Corporate governance

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You now understand Sally’s ambition, how she thinks, her quest for perfection, and her focused vision for future success. From your perspective consider, (1) what form of business, an LLC; S-Corp; or Corp, matches the business platform you have been pursuing with Sally? Based on the information you have now acquired about the direction of the business, (2) do you perceive the need to change your original choice of formation to one of the other forms? (3) Why or why not? You have reviewed all aspects of becoming a legally recognized business. You understand the tax issues, the management structure options, raising operating capital, the various types of insurance coverage required, and the necessity of having peace of mind in the event of a catastrophic moment. As a manager-owner, the concept of “Piercing the Corporate Veil” may give you a sinking feeling when confronted with a questionable operating decision that may trigger both company and personal liability. (4) What steps can you take to avoid facing situations that trigger a court to Pierce, the Corporate Veil of your company? You have a lot to ponder in deciding the best form of governance and assuring the one you select meets Sally’s management style. (5) In determining the form of your business organization (an LLC, S-Corp, or C-Corp.) and matching Sally’s long-term plans, consider which provides most the security, protection against personal liability, management control, financing capability, and long-term expansion planning. (6) Would Sally want a Board of Directors managing her menu?

We know Sally successfully operated her own multimillion-dollar business with sufficient business expertise and without a corporate board or shareholders. We know she fully funded her business and carries no debt that would impede this new venture. We know she has worked well with you as a team and owner in the drive to establish this enterprise. Carefully consider these issues before selecting an organizational form.

Sally has found several documents to help pick which type of corporation to form for the business you are building with her. Feel free to use this information. She has shared them here: These documents are listed in the attachment section.

· Choosing an Entity Comparison Chart (PDF). 

· Business Selection Worksheet (PDF). 

· Forming a Corporation Checklist (PDF). 

· Forming and Organizing a Corporation (PDF). 

· Forming and Organizing an LLC (PDF). 

· Business Structures (IRS). https://www.irs.gov/businesses/small-businesses-self-employed/business-structures

· Choose a Business Structure (SBA). https://www.sba.gov/business-guide/launch-your-business/choose-business-structure 

Your Assignment

Create a matrix charting the pro and cons and advantages and disadvantages for the following forms of company organizations:

· LLC

· S-Corporation

· C-Corporation

  1. Cost: what are the comparative costs of setting up?
  2. Ease: what are the relative costs for setting up each?
  3. Termination: what is the state requirement for continuity?
  4. Public Information: how important is it that your personal information is shared or not shared with the public
  5. Risk: what  level of liability exists in the operation of the business based on the type of business itself what is the best form to insulate owners from personal liability
  6. Operation: what form best supports the intentions of the owners what is the best control risk balance form of operation
  7. Capitalization: is there a risk of undercapitalization what would be the impact will there be a need to raise capital to avoid increased liability is there a form that makes it easier to raise capital
  8. Selling: if owners wish to sell what form best accommodates that situation
  9. State Taxes: what are the tax liabilities from the state in setting up the business
  10. Expansion: which form provides the greatest flexibility in the event of expansion

Your table should look something like the  Example listed in the attachments section.

   

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Forming and Organizing an LLC (FL)

by Practical Law Corporate & Securities

Law stated as of 04 Oct 2018 • Florida

This Practice Note is a guide to the procedural steps, documents, and considerations necessary to form a limited liability
company (LLC) in Florida, including a professional limited liability company. This Note discusses initial considerations,
organizational documents, pre- and post-formation matters, and other important issues.

Contents

Initial Considerations

State of Formation

Name of the LLC

Pre-Formation Logistics

Articles of Organization

Filing the Articles of Organization

Professional Limited Liability Company

Operating Agreement

Considerations Regarding Ownership Interests

Initial Acts of the Members or Managers

Post-Formation Matters

Preparing the Minute Book and Ledger

Apply for a Taxpayer Identification Number

Obtain Licenses and Permits

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Tax Considerations

Employee Incentive Considerations

Capital Raising Considerations

Further Assistance

Initial Considerations

When forming a business in Florida, the first step is deciding what type of entity is best (for example, a corporation,
partnership, or limited liability company (LLC)). The best entity form depends on structure, liability, tax, and management

considerations (see Choosing an Entity Comparison Chart (FL)).

LLCs offer substantial flexibility and combine the liability protection of a corporation with the tax treatment of a partnership. For
these reasons, LLCs are increasingly popular business entities.

Advantages of an LLC include:

• Limited liability of the members for the LLC’s debts. A member is an individual or entity who is an undissociated

member of the LLC (§§ 605.0102(40), (48), 605.0401, and 605.0602, Fla. Stat.).

• Greater flexibility in allocating profits among members.

• Freedom to contract for the management of the LLC’s business, often superseding default statutory requirements.

• Fewer formalities than with a corporation (for example, an LLC is not required to have annual meetings or keep written
minutes of its proceedings).

• Pass-through taxation to avoid double taxation, unless the members choose an alternative tax classification (see
Practice Note, Choice of Entity: Tax Issues).

• Fewer restrictions on ownership.

Disadvantages of an LLC include:

• Additional hurdles if the LLC plans to eventually become a public company.

• Generally more complex than a partnership.

• The income of certain members may be subject to self-employment tax (see Practice Note, Dual Status: Treating
Partners as Employees: Wage Withholding and Payroll Taxes – Partners).

When deciding to form an LLC, there are also several threshold issues to consider. For information on certain principal issues
involved with forming an LLC, see Forming an LLC Checklist. For additional state-specific issues to consider before preparing
a comprehensive operating agreement, see Operating Agreement Checklist (FL).

State of Formation
Before forming an LLC, organizers must determine the preferred state of formation. LLCs are governed by the laws of the
state of formation. In Florida, the Florida Revised Limited Liability Company Act (RLLCA) (§§ 605.0101 et seq., Fla. Stat.)
governs the management and operation of an LLC and includes provisions concerning:

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• Formation.

• Management by members or managers. A manager is a person or entity that is responsible under an operating

agreement (alone or with others) to perform the management functions set out in the RLLCA (§§ 605.0102(38), (48),
605.0407(3), and 605.04073(2), Fla. Stat.).

• Contributions and distributions.

• Membership, assignment of membership interests, and dissociation.

• Mergers and conversions.

• Dissolution.

Organizers should also consider where the LLC will primarily transact its business and if there are any business, tax, social, or
policy reasons for choosing a particular state. Forming an LLC in the state where it will primarily conduct business is typic ally
the easiest and most cost effective. However, there may be business advantages, tax or otherwise, to forming an LLC in other
states, such as Delaware or Nevada.

If the LLC is going to conduct a regulated business in a state other than Florida, it may be easier to obtain the necessary s tate
licenses if it is a domestic LLC within that state.

For more information on qualifying a foreign entity to do business in Florida, see Qualifying a Foreign Entity to do Business in

Florida Checklist.

Name of the LLC
Before drafting or filing any formation documents, determine the name of the LLC. The name of a Florida LLC must:

• Contain the words “limited liability company” or the abbreviation “LLC” or “L.L.C.”.

• For professional LLCs formed on or after January 1, 2014, contain the words “professional limited liability company” or
the abbreviation “PLLC” or “P.L.L.C.” in lieu of the words or abbreviations used for a general LLC (§ 621.12(2)(b)(3), Fla.
Stat.).

• Be distinguishable from all other entities or filings in the records of the Florida Department of State, Division of
Corporations (DOC), except for:

• fictitious name registrations (§ 865.09, Fla. Stat.);

• general partnership registrations (§ 620.8105, Fla. Stat.); and

• limited liability partnership statements (§ 620.9001, Fla. Stat.).

• However, an LLC may register under a name that is not otherwise distinguishable with the written consent of the owner
of the similarly named entity if the consent is filed with the DOC when the indistinguishable name is registered.

• Not contain language implying a purpose other than one authorized by the RLLCA and as stated in the articles of
organization.

• Not contain language stating or implying association with a state or federal governmental agency or corporation
chartered under US laws.

(§ 605.0112(1), Fla. Stat.)

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A name is not distinguishable when the difference is due to:

• A suffix.

• A definite or indefinite article.

• The word “and” and the symbol “&.”

• The singular, plural, or possessive form of a word.

• A recognized abbreviation of a root word.

• A punctuation mark or symbol.

(§ 605.0112(1)(b), Fla. Stat.)

For more information on naming an LLC, see Division of Corporations: Division FAQs.

To avoid possible delays in filing the articles of organization, organizers should conduct a preliminary search for name
availability through the DOC’s online records (see Division of Corporations: Search for Corporations, Limited Liability
Companies, Limited Partnerships, and Trademarks by Name). Names cannot be reserved in advance. Final name approval is
determined by the DOC, so a name should not be used until the DOC acknowledges that the articles of organization have
been accepted for filing. The DOC’s website states that the LLC is liable for any infringements resulting from the name
selected (see Division of Corporations: Articles of Organization).

If the LLC will transact business in Florida under any name other than its legal name, it must register that name with the DOC
as required by the Florida Fictitious Name Act (§ 865.09, Fla. Stat.). For more information on using and registering a fictitious
name, see Practice Note, Fictitious Names in Florida.

If the LLC intends to use its name as a trademark, service mark, domain name, or trade name, organizers should run a
trademark search to see if the name is currently registered by another business. These searches can be conducted for free
online (see Division of Corporations: Search for Corporations, Limited Liability Companies, Limited Partnerships, and
Trademarks by Name and US Patent and Trademark Office).

Organizers should not take any action in reliance on the availability of a name until the DOC has filed the articles of
organization. It is often a good idea, particularly if an attorney is handling the filing for a client, to have backup name ch oices in
case a name is taken or rejected.

Pre-Formation Logistics
Once the state of formation and the name of the LLC have been identified, counsel should determine:

• Who the organizers should be. The organizers prepare, execute, and file the articles of organization. An attorney often

acts as the organizer, but the organizer does not need to be an attorney. An organizer also does not need to be a
member of the LLC. (§ 605.0102(8)(a), Fla. Stat.)

• Whether to use a service company to file the formation documents. Although many firms and companies have a

relationship with a particular service company, using a service company is not required. If counsel does not already have
a service company, check the law firm or company directory or with another member of the team for the name of the
preferred service company and contact information. At law firms, paralegals often have this type of information.

• The street and mailing address of the LLC’s principal office. This information must be included in the articles of
organization (§ 605.0201(2)(b), Fla. Stat. and see Required Provisions). The LLC’s principal office does not have to be

in Florida (§ 605.0102(54), Fla. Stat.).

• The location of the LLC’s registered office. An LLC must designate and continuously maintain a registered office in

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Florida, which may (but need not be) the same as its place of business in the state (§ 605.0113(1)(a), Fla. Stat.).

• The LLC’s registered agent. An LLC must designate and continuously maintain a registered agent whose business

address is the same as the address of the LLC’s registered office and is:

• an individual Florida resident; or

• a foreign or domestic entity authorized to transact business in Florida.

• (§ 605.0113(1)(b), Fla. Stat.)

• Whether the LLC should have an indefinite duration. By default, an LLC has an indefinite duration, subject to certain

dissolution events (§§ 605.0108(3) and 605.0701, Fla. Stat.). The operating agreement can vary this default rule if the
LLC prefers to have a specific period of duration (§ 605.0105(2), Fla. Stat.).

• Whether the LLC will render professional services. If the LLC will render professional services, such as the practice

of law or medicine, there are additional statutory requirements, such as limitations on who can be a member of a
professional LLC (§ 621.09(2), Fla. Stat. and see Professional Limited Liability Company).

• Whether the LLC should be member-managed or manager-managed. Unless otherwise provided by the operating

agreement or articles of organization, management is vested in the members (§ 605.0407(1), Fla. Stat.).

