Corporate Formation Attorney
Entrepreneurs are at the forefront of exploration and innovation, driving the culture and the economy in new and exciting ways. But starting a business can also be incredibly challenging, with a vast array of decisions to make, each affecting the overall trajectory of your enterprise.
One of the most crucial decisions that startups need to make is to choose the right type of business entity for their current needs and future growth. Each type of business has different requirements, risks, benefits, and limitations. In addition, choosing the right type of entity improves access to venture capital and other forms of financing.
It is critical for entrepreneurs to consult with a corporate formation attorney before making such a significant decision for the future of their business.
Fridman Law Firm’s Corporate Formation Services
Generally speaking, a corporate formation attorney provides the following services:
- Consulting on the correct type of business entity and corporate structure for your startup
- Researching and clearing issues related to business and product names and intellectual property
- Organizing and filing business incorporation paperwork with the relevant entities and agencies
- Ensuring all formation documents are error-free and that associated fees and payments are made correctly
- Filing identity verification and other documentation required for due diligence
- Ensuring the correct receipt and processing of documents like the business formation certificate, Certificate of Good Standing, Tax Residence Certificate, Certificate of Authority to do business in a foreign jurisdiction, and other compliance documents
- Designating a registered agent to represent your business to government agencies and other officials
Every startup is unique, and every entrepreneur faces their own challenges and opportunities. Because every venture is different, the corporate formation process may require additional steps and services, and it is important to work with an experienced corporate formation attorney who can guide the process.
Choosing an Entity and Drafting Key Agreements
The core of choosing a business entity is specifying who owns a business and how earnings will be returned to the owner(s). However, the type of entity you choose governs everything from basic day-to-day operations to your legal and financial risk and exposure. Each business entity type has its own benefits, risks, opportunities, and limitations. Here is a brief overview:
Sole Proprietorship
All entrepreneurs are sole proprietors by default, and the government and IRS consider all businesses to be sole proprietorships until a different type of business entity is formed. In a sole proprietorship, the owner’s personal and business assets and liabilities are not separated; the owners are personally liable for any debts and liabilities and are personally taxed on any earnings and profits. It can be difficult for sole proprietors to access funding because they pose a higher risk to creditors.
Partnership
A partnership is a common way for two or more people to own a business together. Business partnerships usually take one of two forms:
- Limited Partnership (LP). A limited partnership is commonly used by small companies and families where one partner primarily runs the business, and other partners are primarily investors. In a limited partnership, one partner has unlimited liability and pays self-employment tax. Other partners have limited liability, reducing their financial risk and limited control over the company, as specified in the partnership agreement.
- Limited Liability Partnership (LLP). The LLP is commonly used in professional groups like accountants or attorneys. In a limited liability partnership, each partner has their own individual liability and limited control over the business, as specified in the partnership agreement. This protects each partner from debts or risks that another partner may incur.
Limited Liability Companies
A Limited Liability Company, or LLC for short, is a flexible business entity that combines some of the benefits of a private partnership with some of the benefits of being a corporation. It allows owners to limit their personal risk by separating their assets from the company’s. Profits and losses are passed through to the owner’s personal taxes without corporate taxation, and partners can agree on a management structure that distributes control of the business.
Each state has different rules regarding how financial interests in an LLC can be transferred or changed over time: in some states, if a partner leaves, the entity must be dissolved and re-formed with new owners, while others will allow for the transfer of ownership and liability over time.
Corporation (C-corp)
A corporation is another entity that protects personal assets by creating a legal entity separate from its owners. Like an individual, a corporation can make a profit, pay taxes, and be held legally liable, and the corporation remains intact even when shareholders depart the company.
Corporations are excellent entities for protecting personal liability, which contributes to their appeal for fundraising and venture capital, but corporations are subject to double taxation: the corporation pays income taxes, and shareholders pay income taxes on distributed profits. They also require much more extensive record-keeping and administration. There are several types of corporations, detailed below:
- S-corp. An S-corp is a corporate entity with special tax status. Many states have different rules regarding how S-corps are taxed, but an S-corp often escapes double taxation, with profits being passed directly to the shareholder without being subject to corporate taxes
- Delaware Public Benefit Corporation. A Public Benefit Corporation is not a non-profit. It’s a for-profit company that also pursues specific social benefits as part of the articles of incorporation. This corporate structure allows a business to use company resources to pursue social goals, and frees a company from the requirement to maximize shareholder value.
- Close corporation. A close corporation is a corporation with a non-traditional, less formal corporate structure. They are often managed directly by shareholders, are barred from public trading, and do not have special tax benefits.
- Nonprofit corporation. Nonprofit corporations are usually organized to work for the public benefit and not to earn profit for owners or shareholders. Nonprofits are typically organized like a regular C-corp and must comply with special structure and finance rules. A nonprofit corporation can be registered with the IRS and gain tax-exempt status, so they are often referred to by the relevant section of the tax code: 501(c)(3).
- Cooperative corporation. A cooperative corporation is owned, organized, and operated for the benefit of its members. Members are employees and officers of the company, as well as customers, who often purchase shares and become co-owners. Cooperative corporations are managed by owner-operators, who elect a board of directors, and members have control over the direction of the business, as well as getting a share of the profits.
It is also possible to utilize a different tax status than the default one associated with the entity being formed. Some designations, like an S-corp or a nonprofit, can be a tax status applied to a different type of business entity, like an LLC. These blended designations are highly specialized and complex and should be discussed with a corporate formation attorney and tax advisor.
Depending on the type of business entity you choose, you will need to register the business with state and federal agencies. You will also need to create a series of key agreements and documents, which may include partnership agreements, contracts, policies, trademarks, and other legal forms and procedures.
Why You Should Consult a Corporate Formation Attorney
Forming the right type of business entity for your new venture is a strategic decision determined by your vision for the future growth of the company, as well as by your current financial and ownership structures. Working with a corporate formation attorney helps you make the right decision now and guides the future growth of the business.
Entrepreneurs should consult with a corporate formation attorney very early in the life of the venture in order to clarify questions around control and taxation and guide agreements with partners, stakeholders, and financiers.
In addition, even if you are certain about the type of business entity you want to form, a corporate formation attorney can ensure that all the necessary documents and reports are filed correctly and completely, avoiding future complications.
The Fridman Law Firm is not only a New York and Delaware corporate formation attorney, but our diverse experience and expertise make us an excellent partner for entrepreneurs and startups of all sizes.
We help new businesses navigate all aspects of corporate formation, as well as assisting with everything from employment contracts and commercial real estate to protecting intellectual property and securing venture capital investments. The Fridman Law Firm is proud to support entrepreneurs and innovators as they shape our economy and the future, and we are a partner who will be with you every step of the way.
Contact us today to learn more about corporate formation services, or call Fridman Law Firm at 212-262-9823.