Forming a New Business Entity?

A few months ago, I responded to an Avvo inquiry about forming a new business entity. The “asker” said that he/she was considering starting a company in California to provide various services to the general public. The asker also requested information on the best place (state) in which to form the new entity. Perhaps you will find a valuable tidbit in my comments.

Typically it is frustrating when out of state practitioners try to provide comments in response to California questions. In this instance I am glad that you’ve heard from two lawyers practicing elsewhere.

California is somewhat aggressive about eliminating what you might guess are tax advantages of incorprating or forming your company elsewhere. The bottom line is that if you do most of your business here, you WILL pay taxes here and be subject to many of California’s quirky and I am sorry to say sometimes less than business friendly laws. That said, there are advantages to local incorporation/formation. You will need a competent California attorney to work with you and your “people.”

Whether a corporation or an LLC is a better vehicle will be determined by your goals and preferences with respect to operations, growth, control by ownership/management over company affairs, and a host of other important considerations. Imagine you are building a structure – DON’T neglect to lay a proper foundation. If you skimp on professional services on the front end, you will likely regret it on the back end. Your lawyer, your insurance broker, and your accountant are VERY important people in your life when you start a company. Hire carefully.

Following up on another attorney’s general comment re LLCs – one size does not fit all. For example, there may be a good reason to have a simple, non-restrictive and succinct operating agreement. On the other hand, failing to grapple with certain issues in an operating agreement may completely undermine any success you might otherwise enjoy.

In closing, a shareholder agreement (for a corporation) or your operating agreement (or another document addressing nuts and bolts if you choose an LLC) should be prepared sooner than later.

Good luck.