• Whether the LLC should be a single-member or multi-member LLC. A Florida LLC may have one or more members

(§ 605.0401, Fla. Stat.). If two or more parties are forming the LLC, they should be advised of their rights to seek
separate counsel in relation to their individual interests.

• The type of operating agreement. Members of an LLC may enter into one comprehensive long-form operating

agreement or a series of one or more stand-alone agreements covering different matters (§ 605.0102(45), Fla. Stat.).

• Whether the LLC should have majority and minority interests or be a 50/50 LLC. Majority and minority parties often

have different concerns than two 50/50 members.

There may be situations where an existing business wants to become an LLC. Florida law allows foreign and domestic entities
that are not organized as LLCs to convert to Florida LLCs by complying with certain statutory requirements. (§§ 605.1041 et
seq., Fla. Stat.) Examples of business entities that may convert to a Florida LLC include:

• Corporations.

• Nonprofit corporations.

• Real estate investment trusts.

• General partnerships.

• Limited partnerships.

• Limited liability partnerships.

• Limited liability limited partnerships.

• Any other Florida or foreign entity organized under an organic law.

(§§ 605.0102(23)(a) and 605.1041(2), (3), Fla. Stat.)

For more information on Florida entity conversion, see Entity Conversion and Domestication Checklist (FL).

An existing business converting to a Florida LLC may have responsibilities for certain tax matters (see Department of

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Revenue: Considering Business Opportunities in Florida?). There may be other tax consequences associated with converting
to an LLC. Therefore, the entity should seek advice from a tax professional before taking any action.

Articles of Organization
Under the RLLCA, a Florida LLC is formed when the articles of organization become effective and the LLC has at least one
member (§ 605.0201(4), Fla. Stat.). As part of the formation process, the organizer must file the articles of organization with
the DOC. Although the RLLCA only requires minimal information in the articles of organization, organizers should consider
whether there are any additional provisions to include, such as a statement setting out any limitations on the authority of
members or managers to bind the LLC. (§ 605.0201, Fla. Stat.)

Required Provisions
Under the RLLCA, the articles of organization must include:

• The LLC’s name, which must comply with the RLLCA’s requirements (see Name of the LLC).

• The street and mailing address of the LLC’s principal office (where the LLC’s principal executive offices are located,
within or outside Florida) (§ 605.0102(54), Fla. Stat.).

• The name, Florida street address, and written acceptance of the LLC’s initial registered agent.

(§ 605.0201(2), Fla. Stat.)

Optional Provisions
Beyond these required provisions, the articles of organization can include any other provisions consistent with the law that the
members want in the articles of organization for the regulation of the internal affairs of the LLC, including:

• A declaration of whether the LLC is member-managed or manager-managed.

• For manager-managed LLCs, the names and addresses of the managers of the LLC.

• For member-managed LLCs, the names and addresses of one or more of the members of the LLC.

• A description of the authority or limitation of authority of specific persons or positions in the LLC.

(§ 605.0201(3), Fla. Stat.)

However, an LLC should consider omitting other information not required by law from the articles of organization because:

• Optional information such as details regarding membership, capital contributions, profit and loss allocations and
distributions, meetings, termination provisions and other particulars of the LLC’s internal affairs and business operations,
may be better left out of a public record and instead included in the LLC’s operating agreement. For more information on
operating agreements, see Standard Document, Operating Agreement (Single Member) (FL).

• If the information changes in the future, revising an internal governing document rather than the articles of organization
offers the LLC greater flexibility and cost-savings since an amendment or restatement of the articles of organization
requires an additional filing and fee (§§ 605.0202 and 605.0213(11), Fla. Stat.).

Prohibited Provisions
The articles of organization may not modify or otherwise alter certain matters that cannot be modified in the LLC’s operating
agreement (§§ 605.0105(3) and 605.0201(3), Fla. Stat. and see Operating Agreement).

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Effective Date and Time
If the articles of organization are silent, the default statutory effective date and time is the date and time of filing.

The initial articles of organization alternatively may state a specific delayed effective date and time that is not more than 90
days after the filing date or a prior effective date not more than five business days before the filing date. If the initial articles of
organization state a delayed or prior effective date without a time, the articles of organization are effective by default at 12:01
a.m. on the effective date. (§ 605.0207(3) to (4), Fla. Stat.) If the specified effective date does not meet the applicable statutory
filing requirements, the effective date of the initial articles of organization is:

• For a prior effective date, the later of the specified date or five business days before the filing.

• For a delayed effective date, the earlier of the specified date or the 90th day after the filing.

(§ 605.0207(4), (5), Fla. Stat.)

The effective date of the articles of organization is typically the filing date. However, there are situations where delaying the
effective date is useful. For example, the LLC may need time to prepare an operating agreement or to wait for member
contributions of cash or other assets to be in place. For filings late in the year, there may also be administrative or tax
advantages to delaying the effective date until the following year.

For more information on creating the articles of organization, see Standard Document, Articles of Organization (FL). A sample
form for the articles of organization is also available on the DOC’s website (see Division of Corporations: Articles of
Organization).

Filing the Articles of Organization
Organizers may file the articles of organization online, by mail, by walk-in service, or by fax. For more information on filing
documents with the DOC, see Practice Note, Filing Documents with the Division of Corporations (FL).

The filing fee for the articles of organization is $125, which includes:

• $100 for the articles of organization.

• $25 for the designation of registered agent.

(§ 605.0213(2), (7), Fla. Stat.)

Professional Limited Liability Company
One or more professionals may form, or cause to be formed, a professional LLC (PLLC) under the Professional Service
Corporation and Limited Liability Company Act (PSLLCA) (§§ 621.01 et seq., Fla. Stat.) for the sole and specific purpose of
rendering the professional service that the professionals are duly licensed or otherwise legally authorized to practice (§
621.03(3), Fla. Stat.). Only other PLLCs, professional corporations, or individuals who are licensed or otherwise legally
authorized to render the same professional service for which the PLLC was formed can be members of the PLLC (§ 621.09(2),
Fla. Stat.). A PLLC is formed by filing articles of organization under the RLLCA (§§ 605.0201(4) and 621.13(2), Fla. Stat.). If
the RLLCA conflicts with the PSLLCA, the PSLLCA governs the PLLC (§ 621.13(2), Fla. Stat.).

Professional services include any type of personal service to the public that requires licensure or other legal authorization.
Examples of professional services under the PSLLCA are personal services rendered by accountants, physicians, dentists,
architects, veterinarians, attorneys and life insurance agents. (§ 621.03(1), Fla. Stat.)

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Operating Agreement
The operating agreement defines the LLC’s management structure, describes how the LLC’s profits are allocated and
distributed, and sets out the agreements among the LLC’s members. It is similar to a combination of a corporation’s bylaws
and a typical shareholders’ agreement. For more information on operating agreements and their principal provisions, see
Practice Note, LLC Agreement Commentary.

When preparing the operating agreement, parties should consider:

• The rights of members. The operating agreement should spell out a member’s aggregate rights in the LLC, including

the right to:

• share in the LLC’s profits and losses;

• receive distributions from the LLC; and

• vote and participate in the LLC’s management.

• Whether the LLC will have multiple classes of membership interests. With the flexible capital structure of an LLC,
classes of membership interests can be created which include:

• non-voting interests;

• non-economic interests;

• convertible interests;

• income interests; or

• profit interests.

• The management of the LLC. Unless otherwise specified in the articles of organization or operating agreement,

management is vested in the members (§ 605.0407(1), Fla. Stat.). An LLC may be:

• member-managed, which is the management structure of most small business LLCs, with each member typically

having the inherent authority to act on behalf of the LLC and execute contracts; or

• manager-managed, which is generally more appropriate where there are passive members in the LLC (for example,

investors who are not actively involved in the direct management or day-to-day activities of the LLC), with
managers governing the LLC in a manner similar to a corporation’s board of directors.

• In either case, the operating agreement should specify rules and procedures for members and managers to follow when
managing the LLC.

• For further information on the distinctions between manager-managed and member–managed LLCs, see Standard
Document, Operating Agreement (Single Member) (FL): Drafting Note: Management.

• Initial capital contributions. The operating agreement should state how an initial capital contribution will be made,

whether by cash, tangible or intangible property, services rendered, promissory notes, or other obligations (§ 605.0402,
Fla. Stat.). The operating agreement may also address a member’s liability or penalty for failing to make a contribution (§
605.0403(5), Fla. Stat.). The default rule under the RLLCA, unless eliminated or varied by the operating agreement,

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however, is that a person can become a member without making or being obligated to make a contribution to the LLC
(§§ 605.0105(2) and 605.0401(4), Fla. Stat.). The operating agreement should specify if all, or just certain, members are
required to make an initial contribution and the form and amount of that initial contribution.

• The allocation of profits, losses, and distributions. The operating agreement should specify how profits, losses, and

distributions are allocated among the members. Otherwise, the allocation is based on the agreed value of each
member’s contributions to the LLC as stated in the LLC’s records (§ 605.0404(1), (5), Fla. Stat.).

• The admission of new members and the transfer of membership interests. The operating agreement should specify

the terms and conditions of admitting new members and any transfer restrictions on the membership interests (§§
605.0401(3)(a) and 605.0502(6), Fla. Stat.). For a discussion of potential transfer restrictions, see Transfer Restrictions
and Buy-Sell Rights.

• The dissolution and winding up of the LLC. The operating agreement can specify events or circumstances that cause

dissolution (§ 605.0701(1), Fla. Stat.). The RLLCA has default rules to determine who winds up an LLC’s affairs after
dissolution, but the operating agreement can vary these default rules unless judicial supervision of the winding up is
ordered (including the court-ordered appointment of a person to wind up the LLC) (§§ 605.0105(3)(j) and 605.0709(5),
Fla. Stat.). The operating agreement also cannot vary certain other statutory requirements for winding up the LLC’s
business, activities, and affairs (§§ 605.0105(3)(j) and 605.0709(1), (2)(a), Fla. Stat.).

For more consideration of the above topics, see Operating Agreement Checklist (FL).

A Florida LLC, regardless of the number of members, is not required to have a written operating agreement (§ 605.0201(4),
Fla. Stat.). Nevertheless, an operating agreement is generally used to govern:

• The relations among the members and between the members and the LLC.

• The rights and duties of the LLC’s manager or managers.

• The LLC’s activities and affairs and the conduct of those activities and affairs.

• The means and conditions for amending the operating agreement.

(§ 605.0105(1), Fla. Stat.)

Most of the RLLCA’s provisions are default provisions, meaning they only apply if the applicable subject is not otherwise
addressed by an operating agreement. If an operating agreement covers one of the matters set out above, it supersedes the
RLLCA’s default rules. (§ 605.0105(2), Fla. Stat.) However, the following RLLCA provisions that cannot be varied by the
operating agreement:

• Vary an LLC’s capacity to sue and be sued in its own name (§ 605.0109, Fla. Stat.).

• Apply any law other than Florida law to:

• the LLC’s internal affairs; or

• a member’s or manager’s liability for the LLC’s debts, obligations, or other liabilities.

• (§ 605.0104, Fla. Stat.)

• Vary the Florida Act’s requirement, procedures, or other provisions on:

• registered agents; or

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• the DOC, including those related to documents that must be filed.

• Vary provisions related to signing and filing on behalf of the LLC under a judicial order (§ 605.0204, Fla. Stat.).

• Eliminate the duty of loyalty or the duty of care except as otherwise provided by the Florida Act. For example, if the
conduct does not involve bad faith, willful or intentional misconduct, or a knowing violation of law, the operating
agreement may, if not manifestly unreasonable:

• alter or eliminate aspects of the duty of loyalty;

• identify activities that do not violate the duty of loyalty;

• alter the duty of care (but may not permit any willful or intentional misconduct or a knowing violation of law); and

• alter or eliminate any other fiduciary duty, such as common law duties of loyalty and care.

• (§§ 605.0105(3)(g), (4)(c) and 605.04091, Fla. Stat.)

