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Forming a Business Entity

The formation of legal business entities is governed by state law. Every state has different rules, forms, and processes (and costs) for forming a business entity. The starting point for properly forming a legal business entity is usually with your Secretary of State.

Most states allow the formation of legal entities entirely online. This helps you quickly obtain legal status for your business and begin selling your product or providing the service of your business. However, before attempting to register your business, you must conduct a search of the Secretary of State’s corporate listings for entities with the same or similar name. You should conduct this search before registering a domain name for the business or buying business cards and stationery. The Secretary of State will not register your business if it has the same or similar name as one already in use by another business. The name must be distinguishable from any other name already registered with the Secretary. I also suggest doing an internet search to see if anyone else in the country is using your business name. This may not be a concern if you have no interest in conducting business outside your state and no intention of trademarking the name or logo. Once you have determined your corporate name is not in use, you can proceed to register your corporate entity.

If you choose to form an LLC or corporation, you will need to name a registered agent. The registered agent is someone who can accept service for any lawsuits that may be filed against the legal entity. In most states, you can name yourself as the registered agent, if you reside in the state where you are forming the legal entity. If you are forming in another state where you do not live, you need to name an agent who lives in that state. Many organizations provide registered agent services. Some attorneys offer this service to their business clients as a benefit of working with them or as a package when managing your corporate books. Having your business attorney as your registered agent provides several benefits. They will receive any service of process should you ever be sued, rather than having the sheriff show up at your place of business during business hours when customers might be there. Regardless of who may be at fault, it is not the best impression for your business. It provides peace of mind that you won’t miss a court deadline because you were out of the office, or it got buried in a stack of mail. A registered agent can also help keep up with the regular state renewal filings and corporate documents.

In Illinois, you register your LLC by filing Articles of Organization online or hard copy by mail to the Secretary of State. If you are going to file online, I suggest printing out the paper form to use to gather the necessary information before starting the online application.

If you are incorporating as an LLC, most states require the inclusion of “Limited Liability Company,” “L.L.C.,” or “LLC” in the name of the entity. It is typically tacked on at the end of the name. For example, “Legal Advocacy Headquarters, LLC.” You can incorporate as a single-member LLC in most states, which doesn’t require the names of any more members than yourself. You will need to create a purpose statement for your LLC and provide it to the state on your application. Each state has a preferred format.

Even though you aren’t required to provide it in all states, you should draft an Operating Agreement (OA) for your LLC. The OA outlines your business’s financial and functional decisions including rules, regulations, and provisions. This can be as simple or complicated as necessary depending on how many members you have and the value of your business. An OA is important because it protects members from personal liability by maintaining corporate formalities. Without an OA, your LLC could look like a sole proprietorship or partnership. At a minimum, the OA should include the percentage of each member’s ownership; voting rights and responsibilities; powers and duties of members; distribution of profits and losses; method of holding meetings; buyout and buy-sell rules and the procedures for transferring interest or in the event of death of a member.

Like the Partnership Agreement, you should plan for the growth of your company, and for what happens if it fails, or you choose to terminate it. If you have more than one member, what happens if that association goes bad? Include language that explains how the member can withdraw, or how they can be involuntarily removed. If the leaving member has a capital contribution, determine how their share will be calculated and paid.

The OA should be signed and kept with the other important corporate and business documents. If you have contracted for registered agent service, the agent will often safeguard these documents as part of their service.

If you are forming a corporation, most states require the inclusion of “Corporation,” “Company,” “Incorporated,” “Limited” or an abbreviation of one of those. For example, “Legal Advocacy Headquarters, Corporation” or “Legal Advocacy Headquarters, Inc.” As with the LLC, you will need to provide a purpose statement on your Articles of Incorporation to the state. You need to list the types of shares, the number of shares authorized, the number of shares to be issued, and the price of the shares. You may need to list any restrictions on the share types. The number of directors and their names and addresses must be included as well. Most states require the reporting of the estimated value of the property the corporation will own and an estimate of the gross amount of business that will be transacted in its first year.

Like an LLC’s Operating Agreement, a corporation’s bylaws govern the way the corporation does its business. It discusses the corporation’s purposes, the issuance of shares, the makeup of the board of directors, how officers are named and compensated, meetings of the board of directors and shareholders, how dividends are paid, and how shares are transferred. Like the other agreements discussed, plan for growth and the end. Try and think of all the ways things could go wrong and include language to address them. You won’t think of everything, but a well-thought-out agreement should cover most of the likely scenarios.

As you can see, even from this brief description of the corporate formation process, forming a corporation is more complicated than forming an LLC. Additionally, there are ongoing, regular corporate meetings and reporting formalities that add time and expense to this form of business entity.

For Illinois residents, the Illinois Secretary of State website has many resources to further assist you in picking your business entity and to guide you in applying to the state.

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