How do I form a company?
Companies are creatures of state law so most types of companies, including corporations, are formed by filing specific documents with the secretary of state’s office in the state where you want to organize. At a minimum these filings require basic information about the company – such as name, purpose and business address – but most companies choose to include some additional details about the operation of the company. For example, when forming a corporation it may be appropriate to include provisions limiting the liability of the officers and directors of the company for actions taken on behalf of the company.
What type of entity is the best fit for my business?
The answer depends on a number of factors, but for most start-up technology companies expecting to require venture financing the best option is usually a corporation. Corporations are the most popular form of business entity for start-up technology companies for several reasons. One reason is that shareholders of corporations have limited liability, meaning that except in specific (and somewhat extraordinary) circumstances they are not personally liable for the debts of the company. Another reason is that the ownership structure of corporations makes it easy to set up equity incentive plans (to issue stock options to employees) and to set up different classes of ownership (which is important for VCs who want to buy Preferred Stock).
Does it matter which state I organize my company in?
Rules and costs vary greatly from state to state, so the decision does matter, but most businesses headquartered in Massachusetts will want to organize in either Massachusetts or Delaware. If your business is based in Massachusetts but you choose to organize in a different state, you will still have to register to do business in Massachusetts, which means you’ll pay fees in two states instead of just one. In the past, many companies chose to organize in Delaware in large part because the corporate law in Delaware was much better developed, but a recent overhaul of Massachusetts’ corporate law has gone a long way towards leveling the playing field. With that said, most venture capitalists still prefer to have their portfolio companies organized in Delaware so if you do organize in Massachusetts your company might be required to “migrate” to Delaware when it receives VC financing, but this migration is simple to accomplish and is not very costly.
What is “corporate governance” and what do I have to do?
“Corporate governance” encompasses the formal rules and procedures companies must follow in their day-to-day operations, including the rules governing how companies make decisions. Many of these rules are imposed by the law of the state where the company is organized, and therefore the specifics may vary by state, but the general governance rules are fairly consistent across jurisdictions. For example, both Massachusetts and Delaware require certain corporate actions be approved by a vote of the shareholders, while others can be approved simply by a vote of the corporation’s board of directors. Most governance requirements are easy to follow, but failing to do so can lead to questions about the validity of corporate actions and in extreme cases may expose owners of a company to personal liability.
Keeping your lawyer informed about your company’s activities, especially when it comes to big decisions and expenditures, can help you stay on the right side of the governance rules.
When should I get a lawyer involved?
It is almost always better to get your lawyer involved sooner rather than later. As this is a law firm’s blog that advice may sound a tad self-serving, but in the long run you will spend less on legal fees by doing things right the first time instead of paying to fix them later. Two of the most costly mistakes start-up companies make are failing to properly protect their intellectual property and failing to properly document the issuance of equity in the company. These mistakes are easy to avoid with a little guidance from your lawyer, but they can be very costly (and sometimes impossible) to fix.