- The formation and regulation of business entities in the United States is mainly governed by state law. There are no federal corporations in the United States. Corporations, partnerships, limited partnerships, and limited liability companies can be established under the laws of any state. These entities may have their main or other offices in another state, although they must meet the requirements and register to conduct business in all states where they are "doing business."

- The timeframe for formation can vary among states, but entities in Delaware and California can be established in a few days or even in a few hours if necessary.

- Many entities are established in Delaware due to the well-developed business entity laws, minimal annual reporting requirements, and the significant corporate law experience of Delaware courts. Additionally, Delaware is one of several states that do not impose a state income tax nonetheless it requires an Annual Report and payment of Franchise Tax fees (business entity tax) on or before March 1st.

- Since corporations and other business entities need to individually qualify and register in each state where they are "doing business," it may be advisable to form the entity in the state where the business will be located rather than in Delaware. This decision needs to be evaluated on a case-by-case basis, and most companies prefer to streamline their reporting obligations in multiple states.

- An entity's name must include specific terms. Corporations must include "Corporation," "Incorporated," or an abbreviation of those terms in their names (e.g., "Inc."). Limited liability companies must use "Limited Liability Company" or "LLC." The name of a limited partnership must include "Limited Partnership" or "L.P."

- The entity's name must also be distinguishable from other registered names in the state of formation, including names of entities of a different type. In situations where an entity will operate in multiple states, a name might be available in one state and unavailable in another, so it is crucial to address the name availability issue as part of the entity formation process.

- Most corporations have "common shares" or "common stock." A corporation may have multiple classes of common stock, such as voting and non-voting shares. Corporations may also issue "preferred stock," which typically has priority for dividends and may carry voting or non-voting rights. Shares in a corporation are generally freely transferable, although agreements among shareholders of private corporations that restrict transfers are common.

- Shareholders are typically not personally liable for the actions or omissions of the corporation. However, certain state and federal laws may impose personal liability, including for tax withholding and certain taxes.

- Corporations face "double taxation," being taxed at the entity level on their net income as well as their shareholders being taxed on the income (dividends) they receive from the corporation. Most corporations are known as "C corporations," but U.S. law allows small, closely held corporations to elect to be treated as a pass-through entity—an "S-Corp"—thus avoiding double taxation. This option, however, is restricted to corporations owned by U.S. citizens.

Case-by-Case Review

The type of entity to be formed, the state of formation, and the entity's structure vary on a case-by-case basis and should be thoroughly analyzed before moving forward.

Zecca Ross Law Firm P.C. regularly assists founders in making well-informed decisions on these matters. If you have any questions regarding the content of this article, please contact Zecca Ross Law Firm P.C. at contact@zeccaross.com and schedule a free 15-minute consultation. Zecca Ross Law Firm P.C. delves into the legal, financial, and operational challenges that venture-backed startups and their founder’s encounter. Topics include entity formation, issuance of founder equity, fundraising from investors, and securities laws.

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