tag line for my practice is “High-touch Legal Services for High-tech Companies”, so I have decided to call this the “High-touch Legal Services Blog”.
I hope you will find my posts both interesting and informative.
Dana Shultz is a business-savvy lawyer located in Northern California's San Francisco Bay Area (in the East Bay, near Oakland) who has in-depth knowledge of law, business, technology, and the needs of startup and early-stage companies.