Incorporating a company in the United States means to create a “corporation,” which is a legal entity separate and distinct from the company’s officers, directors, employees, and stockholders. The benefit of having a corporation is that it limits the personal liability of the officers, directors, employees, and stockholders of the company if the company follows the laws governing corporations. Incorporation involves registering the name and certain information of the company with the state agency responsible for regulating corporations in one of the United States and following the corporation laws of that state.
Many companies and most startup companies that plan to take venture financing choose to incorporate in the state of Delaware, regardless of where the business is physically located. Delaware has a number of advantages over other states as a place for incorporation, including the most developed corporate case law in the country, a court system with expertise in resolving business disputes, and a secretary of state’s office that has streamlined the state’s interactions with businesses incorporated within the state. Because of these advantages, many lawyers are familiar with Delaware corporate law, and institutional investors, such as venture capital funds, are more comfortable with investing in Delaware corporations. Venture capital funds will often require companies incorporated in other states to convert into a Delaware corporation before they will invest.
In Delaware, incorporation is achieved by filing a document called a certificate of incorporation with the Secretary of State. We advise doing a preliminary entity name search to confirm that the new company’s chosen name is not already being used by another company in that state. If the new company will not be headquartered in the state of incorporation, the company will need to hire a registered agent who will accept legal documents on the company’s behalf in the state of incorporation. The company may also need to qualify to do business in other states where the company has physical locations or otherwise conducts business (such as hiring employees in those states).
Lastly, the post-incorporation setup documentation (e.g., approvals, bylaws, stock purchase agreements) and continuing corporate legal maintenance will help a new corporation follow the laws of its state of incorporation and other applicable laws. It is important that the corporation is set up correctly and maintained well to ensure smooth operations and to avoid unnecessary cleanup costs down the line. For this reason, we recommend obtaining good advice at incorporation and engaging competent counsel to help the corporation follow good corporate hygiene practices.