• Eliminate the obligation of good faith and fair dealing (§ 605.04091, Fla. Stat.), except the operating agreement may
prescribe standards by which performance will be measured, if not manifestly unreasonable.

• Relieve or exonerate liability for conduct involving bad faith, willful or intentional misconduct, or a knowing violation of
law.

• Unreasonably restrict the member’s or manager’s duties and rights to inspect and copy LLC records (§ 605.0410, Fla.
Stat.), except the operating agreement may:

• impose reasonable restrictions on the availability and use of information; and

• define appropriate remedies (including liquidated damages) for any breach of those restrictions.

• Vary the grounds for judicial dissolution (§ 605.0702, Fla. Stat.).

• Vary certain requirements for winding up the LLC’s business, activities, and affairs on dissolution, including:

• discharging or making provision for the LLC’s debts, obligations, and other liabilities;

• settling and closing the LLC’s activities and affairs;

• distributing the LLC’s assets; and

• conducting the wind up under judicial supervision, if applicable.

• (§ 605.0709, Fla. Stat.)

• Unreasonably restrict a member’s right to maintain a direct or derivative action (§§ 605.0801 to 605.0806, Fla. Stat.).

• Vary provisions relating to special litigation committees (§ 605.0804, Fla. Stat.), except the operating agreement may bar
the LLC (but not a court) from appointing a special litigation committee.

• Vary a member’s right to approve a merger, interest exchange, or conversion if the member will have any interest holder
liability for any of the LLC’s debts, obligations, or other liabilities arising after the transaction (§§ 605.1023(l)(b),

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605.1033(l)(b), and 605.1043(l)(b), Fla. Stat.).

• Vary the required contents of a plan of merger, interest exchange, conversion, or domestication (§§ 605.1022, 605.1032,
605.1042, and 605.1052, Fla. Stat.).

• Restrict the rights of a person other than a member or manager, except as otherwise provided by the RLLCA (§§
605.0106 and 605.0107(2), Fla. Stat.).

• Indemnify a member or manager for:

• conduct involving bad faith, willful or intentional misconduct, or a knowing violation of law;

• a transaction where the member or manager received an improper personal benefit;

• personal liability for improper distributions (§ 605.0406, Fla. Stat.); or

• a breach of fiduciary duties or obligations except as permissibly restricted, expanded, or eliminated by the operating
agreement (§§ 605.0105(3)(g), (4) and 605.04091, Fla. Stat.).

(§ 605.0105(3), Fla. Stat.)

For examples of operating agreements, see Standard Documents:

• Operating Agreement (Single Member) (FL).

• Operating Agreement (Multi-Member, Manager-Managed) (FL) (a long-form agreement for an LLC with multiple
members, one of which is the LLC’s manager).

• LLC Agreement (Single Class, Multi-Member) (a long-form agreement for a manager-managed LLC with multiple
members).

• LLC Agreement (Operating Company) (a long-form agreement for a joint venture with two members and a managing
member).

The last two forms are based on the Delaware Limited Liability Company Act, which differs from the RLLCA in several material
substantive areas that will affect the drafting of the operating agreement.

Considerations Regarding Ownership Interests

Transfer Restrictions and Buy-Sell Rights
There are certain clauses the LLC may consider including in the operating agreement that affect the future purchase or sale o f
membership interests, including:

• Right of first refusal. A right of first refusal requires a member who has received an offer from a third party to first

offer its interest to the other members. For a sample provision, see Standard Clauses, LLC Agreement: Right of First
Refusal.

• Right of first offer. Like the right of first refusal, a right of first offer requires a member wishing to sell its interest to

offer the interest to the other members first. For a sample provision, see Standard Clauses, LLC Agreement: Right of
First Offer.

• Drag-along provision. A drag-along provision gives a majority member wishing to sell all or a substantial percentage

of its membership interests to an unrelated third party the right to force the other members to also sell all or a portion of

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their membership interests to the third party. For a sample provision, see Standard Clauses, LLC Agreement:
Drag-Along Rights.

• Tag-along (or co-sale) provision. A tag-along provision gives minority members the right to participate on a pro rata

basis in any controlling member’s sale of its membership interests to a third party. For a sample provision, see Standard
Clauses, LLC Agreement: Tag-Along Rights.

• Pre-emptive rights. Pre-emptive rights give the members the right to buy a pro rata portion based on their ownership

interest of any future membership interests the LLC issues. For a sample provision, see Standard Clauses, LLC
Agreement: Pre-Emptive Rights.

Unless the operating agreement provides otherwise, for example, in a permitted transfer where the transferee becomes a
member of the LLC in accordance with the operating agreement, if a member transfers his interest in whole or in part to a
person other than another member, the transferee only receives a transferable interest. Unless the operating agreement
provides otherwise, a transferee receiving a transferable interest:

• Has no right to manage or be involved in the conduct of the LLC’s activities and affairs.

• Has no right to access the LLC’s records or other information except during dissolution.

• Only has the right to receive the distributions to which the transferor would have been entitled.

(§ 605.0502(1)(c), (2), Fla. Stat.)

Unless the operating agreement provides otherwise, the transferor of a transferable interest retains the rights of a member not
associated with the transferable interest, including all duties and obligations of a member (§ 605.0502(7), Fla. Stat.).

Certificated or Uncertificated?
The LLC must determine whether its membership interests should be evidenced by certificates (similar to share certificates) or
uncertificated (§ 605.0502(4), Fla. Stat.). Whether an LLC’s membership interests are certificated is usually addressed in the
operating agreement. LLCs sometimes do not issue certificates for membership interests. However, if a member wishes to
pledge its interest as security for a loan, lenders may look to the operating agreement to verify whether the interests are
certificated.

Counsel should also consider including a reference to any operating agreement transfer restrictions, buy-sell rights, or transfer
requirements on the certificates of membership if any are issued (see Transfer Restrictions and Buy-Sell Rights). A transfer of
a transferable interest that violates any transfer restriction is ineffective if the transferee had knowledge of the restriction before
the transfer (§ 605.0502(6), Fla. Stat.).

Initial Acts of the Members or Managers

Though not required by the RLLCA, some LLCs choose to pass initial resolutions of the members or managers similar to the
matters authorized at an organizational meeting of the directors of a Florida corporation (§ 607.0205, Fla. Stat.). If the LLC
chooses to do this, consider authorizing organizational acts such as:

• Applying for foreign qualification in other states.

• Adopting the fiscal year (LLCs usually operate on a calendar year).

• Opening bank accounts and authorizing signatories.

• Appointing officers (LLCs can have officers similar to corporations).

• Approving budgets, especially if the LLC will have third-party investors.

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The LLC should also address specific actions or documents the members or managers need to approve (for example,
employment agreements).

If the LLC is being formed for a specific reason or as part of a transaction (such as a merger), it may also need to approve
deal-specific agreements and documents.

Post-Formation Matters

Once the LLC is formed, there are several things to do before it can begin conducting business.

Preparing the Minute Book and Ledger
Though typically a corporate practice and not required under the RLLCA, LLCs should keep minute books as a matter of good
governance and organization. If the LLC uses a service company, it may sell minute books, or the LLC can order one from a
variety of online sources. Once the minute book has been ordered and received, the LLC should determine who (counsel or
the LLC itself) will hold and maintain it.

An LLC must maintain at its principal office or another location:

• A current list of each member and manager’s full name and last known business, residence, or mailing address, which
can be prepared in the form of a ledger.

• A copy of the then-effective operating agreement and any amendments (if written).

• A copy of all documents filed with the DOC, including:

• the LLC’s articles of organization and any amendments;

• articles evidencing any transaction or change in structure; and

• executed copies of any powers of attorney under which those documents were executed.

• Copies of the LLC’s federal, state, and local income tax returns and reports for the last three years.

• Copies of the LLC’s financial statements (if any) for the last three years.

• Unless contained in a written operating agreement, a record stating the amount of cash and a description and statement
of the agreed value of any property or other benefits contributed to the LLC by each member, including any future
triggering events for additional contributions.

(§ 605.0410(1), Fla. Stat.)

Copies of all formation documents, member agreements, resolutions, and other organizational documents are normally kept in
the minute book.

The LLC may maintain its records on a tangible medium or in an electronic or other medium that is retrievable in p erceivable
form (§ 605.0102(59), Fla. Stat.). As an alternative to or in conjunction with storing paper versions in an official minute book,
the LLC may consider scanning or creating electronic copies of its records and maintaining them in a secure, searchable
database.

Apply for a Taxpayer Identification Number

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To register for and pay taxes, an LLC must obtain a taxpayer identification number (TIN) from the Internal Revenue Service
(IRS), which is typically required before an LLC can transact business such as opening a bank account (see IRS: Taxpayer
Identification Numbers (TIN)).

A TIN may be the owner’s social security number (SSN) for a single-member LLC when its tax status is a disregarded entity, it
will not have any employees, and it meets all other IRS requirements. For more information on whether an LLC is eligible to
use a single owner’s SSN, see IRS: Do You Need an EIN? and IRS: Do You Need a New EIN?. If the LLC plans to eventually
admit additional members, best practice is to apply for a TIN when the LLC begins. This prevents the LLC from having to
change its TIN in the future after those additional members are admitted.

An LLC with multiple members or any other tax status typically must obtain a TIN by signing up for an employer identification
number (EIN). Counsel or the client should consult with a tax specialist familiar with these matters before the LLC obtains an

EIN.

An EIN may be obtained:

• Online at IRS: Apply for an Employer Identified Number (EIN) Online.

• By mailing a completed IRS Form SS-4 to: Internal Revenue Service, Attn: EIN Operation, Cincinnati, OH 45999.

• By faxing IRS Form SS-4 to 1-855-641-6935 (see IRS Form SS-4 and IRS: Instructions for Form SS-4, Where to File or
Fax).

If counsel registers an LLC for an EIN (or any other TIN) online or otherwise as a third-party designee, counsel must obtain a
signed paper copy of IRS Form SS-4 from the organizers, members, or principal officers as evidence of counsel’s authority to
register the LLC.

Obtain Licenses and Permits
Some business activities require licenses or permits from state or local governments. For assistance in determining whether
the LLC requires licenses or permits for certain business activities, see the Florida Department of Business and Professional
Regulation.

Before applying for a license or permit, parties should consult with a specialist that is knowledgeable in the specific type of
license or permit sought. Parties can also contact the county clerk and the clerk of the city, town, or municipality in which the
LLC intends to operate with questions regarding local licenses or permits.

If the LLC is going to conduct business in other states, it must be properly qualified. Counsel should verify the specific
requirements of each state in which the LLC will do business. This typically involves:

• Checking the name availability of the LLC in that foreign state.

• Preparing and filing any necessary documents, often called a certificate of authority. These documents often contain
similar information to the articles of organization and include submission of process in the jurisdiction.

• Paying fees.

Tax Considerations

Even though an LLC is a recognized type of business entity under Florida law, LLCs do not have their own US federal income
tax regime. For federal income tax purposes, an LLC is typically treated as a pass-through entity. This means that for federal
income tax purposes the entity is not directly subject to income tax, but rather the income passes through to the
owner-members as follows:

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• A single-member LLC is a disregarded entity and treated as a sole proprietorship.

• A multi-member LLC is treated as a partnership.

(Treas. Reg. § 301.7701-2(a).)

However, an LLC may elect classification as a C-corporation or S-corporation for federal tax purposes. For more information
on tax considerations under federal law, see Practice Note, Choice of Entity: Tax Issues and IRS: LLC Filing as a Corporation
or Partnership.

The IRS may be able to answer questions about paying or withholding federal income tax, Social Security taxes, and other
federal taxes. However, an LLC’s organizers and members should consult an accountant or other tax advisor to determine the
required tax filings and to discuss any other tax considerations involved in organizing and operating the LLC.

