What Kind of Company Do I Need? Can I Do It Myself?

When launching a small business, most people are not sure whether they need to form a company or not – and if so, should they form a corporation, or use another form such as an LLC.  They also may be unsure whether they should organize under the law of their “home state” or choose another state, such as Delaware.

The reasons for forming a company are generally understood – limiting liability (keeping your personal assets, other than those you specifically put into the business, safeguarded from business losses).   A professional-seeming business presence can be another reason.

It can seem deceptively easy these days to “do it yourself” in setting up a company.  Many states including New Jersey have created user-friendly web sites to help you get things underway.  In the excitement of getting the business launched, legal documentation and expenses may seem like a boring distraction.  Commonly we see people take the first step – filing a certificate to set up a corporation or an LLC – without realizing that there are other crucial steps to completing the set-up of the company.  Even with the best of intentions, if postponed at the beginning, those actions have a way of continuing to be postponed indefinitely.

Completing the organizational process for a company is surprisingly complex, even if you are the sole owner and contributor.  If others are investing in your business, then you REALLY owe it to yourself (and to them) to answer questions about the company’s operation before money changes hands.  A business plan is a crucial first step.  In New Jersey, help and mentoring is available from various sources.  The following link is an 80-page Guide to Doing Business in New Jersey that is thorough and helpful: http://www.nj.gov/njbusiness/pdfs/Doing_Business_in_New_Jersey08.pdf.  This guide addresses many issues beyond writing a business plan, including basics of setting up a company, resources for funding, suggested topics that should be covered in governing documents, several pages on franchises, and ongoing requirements once your business is launched, depending on how you conduct business (for example, if you have employees, you will have responsibilities for unemployment insurance, workmen’s compensation, and income tax withholding).

Corporations, partnerships and LLCs have different organizing steps and documents, and the steps as well as the legal framework are different in different states.   Corporations have more formalities on an ongoing basis which it’s important to keep up with (even if they seem silly – like the sole owner, each year, re-electing himself director and president).  Corporations are governed according to by-laws (different from the certificate filed with the state).   LLCs are more flexible – potentially either a good or bad thing, as failure to spell out details in an operating agreement (again, different from the certificate filed with the state)  will leave more legal questions open than would be the case with a corporation. While a company formed in one manner (corporation, LLC, etc.) generally can convert to another, it’s not simple or inexpensive so making the right choice at the outset is preferable. 

In choosing what state to organize in, it’s important to be advised on the differences in the law between one state and another, and make sure your documents follow suit.   Delaware has a well-developed background and is often chosen for an interstate business, or to facilitate the eventual sale of the company.  Most public companies are organized in Delaware.   The following link is their pitch for using Delaware: http://corp.delaware.gov/pdfs/whycorporations_english.pdf  However, there are additional costs involved, such as maintaining a Delaware “registered agent.”  In addition, an out-of-state company is required to file for authority to do business in their “home” state, and possibly other states in which the company maintains an office or does business.

The recommended terms of governing documents need to be tailored to the state law.  While each state would include certain common elements, others are state specific and therefore there is no one-size-fits-all form.

The prospective owners of a company, whatever form you choose, each should have the opportunity for an independent review of the governing documents and should sign a subscription agreement.

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