The decisions made at the start phase of an entity’s lifecycle do more than get a business up and running, they establish the legal, tax, and compliance framework.
For law firms advising clients, the start phase presents a critical opportunity to help clients make informed choices, avoid common missteps, and set expectations for ongoing compliance obligations.
Key takeaways:
- Choosing the right entity type and formation jurisdiction at the start establishes the legal, tax, and reporting framework that governs a business for years.
- Accurate formation steps and post-formation registrations (e.g., registered agent, EIN, licenses) are essential to avoid delays, penalties, and future governance issues.
Throughout a company’s lifecycle, key events trigger state, federal, and local requirements. Using an entity lifecycle framework as a proactive advisory tool allows firms to engage clients early, review their current practices, and ensure foundational requirements are met before operations begin.
Starting a new business: Choosing the right entity
The first and often most consequential decision is selecting the appropriate entity type. Corporations, LLCs, partnerships (general, LPs, LLPs, LLLPs), and professional entities each carry distinct implications for liability protection, taxation, governance, and reporting obligations. Helping clients evaluate these tradeoffs at the outset can prevent costly restructuring or compliance issues later.
Equally important is the choice of formation jurisdiction (a.k.a., the home or domestic jurisdiction), particularly for clients planning to operate in multiple states. Corporations and LLCs are statutory entities and are formed under and governed by the corporation or LLC statute of their domestic state. Entity type and jurisdiction determine not only formation requirements but also future obligations such as annual reports, franchise taxes, and governance standards. Early legal guidance ensures the entity’s structure aligns with the client’s business goals and risk profile.
Forming the entity: Meeting core legal requirements
Once entity type and jurisdiction are selected, formation introduces a series of requirements, imposed by the state’s business entity statute and, in some cases, administrative regulations, that must be completed accurately and in the correct sequence. Core formation requirements typically include:
- Checking the availability of the name the client wants for their entity and reserving the entity name (Even if not required, this step is highly recommended)
- Selecting a registered agent authorized to receive legal and state notices. The registered agent must be located in the formation state and have a physical location there.
- Filing the formation document (e.g., Articles of Incorporation or Articles of Organization)
- Drafting governing documents, such as bylaws, operating agreements, or partnership agreements
Be aware that some states may have additional steps that need to be taken during the formation phase, such as publishing notice of formation or filing an initial information report.
Formation steps may appear administrative, however, errors or omissions can result in rejected filings, compliance gaps, and downstream governance issues. Formation is not simply a filing event—it is the moment the entity’s existence begins and so its compliance obligations begin too.