An LLC’s tax classification under state law is not always the same as its tax classification under federal law. However, Florida
treats an LLC the same as its federal tax classification whether it is a disregarded entity, partnership, corporation, or
S-corporation. For more information on an LLC’s tax status under Florida law, see Department of Revenue: Florida Corporate
Income Tax.

Florida offers a wide range of tax incentives that may help an LLC minimize state taxes (see Department of Revenue: Florida
Tax Incentives for Business).

Counsel or the client should consult with a tax specialist familiar with both state and federal taxation issues before formin g an
entity.

Employee Incentive Considerations

Profits interests or non-qualified options to acquire a membership interest can be granted to employees. Incentive stock
options are unavailable. Profits interests provide favorable tax treatment to employees and are more common than options.

Both profits interests and options to acquire a membership interest are less familiar than traditional stock options and may
result in an employee being treated as a partner for tax and employee benefit purposes.

Other equity compensation arrangements (such as restricted stock units) can be replicated in the partnership context but are

uncommon. For more information regarding LLCs, see Choosing an Entity Comparison Chart (FL).

For an overview of employment laws and human resources issues that may impact new and expanding companies, see
Employment Law Issues for Start-ups, Entrepreneurs, and Growing Businesses: Overview.

For an overview of the types of equity compensation commonly used by new companies for employees, see Practice Note,
Choosing the Right Type of Equity Compensation for Start-up Company Employees.

Capital Raising Considerations

LLCs raise capital by issuing equity (membership interests) and incurring debt. Membership interests are typically issued in
private placements. An LLC can create membership interests that mirror the properties of different types of stock. LLCs are not
limited by a preset number of authorized interests, but may be restricted from diluting their current members’ interest by
provisions in the operating agreement.

Further Assistance

An LLC can seek advice or assistance from several local, state, or federal programs to facilitate the business of the LLC,

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including:

• The US Small Business Administration (see US Small Business Administration: Region IV).

• SCORE, a non-profit association for the benefit of entrepreneurs and small businesses (SCORE).

• Local, state, or national Chambers of Commerce.

• The Minority Business Development Agency (MBDA), a part of the US Department of Commerce.

• Enterprise Florida, Inc., the state’s official economic development organization, which assists companies in locating to,
expanding within, finding available properties in, and exporting from, Florida (see Enterprise Florida).

• The Florida Department of Economic Opportunity, which provides information about workforce programs, community
development opportunities, and economic development initiatives and programs in Florida (see Florida Department of
Economic Opportunity: Business Growth and Partnerships).

• The Florida State Workers’ Compensation System (see Division of Workers’ Compensation).

• The Florida Research and Economic Information Database Application (FREIDA), which allows users to access Florida
employment and occupational data searches and labor or market analyses.

• The Florida Department of Management Services (DMS), which allows users to search for vendors that do business in
Florida.

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Forming and Organizing a Corporation (CA)

by Practical Law Corporate & Securities

Maintained • California

This Practice Note explains the process, steps, and documents required to form a for-profit corporation in California. It
discusses initial considerations, pre-incorporation logistics, drafting and filing formation documents, post-incorporation
logistics, and other important considerations.

Contents

Pre-Incorporation Planning: Initial Considerations

State of Incorporation

Special Types of California Business Corporations

Statutory Close Corporation

Professional Corporation

Social Purpose Corporation

Benefit Corporation

C- or S-Corporation

Name of Corporation

Requirements and Restrictions

Name Availability

Name Reservation

Fictitious Business Names

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Pre-Incorporation Logistics

Ordering a Minute Book

Determining Whether to Use a Service Company to File the Articles of Incorporation

Determining Whether the Filing Needs to be Precleared or Expedited

Choosing the Initial Agent for Service of Process

Choosing the Incorporators

Choosing the Initial Directors

Choosing the Initial Officers

Confirming the Availability of Signatories

Draft Formation and Organizational Documents

Articles of Incorporation

Required Provisions

Optional Provisions

Filing the Articles of Incorporation

Statement of Information

Bylaws

Organizational Action

Issuance of Shares

Shareholder Agreements

Close Corporations

Obtaining Signatures and Delivering Documents

Post-Incorporation Logistics

Tax Credits and Incentives

Further Assistance

Pre-Incorporation Planning: Initial Considerations

When forming a business in California, the first step is deciding what type of entity is best (for example, a corporation,
partnership, or limited liability company). The best entity form depends on structure, liability, tax, and management

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considerations (see Choosing an Entity Comparison Chart (CA), and Practice Note, Choice of Entity: Tax Issues).

Corporations are a common form for entities that:

• Have a formal management structure.

• Are currently or may become a public company.

• Have owners (shareholders) or management (directors and officers) that desire:

• predictable and recognized legal structure;

• limited liability; and

• relative flexibility in transferring ownership interests; and

• perpetual existence.

When deciding to incorporate, there are several threshold issues to consider. The following is a list of key questions to ans wer
and decisions to make before forming a California corporation.

State of Incorporation

Before forming a corporation, it is necessary to determine the preferred state of incorporation. Corporations are generally
governed by the laws of the state of incorporation. The California Corporations Code (Code) (Cal. Corp. Code §§ 1 et seq.)
governs the organization of, and procedural rules for transactions involving, a California corporation and includes provisions
concerning:

• Filing requirements.

• The f of the corporation’s directors and officers.

• The corporation’s shares and shareholder rights.

• Mergers, conversions, reorganizations, and asset sales.

Many corporations based in California chose California as the state of incorporation. Delaware is also a common state for
incorporation for corporations based in California for a variety of reasons:

• Low franchise taxes.

• Ease of filing and online services.

• Well-developed body of corporate law.

• Respected judicial bench in corporate law.

• Business-friendly statutes and decisions.

A corporation based in California but formed in another state (such as Delaware) must pay additional fees to register as a
foreign entity if it is doing business in California. For more information on qualifying a foreign entity to do business in

California, see Qualifying a Foreign Entity to do Business in California Checklist.

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The shareholders should consider where the corporation will primarily transact its business and if there are any business, tax,
social, or policy reasons for choosing a particular state. If the corporation is going to conduct a regulated business in a state
other than California, it may be easier to obtain the necessary state licenses if it is a domestic corporation within the state. For
example, if someone living in California was considering forming a corporation that would primarily do business across the
border in Nevada, then Nevada law may be more appropriate.

For more information about choosing California or Delaware as a jurisdiction of incorporation, see Choosing a Jurisdiction
Comparison Chart: C-Corporations (DE and CA) and Choosing a Jurisdiction Comparison Chart: S-Corporations (DE and CA).

Special Types of California Business Corporations

A California corporation may choose to be classified as one or more of the special types of corporation listed below (for
example, a close corporation may also be a social purpose corporation) provided its articles of incorporation satisfy the
statutory requirements for that classification:

• Statutory close corporation.

• Professional corporation.

• Social purpose corporation.

• Benefit corporation.

Statutory Close Corporation
A close corporation is a corporation that conforms to certain statutory requirements (including a required statement in the
articles of incorporation) and does not have:

• More than 35 shareholders of record.

• Publicly traded shares.

(Cal. Corp. Code §§ 158(a), 418(c), and 421.)

A close corporation can be a practical alternative to a partnership by allowing a limited number of individuals that actively
participate in the corporation’s operations to take advantage of the corporate form, which includes the limitation of personal
liability for the acts of the corporation. For further discussion of the potential advantages and disadvantages of close
corporations, see Cal. Prac. Guide Corps. Ch. 3-D §§ 3:245 et seq. and Cal. Prac. Guide Corps. Ch. 3-D §§ 3:269 et seq.

Professional Corporation
The Moscone-Knox Professional Corporation Act (Cal. Corp. Code §§ 13400 et seq.) allows the formation of a corporation to
render certain licensed professional services, but only through licensed individuals (Cal. Corp. Code § 13405(a)). In addition to
being subject to general corporation law, a professional corporation must also comply with the regulations of the state agency
that licenses the professional activity (Cal. Corp. Code §13410(a) and Cal. Prac. Guide Corps. Ch. 2-E § 2:245).

A professional corporation can provide an advantage over other entity forms, such as a partnership, for individuals engaged in
licensed activities subject to malpractice claims. While an individual cannot be absolved of personal liability for their own
malpractice, the professional corporation does limit that individual’s vicarious liability for the malpractice of other practicing
professionals in the corporation (T & R Foods, Inc. v. Rose (1996) 47 Cal. App.4th Supp. 1, 8-10). For further discussion of
considerations unique to professional corporations, see Cal. Prac. Guide Corps. Ch. 2-E § 2:272.

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Social Purpose Corporation
A social purpose corporation (SPC) is a for-profit corporation that, under the Social Purpose Corporations Act (Cal. Corp.
Code §§ 2500 et seq.) may also pursue environmental or other public purpose objectives (Cal. Corp. Code § 2602(b)(2)). This
additional purpose may be appealing to consumers or investors, depending on the corporation’s market and sources of capital.
The SPC’s annual report must include a management discussion and analysis addressing the SPC’s public purpose (Cal.
Corp. Code § 3500(b)). For further discussion of SPCs, see Cal. Prac. Guide Corps. Ch. 9-A §§ 9:1 et seq.

Benefit Corporation
A benefit corporation is a for-profit corporation that has the purpose of creating general public benefit (Cal. Corp. Code §
14610(a)). Unlike directors of other types of corporations, a benefit corporation’s directors are not required to perform their
duties in the best interests of shareholders (although they must perform their duties in the best interests of the corporation, and
consider the impact of any action or proposed action on shareholders) (Cal. Corp. Code § 14620(a), (b)(1)). This allows the
benefit corporation to address and promote socially desirable goals while balancing the economic benefits of the shareholders.
The benefit corporation’s annual report to shareholders must assess the corporation’s social and environmental performance,
using a third-party standard consistently applied (Cal. Corp. Code § 14630(a)(2)). For further discussion of benefit
corporations, see Cal. Prac. Guide Corps. Ch. 9(II)-A §§ 9:500 et seq.

C- or S-Corporation

The most common corporate form is the C-corporation. References to corporations are usually to C-corporations.

C-corporation income is generally subject to two levels of US federal income tax:

• At the corporate level when earned.

• At the shareholder level when profits are distributed as dividends or other distributions.

Corporations can avoid this double taxation by electing to be treated as an S-corporation, which is a pass-through entity for

US federal income tax purposes. An S-corporation does not pay an entity level tax. Profits and losses instead pass through to
its shareholders that report and are taxed on their respective share of those items on their own US federal income tax returns,
whether or not distributed (see Practice Note, Choice of Entity: Tax Issues). However, this form of corporation may not always
be available because there are limitations on the availability of this election, such as restrictions on the number, type, and
residency of shareholders.

While California recognizes, for state purposes, the S-corporation election for federal purposes, it still imposes a 1.5%
franchise tax on the corporation’s net income (Cal. Rev. & Tax. Code § 23802(b)(1) and Cal. Prac. Guide Corps. Ch. 2-C §
2:120).

For more information on S-corporation US federal taxation matters, see Practice Note, Taxation of S-Corporations. Basic
California state tax information is available on the California Franchise Tax Board’s website (see California Franchise Tax
Board). Parties should consult with a tax attorney or certified public accountant familiar with both state and federal taxation
issues before forming an entity.

Name of Corporation

Before drafting formation documents or making any filings, determine the name of the corporation.

Requirements and Restrictions
The name of a California corporation must not:

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• Contain the words “bank”, “trust”, “trustee”, or related words unless approved by the Commissioner of Business
Oversight.

• Be likely to mislead the public, as determined by the California Secretary of State (SOS).

• Be the same or deceptively resemble a corporate name already on record, unless the holder of the original name
consents to its use and the SOS finds that the public is not likely to be misled.

(Cal. Corp. Code §§ 201(a), (b).)

