Pre-incorporation Planning

When a corporation makes the decision to incorporate, it must plan to do so in a manner that is most conducive to future productivity and stability. First, a corporation must decide where it will incorporate. This is ultimately a decision of which state’s laws are most amenable to the corporation and its operations. When a corporation incorporates in a specific state, the corporation becomes liable under the laws and standards of that state. This question largely depends on where a business will be located and where it will conduct the majority of its business. Additionally, a state’s corporate laws may implicate a company that incorporates in another state if the company maintains a substantial presence in the former state.

Once a corporation decides where it will incorporate, it must then outline its financial structure and allocate its control. First, the company will need to decide what its members, officers and shareholders will contribute to the company. This may include both financial contribution and other contributions, such as experience. The company must also establish what each of these participants can expect to receive from their participation. Again, participants may expect to receive both financial and other returns, such as stock options or management options. The corporation will also need to take into account the tax implications of its decisions. As the corporation plans for its future, it will have the option of dividing financial interest in the corporation either in the form of debt or equity. Often, corporations utilize both options in their financial structure. While equity in the corporation carries with it an ownership in the company, debt is only a loan to the corporation. Unlike equity, a company must repay debt, often with interest. In general, the creditors holding debt against a corporation do not maintain a voting option in a corporation’s management and control.

Incorporation also involves the decision of whether the company will be a publicly-traded company that issues stocks. This decision will involve several greater considerations, taking into account applicable securities laws. For instance, if a company does decide to issue stocks, it may only do so towards adequate and legal consideration. Different jurisdictions may have different consideration requirements. Additionally, different entity formations carry unlike requirements for issuing stocks. The decision to issue stocks may also implicate sections of state and federal tax codes because in some jurisdictions issuing shares may lead to tax consequences.

A company will also need to select a name that is appropriate and legally acceptable. A corporation must select a name before it can begin to draft its Articles of Incorporation, which are necessary for incorporation. The Secretary of State, where the corporation decides to incorporate will have certain requirements regarding corporation names. Furthermore, the form of the corporation (e.g., C corporation or S corporations) will apply additional regulations to the company’s name. With the help of trained attorneys, a corporation may learn of all the pre-incorporation considerations and the applicable legal standards.