Many California companies choose to incorporate in the State of Delaware for a variety of reasons. We will explore the advantages of incorporating in California in a future post. Herein, we set forth the steps that a California venture must take to incorporate in Delaware and establish the manner in which it will be owned and operated.
While certain websites (e.g. LegalZoom and Docstoc) offer boilerplate forms and documents intended to form your LLC or corporation for little or no charge, we don’t recommend this. I’ve encountered numerous clients who pursued the online route, only to realize later either that their documents failed to establish the company in the desired manner, contained incorrect legal provisions, or down the road their partners or investors did not find the cookie-cutter documents to be usable or appropriate. In our opinion, non-legal services such as LegalZoom and Docstoc can increase the risk that your venture will end up in a dissolution or partnership dispute. Once these unfortunate circumstances occur, you are then forced to go and pay additional legal fees in order to correct the documents, during oftentimes already difficult circumstances. Sometimes it may be too late to fix the issues preemptively and you will have to deal with the consequences. I would estimate that in the majority of cases use of LegalZoom’s boilerplate forms ends up costing the client more money and (many times more importantly) valuable time. Still, we find, that there are those who insist on going at it themselves without the help of an attorney and believe that the risks are overblown or the cost of legal counsel simply not worth it in their opinion.
Web services such as LegalZoom merely provide standard agreements that may not fit the specific needs of your company. Further, because such websites are not qualified as attorneys in California, they do not render legal advice or provide strategic thinking. Therefore, such services are unable to create the type of sophisticated documents that you need to adequately protect yourself and your company. As Venture Capitalist Craig Johnson explained, “[s]tarting a company is like launching a rocket, if you’re a tenth of degree off at launch, you may be 1,000 miles off downrange.”
That being said, we wish to provide you with insight as to steps needed to incorporate your company in Delaware. To incorporate, you are required to:
1) Confirm the availability of the name chosen for your company. You can informally determine the availability of your company’s name on the California Secretary of State’s website at: http://kepler.sos.ca.gov/. You should also perform the same search on the website for the State of Delaware Division of Corporations.
2) Procure a registered agent in the State of Delaware. The registered agent of a corporation is, among other things, responsible for accepting service of process and other communications directed to the corporation and forwarding such communications to the corporation.
3) Prepare a Certificate of Incorporation or Articles of Organization. We recommend hiring an attorney to prepare your certificate of incorporation and other incorporation documents such as bylaws.
4) File, or cause to be filed, an executed Articles of Organization. Upon the proper filing of the Certificate of Incorporation, a company will constitute a body corporate in the State of California. At that time, the company will have the authority to conduct business as a corporation under California Law.
5) Prepare by-laws that govern the management and operation of the corporation.
6) Select a board of directors.
7) Select officers of the board of directors. Officers typically include a President, Vice President, Treasurer and Secretary.
8) Issue shares of common stock to the founders by preparing Subscription Letters and, if applicable, Founder Stock Restriction Agreements.
9) Obtain a Federal Employer Identification Number (“FEIN”) from the IRS, which is required for all corporations. You may obtain a FEIN number by filing Form SS-4 with the IRS or apply online to the IRS.
10) Register as a foreign corporation in California to the extent that your company intends to conduct business in California. A company may complete this task by filing a Foreign Corporation Certificate of Registration with the California Secretary of State.
11) Comply with federal and state security laws following the formation of your company.
12) Perform due diligence about your industry? For example, in California, businesses investments such as buying a franchise in California have specific laws on franchises. Local ordinances may also apply, for example, if you own a franchise in San Francisco.
In a “worst case scenario,” the failure by a company to properly incorporate may subject its founders to personal liability and have an adverse effect on the companys control and governance. More frequently, incorporation without the help of an attorney leads to disorganization, organizational failure, and/or greater legal costs. Therefore, it is important that a company be properly incorporated and that all statutory and regulatory specifications be strictly followed.
This website does not contain legal advice.