For a discussion of name restrictions and guidelines generally, including name restrictions of other forms of corporations, s uch
as close corporations and social purpose corporations, see Cal. Prac. Guide Corps. Ch. 3-H §§ 3:402 et seq.

Name Availability
To avoid possible delays in filing the articles of organization, parties can informally check the availability of a business name
by performing a search on the SOS website (see Secretary of State: Business Search). Parties can formally check the
availability of a business name by:

• Mailing a Secretary of State: Name Availability Inquiry Letter to the SOS.

• For parties that regularly check name availability, setting up a prepay account with the SOS for Priority Telephone
Service, by email to Secretary of State: Email Prepaid Accounts or telephone at (916) 653–1233.

Parties should have backup name choices in case a name is already taken or rejected. If an attorney is handling the name
availability search or a name reservation filing, the attorney should have the alternate names to save time and avoid having to
contact the client each time a name is rejected.

Checking the name does not reserve or confer any rights to the name. The fact that a name is available does not mean that it
satisfies the statutory requirements set out in the Code or that the SOS will approve it. Parties should not take any action in
reliance on the availability of a name.

If the corporation intends to use its name as a trademark, service mark, domain name, or trade name, consider running a
trademark and copyright search to see if another business has registered the name. These searches can be conducted for

free online at the United States Patent and Trademark Office.

Name Reservation
Parties can reserve a business name in advance for a period of up to 60 days (Cal. Corp. Code § 201(d) and see Secretary of
State: Name Reservation Request).

The Code does not permit the same or a deceptively similar name to be reserved for the same party for consecutive 60 day
periods (Cal. Corp. Code § 201(d)). To renew a previously reserved name, a party must wait at least one business day before
submitting a new name reservation request (if the name has not been reserved by another party in the interval).

For more information on filing a name reservation request, including filing and payment methods, filing and additional fees,
expedited filing, and required supporting documents, see Practice Note, Filing Documents with the Secretary of State (CA).

The SOS reviews names for compliance when the articles of incorporation are filed. Parties should not rely on a reserved
business name, as reserving the name does not guarantee the SOS will approve it.

Fictitious Business Names

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A corporation doing business in California under a name other than its legal name must file a fictitious business name (FBN)
statement with the office of the county clerk (and not the SOS) of either:

• The county where the corporation’s principal place of business in California is located.

• Sacramento County, if the corporation does not have a place of business in California.

(Cal. Bus. & Prof. Code § 17915.)

Parties should confirm the procedures and fees for filing and registering the corporation’s FBN statement with each county in
which the corporation must file the statement.

After filing the FBN statement, the corporation must:

• Within 30 days of filing, publish the FBN statement in a newspaper of general circulation in:

• the county where the FBN statement was filed;

• an adjoining county (if the county of filing has no newspaper of general circulation); or

• Sacramento County, if the LLC has no place of business in California.

• Within 30 days after completion of publication, file an affidavit of publication with the office of the county clerk in the
county where the statement was filed.

(Cal. Bus. & Prof. Code § 17917(a), (d).)

An LLC may file an FBN statement in other counties (Cal. Bus & Prof Code § 17915). For more information on FBNs, see
Fictitious Business Names in California Checklist.

Pre-Incorporation Logistics

After determining the state of incorporation, the type of corporation, whether the corporation will be a C- or S-corporation, and
the name of the corporation, the next steps to take include:

Ordering a Minute Book
A minute book (sometimes referred to as a corporation kit) is a loose ring binder that acts as a place to store minutes of the
board of directors and shareholder meetings, the articles of incorporation, bylaws, share register, and share certificates. The
minute book usually comes with a form of articles of incorporation, bylaws, corporate seal, specimen share certificate, and
share register. The corporation can replace any of the included forms with its own, however counsel should confirm that any
self-drafted forms (as well as any included forms the corporation doesn’t replace) conform to current law.

A corporation must keep the following records:

• Bylaws and any amendments.

• Accounting and tax books and records.

• Minutes of all proceedings of shareholders, board of directors, and any board committees.

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• A record of shareholders, including each shareholder’s name, address, and number and class of shares held.

(Cal. Corp. Code §§ 213 and 1500 and see Cal. Prac. Guide Corps. Ch. 6-F §§ 6:495 et seq.)

The corporation can maintain its records in electronic or other form if they can be converted into clearly legible tangible f orm
(Cal. Corp. Code § 1500). As an alternative to or in conjunction with storing paper versions in an official minute book, the
corporation should consider scanning or creating electronic copies of its records and maintaining them in a secure, searchabl e
database.

Determining Whether to Use a Service Company to File the Articles of
Incorporation
For a fee, a service company can help file any document with the SOS on behalf of the corporation. Using a service company
can provide quicker turn-around times, advancing of filing fees, experience with filing requirements and procedures, and
convenience.

While it is not a requirement, many firms and corporations use service companies. These corporations and law firms typically
have a relationship or account with a particular service company. If using a service company, call the service company’s
representative before filing to determine their fees for handling the filing.

Determining Whether the Filing Needs to be Precleared or Expedited
The SOS offers preclearance and expedited filing services for a fee (see Practice Note, Filing Documents with the Secretary of
State (CA) and Secretary of State: Preclearance and Expedited Filing Services). For information on current processing times,
go to Secretary of State: Current Processing Times.

Confirm that the client has authorized any preclearance or expedite charges before ordering. Although there is an extra
charge, preclearance and expedited processing may be necessary if the corporation is being formed in connection with a
time-sensitive transaction.

Choosing the Initial Agent for Service of Process
A California corporation must designate and maintain an agent for service of process in California, which may be either:

• A natural person who resides in California.

• A domestic or foreign corporation that has filed the required certificate with the SOS and otherwise complied with
Section 1505 of the California Corporations Code, including being authorized to do business and being in good standing
in California (Cal. Corp Code § 1505).

(Cal. Corp Code § 1502(b).)

Choosing the Incorporators
If the articles of incorporation do not name the initial directors, the articles of incorporation must be signed by one or more
incorporators. An incorporator may be a natural person, partnership, association, or corporation. (Cal. Corp. Code § 200(a),
(b).) An attorney often acts as the incorporator, but this is not required, and may not be advisable in some instances, since th e
incorporator has responsibility for the corporation until the board of directors has been elected. For further discussion of the
role of incorporators, see Standard Document, Organizational Action by Sole Incorporator of a Corporation (CA) and Cal. Prac.
Guide Corps. Ch. 3-H §§ 3:418 et seq.

Choosing the Initial Directors

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If the articles of incorporation do not name the initial directors, the incorporators have the initial authority to complete the
corporation’s organization, including adopting bylaws and electing directors and officers (Cal. Corp. Code §210). There may be
advantages in naming the directors in the articles of incorporation, including avoiding potential delays in the corporation’s
business activities or deficiencies in the organizational process. If the directors are not named in the articles of incorporation,
the incorporators must elect them before the organizational meeting (see Cal. Prac. Guide Corps. Ch. 4-E § 4:399). For more
information on directors, see Standard Document, Bylaws (CA): Drafting Note: Powers; Qualifications.

Choosing the Initial Officers
A corporation must have:

• A chairperson of the board or a president or both.

• A secretary.

• A chief financial officer.

(Cal. Corp. Code § 312(a)).

A corporation may have other officers as set out in the bylaws or determined by the board of directors. The same person may
hold two or more offices unless otherwise provided by the articles of incorporation or bylaws. (Cal. Corp. Code § 312(a).) For
example, a corporation may have a treasurer and one or more vice-presidents (see Cal. Prac. Guide Corps. Ch. 4-F §§ 4:429
and 4:430).

The directors typically elect officers as one of their first organizational actions at their initial meeting (or written acti on in lieu of
a formal meeting). If the articles of incorporation do not name the initial directors, the incorporators have the authority t o elect
officers (Cal. Corp. Code § 210).

Confirming the Availability of Signatories
Parties should confirm the availability of signatories before appointing them, especially if the corporation is being formed for a
specific and imminent purpose. For example, if a corporation is formed to make an acquisition:

• The directors must be available to sign resolutions authorizing the acquisition documents.

• At least one of the officers must be available to sign the acquisition agreement.

Draft Formation and Organizational Documents

In addition to the articles of incorporation, which is the only document that must be filed with the SOS, several other
documents are needed to properly form and organize a California corporation. Before drafting these documents, obtain the
necessary information, such as the identity of the directors and the agent for service of process in California.

Articles of Incorporation
In California, a corporation may file articles of incorporation by using one of the following:

• Form ARTS-GS, Articles of Incorporation of a General Stock Corporation, a fillable form for the formation of a general
stock corporation provided by the SOS.

• Form ARTS-CL, Articles of Incorporation of a Close Corporation, a fillable form for the formation of a close corporation
provided by the SOS.

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• Form ARTS-PC, Articles of Incorporation of a Professional Corporation, a fillable form for the formation of a professional
corporation provided by the SOS.

• A self-drafted form of any of the above that conforms to the Code’s requirements (Cal. Corp. Code § 202).

For self-drafted forms of articles of incorporation, including discussion of drafting considerations, specific requirements (based
on the type of corporation) and filing advice, see Standard Documents:

• Articles of Incorporation: General Stock Corporations (CA).

• Articles of Incorporation: Close Corporations (CA).

• Articles of Incorporation: Professional Corporations (CA).

• Articles of Incorporation: Benefit Corporations (CA).

• Articles of Incorporation: Social Purpose Corporations (CA).

The Code specifies both required and optional provisions for the corporation’s articles of incorporation (Cal. Corp. Code §§
202 and 204).

For more information on preparing California articles of incorporation generally, see Cal. Prac. Guide Corps. Ch. 4-A.

Required Provisions
The articles of incorporation must include all of the following:

• The name of the corporation (see Name of Corporation).

• The purpose of the corporation, set forth in specific statutory language.

• The name and street address of the corporation’s initial agent for service of process.

• The corporation’s street address and mailing address (if different from the street address).

• The authorized share structure of the corporation (see Cal. Prac. Guide Corps. Ch. 4-A §§ 4:35 et seq.).

(Cal. Corp. Code § 202.)

Optional Provisions
The articles of incorporation may contain other provisions not inconsistent with law relating to the management of the business
and the conduct of the affairs of the corporation (Cal. Corp. Code § 204(d)). Parties should be cautious on how and to what
extent additional terms are included in the articles because they are publicly filed. For a private corporation, the articles
typically contain only the required and other basic information while all other provisions are included in the bylaws (see
Bylaws).

Certain optional provisions, however, are effective only if included in the articles of incorporation. When drafting articles,
parties may want to consider adding one or more of these provisions to modify the Code’s statutory defaults:

• The right to levy assessments on the shares or any class of shares.

• Preemptive rights granted to shareholders to subscribe to any or all issues of shares or securities.

• Special qualifications of prospective shareholders.

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• Limiting the corporation’s duration to a specified date.

• Requiring a supermajority vote or quorum for any or all corporate actions (supermajority requirements may be

imposed by statute for certain actions even if not included in the articles of incorporation).

• Limiting or restricting the corporation’s powers or business.

• Granting voting rights to holders of any evidences of indebtedness, issued or to be issued by the corporation.

• Shareholders’ right to determine the consideration for issued shares.

• Requiring shareholder approval or the approval of outstanding shares for any corporate action, when this approval is not
otherwise required by the Code.

• Eliminating or limiting director liability for breach of fiduciary duty within certain limits.

• Indemnifying the corporation’s agents (for example, a director).

(Cal. Corp. Code § 204(a).)

For a discussion on including optional provisions in the articles of incorporation, see Cal. Prac. Guide Corps. Ch. 4-A §§ 4:50
et seq.

Filing the Articles of Incorporation
After the articles of incorporation have been prepared, executed, and acknowledged (acknowledgment is needed for each
signature of a director only if directors are named), the original articles of incorporation must be filed with the SOS,
accompanied by payment of the applicable fees (Cal. Corp. Code § 200(a)). If a name has been reserved (see Name
Reservation), a copy of the name reservation certificate should be included to avoid rejection for an unavailable name.

The fee to file the articles of incorporation by mail is $100 (Cal. Gov’t Code § 12186(c)). If filing in person, an additional $15
non-refundable special handling fee is required which must be paid by separate check. Checks or money orders must be
made payable to “Secretary of State”. If submitting articles in person in the Sacramento office, fees may also be paid by credit
card (Visa or MasterCard). Confirm current fees on the SOS website (see Secretary of State: Business Entities Fee Schedule).

For more information on filing the articles of incorporation, including filing and payment methods, filing and additional fee s,
expedited filing, and required supporting documents, see Practice Note, Filing Documents with the Secretary of State (CA) and
Secretary of State: Corporate Filing Tips.

Statement of Information
A new corporation must file a Form SI-550 Statement of Information with the SOS within 90 days after filing its original articles
of incorporation and annually thereafter (Cal. Corp. Code §§ 1502(a), (b) and see Secretary of State: Form SI-550). If there
has been no change in any of the information contained in the previous complete statement of information, a corporation may
instead file a Form SI-550 NC Statement of No Change (Cal. Corp. Code § 1502(c) and see Secretary of State: Form SI-550
NC).

The fee to file the initial or an annual statement of information or an annual statement of no change by mail is $25 (which
includes a $5 disclosure fee). There is no fee to file (by mail) a statement of information submitted between filing periods to
report a change of information. (Cal. Corp. Code § 1502(d) and Cal. Gov’t Code §§ 12186(g), (i) and see Secretary of State:
Form SI-550.) If filing in person, an additional $15 non-refundable special handling fee is required which must be paid by
separate check. Confirm current fees on the SOS website (see Secretary of State: Business Entities Fee Schedule).

Bylaws
Bylaws are the internal governance rules of a corporation. The bylaws may contain any provision, consistent with law and the

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articles of incorporation, for the management of the business and the conduct of the affairs of the corporation (Cal. Corp. Code
§ 212(b)).

Although the Code does not explicitly require a corporation to adopt bylaws, nearly all corporations do, and a corporation mu st
keep an original or copy of its bylaws at its principal executive office or principal business office in California (Cal. Corp. Code
§ 213).

A corporation must adopt bylaws if its articles of incorporation do not state the number (or maximum and minimum number) of
directors. In this case, the incorporators must adopt bylaws specifying the number (or maximum and minimum number) of
directors before the first board meeting. (Cal. Corp. Code § 212(a) and see Cal. Prac. Guide Corps. Ch. 4-D § 4:172.)

Bylaws function as regulations among the shareholders, directors, and officers of the corporation. Typical areas covered in t he
bylaws include:

• Procedures for meetings of shareholders and directors (including record date, notice, and voting).

• Procedures for the election, removal, and compensation of directors and officers.

• Issuance and transfer of shares of the corporation.

• Granting officers authority to execute agreements on behalf of the corporation.

• Defining the scope of indemnification of directors, officers, employees, and agents (Cal. Corp. Code § 317).

Bylaws may be adopted, amended, or repealed by either:

• The incorporators prior to the election of directors.

• The outstanding shares of the corporation (Cal. Corp. Code § 152).

• The directors, unless restricted by the bylaws or articles and subject to certain statutory exceptions.

(Cal. Corp. Code §§ 210 and 211.)

For more information on drafting the bylaws, see Standard Documents, Bylaws (CA) and Cal. Prac. Guide Corps. Ch. 4-D.

Organizational Action

If the articles of incorporation do not name the initial directors, the incorporators may, until the directors are elected, take any
action necessary and proper to complete the organization of the corporation, including:

• Adopting bylaws.

• Electing directors and officers.

(Cal. Corp. Code § 210.)

The incorporators typically only elect the initial directors and, if necessary, a bylaw establishing the number or minimum and
maximum number of authorized directors (if not set forth in the articles). The directors then complete the organization of th e
corporation.

Actions typically taken by the directors as part of the organizational action include, but are not limited to:

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• Adopting bylaws.

• Electing officers.

• Approving the form of certificate for the corporation’s shares (unless uncertificated).

• Accepting subscriptions for, and issuing shares to, the shareholders.

• Determining the corporation’s fiscal year.

• Authorizing the opening of bank accounts.

• Establishing borrowing authority.

• Establishing officers’ salaries if the directors have elected officers.

• Approving contracts.

• Ratifying an S-corporation election for tax purposes, if applicable (see C- or S-Corporation).

For further discussion of organizational action by directors, see Cal. Prac. Guide Corps. Ch. 4-F.

For examples of organizational action taken by written consent, see Standard Documents, Unanimous Written Consent of the
Board in Lieu of Organization Meeting (CA) and Organizational Action by Sole Incorporator of a Corporation (CA).

Issuance of Shares

A corporation raises capital by selling and issuing shares. The articles of incorporation set the number, classes, and series of
shares and their rights, preferences, privileges, and restrictions or, in certain circumstances, such as the determination of the
rights, preferences, privileges, and restrictions of an unissued class of shares, may authorize the board of directors to make
the determination (Cal. Corp. Code §§ 202(f), (g)). Consideration for shares can include:

• Money paid.

• Labor performed.

• Property (tangible or intangible) actually received.

• Services actually rendered (but not future services) to or for the benefit of the corporation or in its formation.

• Cancellation of debt or securities.

(Cal. Corp. Code § 409(a)(1).)

Each shareholder is entitled to a physical share certificate unless the corporation has adopted an electronic system
permissible under the Code (along with the required notice). Each physical share certificate must certify the number of shares
and the class or series of shares owned by each shareholder and be signed by both:

• The chairperson or vice-chairperson of the board, the president, or a vice-president.

• The chief financial officer, an assistant treasurer, the secretary, or an assistant secretary.

(Cal. Corp. Code § 416.)

For a discussion on the contents of certificates, see Cal. Prac. Guide Corps. Ch. 5-D §§ 5:447 et seq.

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As an alternative to share certificates, a corporation may adopt a system of share issuance, registration and transfer by
electronic or other means not involving the physical issuance of share certificates (Cal. Corp. Code § 416(b)). The system
must be approved by the Securities and Exchange Commission (SEC) or otherwise be authorized by any statute or in

accordance with Division 8 of the California Commercial Code (Cal. Com. Code §§ 8101 et seq.). The system must also
comply with any rules adopted by the Corporations Commissioner (Cal. Corp. Code § 416(b)).

The corporation must keep a record of shareholders’ names, addresses, and number and class of shares held (Cal. Corp.
Code § 1600(a) and see Ordering a Minute Book).

Counsel should consider whether there are any registration or notification requirements under applicable federal and state
securities laws (for example, the Securities Act of 1933, as amended (15 U.S.C. §§ 77a et seq.) and the California

Corporate Securities Law of 1968 (Cal. Corp. Code §§ 25100 et seq.)). Unless there is preemption by federal law, a person
generally cannot legally offer or sell any security in California unless the transaction is qualified or exempt (Cal. Corp. Code §§
25102 and 25110). For a discussion of California securities laws requirements generally, see Cal. Prac. Guide Corps. Ch. 5-C.

Counsel should also review the securities statutes and regulations in any state besides California where the shares will be
offered or sold and comply with all applicable requirements.

Before authorizing another class of shares beyond common shares, the parties should confirm that the corporation will be
classified as a C-corporation for federal tax purposes. To qualify for S-corporation status, a corporation may not have more
than one class of shares except for classes distinguishable only by voting rights and not by rights to distributions or
allocations of profit and loss (IRC §§ 1361(b)(1)(D), (c)(4) and see C- or S-Corporation).

Shareholder Agreements

Although not required, shareholders sometimes enter into agreements with each other at the time of formation to anticipate
and provide for the resolution of matters that may be of later concern or disruption, including:

• Control and management of the corporation.

• Initial and future capital contributions.

• Ownership and voting rights or obligations.

• Supermajority voting requirements for specified corporate actions.

• Restrictions on the transfer of shares, such as pre-emptive rights or rights of first refusal.

• Resolution of disputes and deadlock.

• Preventing a shareholder from competing with the corporation, soliciting customers, or revealing trade secrets if the
shareholder sells its interest.

Two or more shareholders may effectively pool their votes by entering into a written agreement providing that their shares will
be voted on certain matters as provided in the agreement, as agreed by the parties, or as determined by an agreed-upon
procedure. The agreement may be enforced by specific performance. (Cal. Corp. Code § 706(a) and see Cal. Prac. Guide

Corps. Ch. 3-B § 3:159.3.)

For resources to assist in preparing and evaluating agreements among shareholders, see Stockholders (Shareholders)
Agreements Toolkit. For an example of a shareholder agreement in a closely held corporation that restricts the transfer of
shares to third parties, see Standard Document, Buy-Sell Agreement (General Form): Corporations.

Close Corporations
Shareholders in a statutory close corporation may enter into a shareholders’ agreement that sets out the matters on which the

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shareholders (and not the board of directors) will exercise management control (Cal. Corp. Code § 300(b) and see Cal. Prac.
Guide Corps. Ch. 3-D §§ 3:243 and 3:248 et seq.). Subject to certain statutory exceptions, a shareholders’ agreement may
govern any of a statutory close corporation’s affairs. Shareholders exercising management control under a shareholders’
agreement are subject to the liability that would otherwise be imposed on directors for performing (or failing to perform)
managerial acts. (Cal. Corp. Code § 300(b) to (d).)

Shareholders in a statutory close corporation sometimes enter into buy-sell or buy-out agreements, intended to preserve
ownership continuity, provide for orderly succession of ownership, and avoid disputes. These agreements may:

• Restrict a transfer of shares to unrelated third parties or establish procedures for a transfer (for example, giving other
shareholders the opportunity to buy the shares).

• Provide a manner for resolving major events, such as a shareholder’s death or divorce.

For a discussion of buy-out agreements generally, see Cal. Prac. Guide Corps. Ch. 3-C. For an example of an agreement that
restricts the transfer of shares to third parties, see Standard Document, Buy-Sell Agreement: Corporations (CA).

Obtaining Signatures and Delivering Documents

It is crucial to obtain all necessary signatures and date the documents so that they are legally binding. Copies of all documents
should be filed in the minute book of the corporation so that the corporation can prove that it observed all necessary formalities
(see Ordering a Minute Book). After the articles of incorporation are filed, counsel must:

• Verify that the organizational actions of the corporation have been taken by either the incorporators or the board of
directors by a unanimous written consent or at a formal meeting. Once these documents are complete, file them in the
corporation’s minute book.

• Arrange for the full execution of any subscription agreements and share certificates. Once these documents are
complete, deliver the originals to the shareholders and file a copy of each in the corporation’s minute book. All share
issuances should be recorded in the share ledger.

• Arrange for the full execution of any shareholder agreements. Once these documents are complete, deliver the originals
to the shareholders and file a copy of each in the corporation’s minute book.

Post-Incorporation Logistics

Once the corporation is formed and the directors and officers are elected and appointed, there are additional steps to complete
before the corporation can begin doing business:

• File for any necessary foreign qualifications. If the corporation will conduct business in other states, it must be properly
qualified. While specific requirements of each state vary, qualification typically involves:

• checking the name availability of the corporation in that state;

• preparing and filing any necessary document (often called a certificate of authority), which often contains similar
information to the articles of incorporation and includes a submission to service of process in that state; and

• paying fees.

• Apply for an Employer Identification Number (EIN) with the Internal Revenue Service (IRS). An EIN is necessary for

tax filing and reporting purposes and to identify the corporation. It is often required before a corporation can transact any

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business or even open a bank account. A corporation can apply for an EIN on the Internal Revenue Service’s website
(see IRS: Apply for an Employer Identification Number (EIN) Online). There is no application fee.

• File for any necessary intellectual property protection, including:

• a state trademark with the SOS (see Secretary of State: Trademarks and Service Marks);

• a federal patent or trademark with the US Patent and Trademark Office (see United States Patent and Trademark

Office); and

• a federal copyright with the US Copyright Office (see United States Copyright Office).

• Apply for any required licenses, permits, or certifications, including:

• federal or state business or occupational licenses and permits necessary for the operation of the business; and

• local permits needed for the operation of the business, such as building, health, food and beverage, and zoning.

For an overview of employment laws and human resources issues that may apply to new and expanding California
companies, see Practice Note, California Employment Law Issues for Startups, Entrepreneurs, and Growing Businesses:
Overview.

For an overview of the types of equity compensation commonly used by new companies for employees, see Practice Note,
Choosing the Right Type of Equity Compensation for Startup Company Employees.

Tax Credits and Incentives

Determine if the corporation is eligible for any beneficial tax credits or incentives, such as:

• California Competes Tax Credit.

• California Motion Picture and Television Production Credit.

• California Research Credit.

• Economic Development Area Credits.

• New Employment Credit.

Further Assistance

A corporation can seek advice or assistance from various local, state, or federal programs to help the corporation’s business,
including:

• US Small Business Administration (SBA). Programs and information that the SBA offers include the following:

• 8(a) Business Development Program, an SBA program designed to help small, disadvantaged businesses;

• Historically Underutilized Business Zone (HUBZone) Program, a program designed to help small businesses in urban
and rural communities gain access to federal procurement opportunities;

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• Women-Owned Small Businesses (WOSB) Federal Contract Program, a program designed to provide greater access
to federal contracting opportunities for WOSBs and economically-disadvantaged women-owned small businesses;

• Service-Disabled Veteran-Owned Small Business Concern (SDVOSBC) Procurement Program, a program designed
to provide SDVOSBCs with exclusive competition to federal procurement opportunities; and

• SBA California State Local Assistance Resources.

• SCORE, a non-profit association for the benefit of entrepreneurs and small businesses (SCORE).

• Minority Business Development Agency (MBDA). (MBDA is a part of the US Department of Commerce).

• California Governor’s Office of Business and Economic Development (GO-Biz). (Go-Biz is a point of contact for

economic development and job creation efforts offering a range of services to business owners).

• State of California Employment Development Department (EDD). (EDD provides employer assistance for workforce

recruitment and training.)

• Governor’s Office of Business and Economic Development provides information relating to California permits.

• California Division of Workers’ Compensation and the California Employment Development Department contain
information relating to being an employer in California.

• Employment Training Panel (ETP). (ETP funds the cost of vocational training.)

• Chambers of Commerce:

• national: US Chamber of Commerce;

• state: California Chamber of Commerce; and

• local.

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Forming a Corporation Checklist

by Practical Law Corporate & Securities

Maintained • USA (National/Federal)

A checklist of the key steps involved and questions to consider when forming a corporation.

Introduction

This Checklist summarizes the main steps to take and key issues to consider when forming a corporation. While it covers the
principal issues involved in forming a corporation, each state has its own statutory requirements that must be satisfied. for a
more detailed discussion on this topic, see Practice Note, Forming and Organizing a Corporation).

In addition, each corporation is formed for a different purpose and will have unique issues and circumstances (for example, the
type of business the corporation will conduct and whether it plans to go public) that must be reviewed before forming the
corporation.

Incorporation Matters

Select the Type of Entity

• Is the client aware of the different types of entities and their features?

• Is a corporation the best choice of entity based on commercial, legal, and tax perspectives? See Choosing an Entity
Comparison Chart and Practice Note, Choice of Entity: Tax Issues.

• Will the corporation be a C-corporation (the most common corporate form) or elect to be treated as an S-corporation

for US federal income tax purposes? See Practice Notes, Forming and Organizing a Corporation and Choice of Entity:
Tax Issues.

• After selecting the type of entity, who will prepare the necessary IRS forms?

Select the State of Incorporation

• Delaware is a common state of incorporation. Is there a reason to form the corporation elsewhere?

• Where will the principal place of business be located?

• Will the corporation need to qualify to do business in other states?

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• Are there special tax matters to consider?

• Are there plans for the company to go public?

See Practice Note, Forming and Organizing a Corporation: State of Incorporation.

Choose a Company Name

• Does the name satisfy statutory requirements in the state of incorporation?

• Is the name available in the state of incorporation and any other states in which the corporation may qualify to do
business?

• If not incorporating immediately, consider reserving the name so it is available when the entity is ready to be formed.

• Will the name serve as a domain name, trademark, or service mark? If so, consider running a separate search (such as
a trademark search) to look for similar names in the marketplace.

See Practice Note, Forming and Organizing a Corporation: Name of Corporation.

Draft the Certificate of Incorporation

• Does the certificate of incorporation satisfy statutory requirements in the state of incorporation?

• Who will be the incorporator?

• Consider the need to include optional provisions such as:

• creation of different classes of stock;

• staggered board of directors;

• supermajority voting provisions;

• pre-emptive rights; and

• limitation of director liability.

• Does the state of incorporation have any specific requirements regarding optional provisions? For example, some states
automatically grant stockholders pre-emptive rights unless the certificate of incorporation specifically provides otherwise.

• Will the corporation be public or remain private?

• Has a registered agent been selected? The service company engaged to file the certificate of incorporation often acts

as the registered agent for an additional fee.

• What is the corporation’s registered address?

File the Certificate of Incorporation

• Will the certificate of incorporation be filed directly with the secretary of state or will a service company be used?

• Is timing an issue? Counsel should be familiar with how long it takes to form a corporation in the target jurisdiction.

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• Does the state of incorporation accept copies of signatures or is an original document required? For instance, Delaware
and New York accept fax signatures.

• How will the filing and organizational fees be paid? Will the service company advance them (they typically do)?

See Practice Note, Forming and Organizing a Corporation: File Certificate of Incorporation.

Draft the By-Laws

• Will the corporation be public or remain private?

• Are the by-laws consistent with the provisions of the certificate of incorporation? For example, if the certificate of

incorporation requires a super-majority to pass certain actions the by-laws should reflect this requirement.

• Does the client have any concerns or objectives the by-laws should reflect?

Draft the Statement (or Action) of the Incorporator

• Did the incorporator adopt the by-laws?

• Did the client decide who the initial directors will be?

• Did the incorporator elect the initial board of directors?

• Are there any other matters on which the incorporator should act?

• Does counsel’s law firm have a policy for or against acting as the incorporator?

Prepare the Initial Acts of the Board of Directors

• Will there be a board meeting or will the board act by unanimous written consent?

• Did the client decide who the initial officers will be?

• Did the board authorize the typical organizational actions such as:

• electing initial officers;

• accepting subscriptions for and issuing stock;

• applying for foreign qualification in other states;

• approving the form of stock certificate (if applicable);

• adopting the corporate seal;

• adopting the fiscal year;

• authorizing a stockholder’s agreement (if applicable);

• opening bank accounts and authorizing signatories; and

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• ratifying the acts of the incorporator?

• Are there any other specific actions or documents the board should or needs to approve?

• Is the corporation being formed for a specific reason or as part of a transaction such as a merger? If so, there may be
deal-specific agreements and documents to approve.

Issue Stock

• Has a basic subscription agreement been prepared?

• Has the stock certificate been filled out in accordance with the applicable statutory requirements?

• Have all issuances been recorded in the stock ledger and are there copies of all stock certificates?

• Have appropriate restrictive legends been included on the back of the stock certificates?

Post-Incorporation Matters

Prepare the Minute Book

• Has counsel, the client, or the service agent ordered a minute book and corporate seal?

• Are copies of all corporate documents, resolutions, and stock certificates in the minute book?

• Will the law firm or the corporation hold the minute book?

Apply for an Employer Identification Number

• Has the client applied for an Employer Identification Number (EIN) for the corporation or will it request counsel to do

so?

Other Considerations

• Are any state filings required in the state of incorporation?

• Are any state or county business licenses required in connection with corporation’s business? For example, if the
corporation will operate a restaurant it may need several licenses.

• If the corporation will conduct business in other states, have all of the necessary foreign qualification forms been filed?

• Does the client need or want a stockholders’ agreement?

• If two or more parties are forming the corporation, have they been advised of their rights to seek separate counsel in
relation to their individual interests?

BUSINESS SELECTION WORKSHEET

The following worksheet will help you choose the business that’s right for you. It’s important that you take
the time to evaluate all aspects very deeply. To fill it out, follow these three steps:

1. First, list the business ideas you’re considering by order of interest. In the top left-hand blank space

put the idea you think you’re most interested in. Underneath it put the next idea and so forth.

2. Then, take each idea and rate it in each of the areas. Use the following rating system:

Rating 0 – none
1 – below average
2 – average
3 – above average

3. Finally, total up the numbers. Here are some tips for making sense of the numbers and for narrowing

your list of business possibilities:

 eliminate any of your ideas that scored less than a total of 10
 eliminate any idea that did not score at least a 2 in every category
 eliminate any idea that did not score at least a 3 in the uniqueness category

How many ideas are left? If the answer is “none,” then you need to use to identify where you need to
improve and you need to develop a strategy for raising the “1’s” to “2’s” or “3’s.” If the answer is “more
than one,” you have a pleasant dilemma. If the answer is “one,” you may have just found the business
that’s perfect for you.

YOUR KNOWLEDGE OF THE BUSINESS

How much do you know about the area? Will you have to spend extra time and money teaching yourself
the business? Will you have to take on a partner because you don’t know the business well enough?

Rating: 0 – No knowledge of the business

1 – Some indirect knowledge of the business
2 – Limited knowledge
3 – Working knowledge

YOUR EXPERIENCE IN THE FIELD

In some cases, you may have a lot of knowledge about the subject, but not much experience. Have you
ever worked in this type of business before? To what extent is experience crucial to the business?

Rating: 0 – No experience;

1 – Indirect experience;
2 – Limited experience;
3 – Familiar with the business.

YOUR SKILLS

Ignore, for now, those skills that might be common to each of your ideas, and try to concentrate on skills
that are unique to that specific idea. To what extent do you possess those skills? If you lack them, how
difficult will it be to acquire them?

Rating: 0 – None;

1 – Limited skills;
2 – Some skills;
3 – Extensive skills.

EASE OF ENTRY

Think both of the costs of entering the business and of the competitive barriers that might exist. For
example, a service business that you can run from your home might be relatively inexpensive to start, but
if several others are already providing that service, entry in the field may be difficult.

Rating: 0 – Crowded field, very difficult to enter;

1 – Limited entry available;
2 – Mix of large and small competitors;
3 – virtually unrestricted entry for any size business.

UNIQUENESS

Uniqueness does not necessarily mean that literally no one else is providing the same product or service;
it can mean that no one else is providing the product or service in the same way you intend to provide it,
or it can mean that no one else is providing that product or service in your area. You’re looking for some
way to distinguish your product or service from others who are already in business.

Rating: 0 – Your product or service widely available;

1 – A few to several others offering your product or service;
2 – Only one or two others;
3 – No others providing your product or service.

Business
idea

Your
knowledge

Your
experience

Your
skills

Ease of
entry

Uniqueness Total

Massie, Raymond 6/7/2019
For Educational Use Only

Choosing an Entity Comparison Chart, Practical Law Checklist 7-381-0701 (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 1

Choosing an Entity Comparison Chart

by Practical Law Corporate & Securities

Maintained • Delaware, USA (National/Federal)

A comparison chart that highlights the various structure, liability, tax and management differences among C-corporations,
S-corporations, limited liability companies, and partnerships.

This chart focuses on the laws of Delaware business entities. Because different states have different laws concerning
business entities, it is important to consult the appropriate state statutes before finalizing your choice of entity (see Corporation
Law: State Q&A Tool).

There are many different considerations when choosing the appropriate business entity. Which entity form you choose
depends on what the intended purpose is for the entity (for example, to make an acquisition). The following table provides a
comparison of the differences among the most common entities: C-corporations, S-corporations, limited liability companies,
and limited partnerships. Use this table as a resource when deciding which entity to form.

Since most LLCs are treated as partnerships or disregarded entities for tax purposes, this chart assumes that is the case.

Type of Entity

C-Corporation

S-Corporation

Limited Liability
Company (LLC)

Limited Partnership (LP)

Ownership
Requirements

One or more stockholders.

No restrictions on the
types of owners.

One to 100 stockholders.

With certain limited
exceptions, only US
individuals (citizens or
residents) can be
stockholders. Certain
trusts and exempt
organizations can also be
stockholders.

Only eligible US entities
can make an S-corporation
election (generally a US
C-corporation or other US
business entity eligible to
elect C-corporation tax
status).

An S-corporation

One or more
members. Two
or more members
required if LLC
wants to be taxed
as a partnership.

No restrictions on
the types of
owners.

Two or more partners.

No restrictions on the types
of owners.

Massie, Raymond 6/7/2019
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Choosing an Entity Comparison Chart, Practical Law Checklist 7-381-0701 (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 2

automatically converts to a
C-corporation if it does not
meet the requirements of
an S-corporation
(meaning, no more than
100 stockholders, only
specific types of
stockholders, and only one
class of stock).

Form of Equity
and Restrictions

Capital stock is held by
one or more stockholders.
There are two basic types
of capital stock: common
stock and preferred stock.

Permissible to have
multiple classes and series
of stock with different
rights and preferences.

Distributions must be
proportionate to stock
ownership within each
class of stock (preferential
distributions permitted for
one class over another).

Capital stock is held by
one or more stockholders.
Only one type of capital
stock: common stock.

Only one class of stock is
permitted, but there can be
differences in voting rights
among shares of common
stock. Certain debt
instruments as well as
certain options, warrants,
or similar instruments may
be treated as a second
class of stock under the
S-corporation rules.

Distributions must be
proportionate to stock
ownership.

Percentage of
membership
interests are held
by one or more
members.

Permissible to
classify
membership
interests into
different classes
(like common and
preferred stock)
with different
rights and
preferences.

Distributions do
not need to be
proportionate to
LLC ownership.

Distribution,
liquidation, and
voting
preferences can
be specified in the
limited liability
company
agreement.

Two classes of partners:

• A general partner
(generally responsible
for management).

• A limited partner
(typically a silent
investor).

• At least one general
partner (who may or
may not have made a
contribution) is
required to form an
LP.

• Distributions do not
need to be
proportionate to
partnership
ownership.

• The limited
partnership agreement
can specify
distribution
preferences.

Organizational
Documents

Formation document:
certificate of incorporation
filed with the secretary of
the state of incorporation.

Governing document:
by-laws (in addition to the
certificate of incorporation).
Stockholders may also
enter into a stockholders’
agreement.

Formation document:
certificate of incorporation
filed with the secretary of
the state of incorporation.

Governing document:
by-laws (in addition to the
certificate of incorporation).
Stockholders may also
enter into a stockholders’
agreement.

An eligible US entity
makes a timely
S-corporation election on
IRS Form 2553, no more

Formation
document:
certificate of
formation filed
with the secretary
of the state of
formation.

Governing
document: limited
liability company
agreement.

Formation document:
certificate of limited
partnership filed with the
secretary of the state of
formation.

Governing document: limited
partnership agreement.

Massie, Raymond 6/7/2019
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Choosing an Entity Comparison Chart, Practical Law Checklist 7-381-0701 (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 3

than two months and 15
days after the beginning of
the tax year the election is
to take effect.

Levels of Tax and
Other Tax
Considerations

At the corporate and
stockholder level.

Can participate in tax-free
reorganizations under IRC
Section 368.

At the stockholder level
only unless S- corporation
was formerly a
C-corporation. Some
states do not recognize
S-corporations for state tax
purposes and instead tax
them as C-corporations.

Can participate in tax-free
reorganizations under IRC
Section 368.

At the member
level only.

Cannot
participate in
tax-free
reorganizations
under IRC
Section 368.

At the partner level only.

Cannot participate in
tax-free reorganizations
under IRC Section 368.

Liability

Stockholder’s liability is
limited to amount of capital
contributed.

Stockholder’s liability is
limited to amount of capital
contributed.

Member’s liability
is limited to
amount of capital
contributed.

Limited partner’s liability is
limited to amount of capital
contributed.

General partner has
unlimited liability.

Management

A C-corporation is
governed by a board of
directors. The board of
directors must designate
officers to manage the
day-to-day operations.
Certain major decisions
need to be approved by
the stockholders.

The board of directors may
delegate certain decision
making to committees.

There is a well-developed
body of corporate case law
and statutes which
provides greater certainty,
but less flexibility than
other entity forms.

An S-corporation is
governed by a board of
directors. The board of
directors must designate
officers to manage the
day-to-day operations.
Certain major decisions
need to be approved by
the stockholders.

The board of directors may
delegate certain decision
making to committees.

There is a well-developed
body of corporate case law
and statutes which
provides greater certainty,
but less flexibility than
other entity forms.

Management is
initially vested in
the members.
Members can
delegate
management to a
managing
member,
non-member
manager, or
board of
managers. The
manager(s) can
(but do not need
to) designate
officers to
manage
day-to-day
operations.
Certain major
decisions typically
have to be
approved by the
members.

The management
structure is
flexible and is
primarily
determined by the

Management is initially
vested in the general
partner(s). The general
partner(s) may delegate
management and may (but
do not need to) designate
officers to manage
day-to-day operations.
Certain major decisions
typically have to be
approved by the limited
partners.

The powers of the general
partner can be limited by the
limited partners in the limited
partnership agreement.

If limited partners participate
in management, they risk
losing the benefit of limited
liability.

Massie, Raymond 6/7/2019
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Choosing an Entity Comparison Chart, Practical Law Checklist 7-381-0701 (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 4

members and set
out in the limited
liability company
agreement.

Employee
Incentive
Considerations

Stock options can be
granted to employees (can
qualify as incentive stock
options (ISOs) under the

IRC).

Other common forms of
equity compensation
include:

• Stock appreciation
rights (SARs).

• Restricted stock.

• Restricted stock
units (RSUs).

• Performance
awards.

Stock options can be
granted to employees (can
qualify as incentive stock
options (ISOs) under the
IRC).

Other common forms of
equity compensation
include:

• Stock appreciation
rights (SARs).

• Restricted stock.

• Restricted stock
units (RSUs).

• Performance
awards.

Profits interests or
non-qualified
options (to
acquire a
membership
interest) can be
granted to
employees. ISOs
are not available.
Profits interests
provide favorable
tax treatment to
employees and
are much more
common than
options. Both
profits interests
and options to
acquire a
membership
interest are less
familiar than
traditional stock
options and may
result in an
employee being
treated as a
partner for tax
and employee
benefit purposes.

Other equity
compensation
arrangements
(such as RSUs)
can be replicated
in the LLC context
but are
uncommon.

Profits interests or
non-qualified options (to
acquire a partnership
interest) can be granted to
employees. ISOs are not
available. Profits interests
provide favorable tax
treatment to employees and
are much more common
than options. Both profits
interests and options to
acquire a partnership
interest are less familiar
than traditional stock options
and may result in an
employee being treated as a
partner for tax and
employee benefit purposes.

Other equity compensation
arrangements (such as
RSUs) can be replicated in
the partnership context but
are uncommon.

Capital Raising
Considerations

C-corporations raise
capital through the
issuance of equity (stock)
and the incurrence of debt.
Stock can be issued by
private placements or if the
C-corporation is public, by
a public offering with stock
that is registered with the
SEC and listed on a public

S-corporations raise
capital through the
issuance of equity (stock)
and the incurrence of debt.

An S-corporation must be
converted to a
C-corporation before an
initial public offering.

It is easier for an

LLCs raise capital
through the
issuance of equity
(membership
interests) and the
incurrence of
debt. Membership
interests are
typically issued in
private

LPs raise capital through the
issuance of equity
(partnership interests) and
the incurrence of debt.
Partnership interests are
typically issued in private
placements. LPs are not
limited by a preset number
of authorized interests, but
may be restricted from

Massie, Raymond 6/7/2019
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Choosing an Entity Comparison Chart, Practical Law Checklist 7-381-0701 (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 5

stock exchange. There is a
lot of flexibility in the type
of stock (for example,
common, preferred,
convertible debt, phantom)
that can be issued, but the
C-corporation is limited by
the number of shares
authorized in its certificate
of incorporation (usually a
very large number). The
number of shares
authorized can be
increased by amending the
certificate of incorporation
which requires stockholder
approval. The
C-corporation may also be
restricted from diluting its
current stockholders by the
terms of a stockholders’
agreement. If the
corporation has current
holders of preferred stock,
they may also have
anti-dilution protection. The
terms of the preferred
stock are typically set out
in a certificate of
designation.

A C-corporation is the
most common entity form
for a public company.
LLCs and LPs are typically
converted to
C-corporations before an
initial public offering. An

S-corporation must be
converted to a
C-corporation before an
initial public offering.

S-corporation to convert to
a C-corporation than it is
for an LLC or LP to convert
to a C-corporation because
an S-corporation
automatically converts to a
C-corporation if it does not
meet the requirements of
an S-corporation.

placements.
Members can
create
membership
interests that
mirror the
properties of
different types of
stock. LLCs are
not limited by a
preset number of
authorized
interests, but may
be restricted from
diluting its current
members by
provisions in the
limited liability
company
agreement.

Except in certain
industries (such
as energy), LLC’s
are not typically
publicly traded.
Often the
members convert
the LLC to a
corporation
before an initial
public offering. If
an LLC is publicly
traded (called a
PTP), it generally
will be treated
and taxed like a
corporation under
the IRC unless
90% or more of
the LLC’s gross
income consists
of qualifying
passive income
(such as
dividends,
interest, real
property rents,
natural resource
income, certain
commodities
income, and
gains from assets
that produce
passive income)
(see IRC § 7704).
If an LLC is

diluting its current partners
by provisions in the limited
partnership agreement.

Because limited partners are
prohibited from managing
the partnership, it is a good
vehicle when raising capital
with silent investors.

Except in certain industries
(such as energy), LPs are
not typically publicly traded.
Often the partners convert
the LP to a corporation
before an initial public
offering. If an LP is publicly
traded (called a PTP), it
generally will be treated and
taxed like a corporation
under the IRC unless 90%
or more of the LP’s gross
income consists of qualifying
passive income (such as
dividends, interest, real
property rents, natural
resource income, certain
commodities income, and
gains from assets that
produce passive income)
(see IRC § 7704). If an LP is
publicly traded, units of LP
interests (instead of shares
of stock) are bought and
sold.

Massie, Raymond 6/7/2019
For Educational Use Only

Choosing an Entity Comparison Chart, Practical Law Checklist 7-381-0701 (2019)

© 2019 Thomson Reuters. No claim to original U.S. Government Works. 6

publicly traded,
units of
membership
interests (instead
of shares of
stock) are bought
and sold.

Other
Considerations

Regulators and employees
are most familiar with this
form.

More regulated than LLCs
or LPs.

There are more limitations
on the availability of the
S-corporation election than
the C-corporation election
(only US entities can make
the election, no more than
100 stockholders, only
specific types of
stockholders, and only one
class of stock).

More regulated than LLCs
or LPs.

Statutory and
case law is less
developed than
corporation and
LP law. This
provides more
freedom, but less
certainty.

Regulators and
employees are
least familiar with
this form.

LPs (like LLCs) are subject
to fewer formalities than
corporations.

Partnership law is more
developed than LLC law.

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