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Understanding Formation Requirements

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When forming a new entity, it is essential to be well-versed in incorporation rules, corporate filing guidelines, and required documentation for corporate matters. Join us to gain a better understanding of formation requirements.

Briefly Speaking: Steps to Entity Formation will include information about:

  • Name availability, reservation, and registration

  • Document retrieval

  • Entity types

  • Common challenges working with DE and NY

Webinar transcript

Disclaimer: Please be advised that this recorded webinar has been edited from its original format, which may have included a product demo. To set up a live demo or to request more information, please complete the form to the right. Or if you are currently not on CSC Global, there is a link to the website in the description of this video. Thank you.

Annie: Hello, everyone, and welcome to today's webinar, "Steps to Entity Formation." My name is Annie Triboletti, and I will be your moderator.

Joining us today are Robert O'Byrne, Pat Nolan, and Helena Ledic. Rob is a team leader and strategic account manager for NLJ 250 Law Firms with CSC in the Manhattan office. He advises all levels within the law firm on strategy, service, legal, and technology matters, day-to-day UCC and corporate transactions. Pat has been a customer service specialist at CSC since 2003 with over 35 years in the legal services industry. In his role, Pat provides exceptional customer service to business, legal, and financial professionals worldwide by helping form corporations, LLCs, and other business entities. Helena is the Associate General Counsel for CSC in the Chicago office. She is a business attorney advising senior management and law firms on strategy, business, legal, and technology matters. And with that, let's welcome, Rob, Pat, and Helena.

Helena: Thank you, Annie. So the agenda today that we're going to cover for entity formation is that we'll talk about the name availability, reservation, and registration process. So, of course, that very important process of making sure that you've got the right name in there. We'll talk about document retrieval, the different types of documents that can be retrieved, different kinds of entities that you may encounter, some of those common challenges that will happen with Delaware and New York, because those are the states that we have the most amount of filing with and document retrievals. And then we'll jump into a Q&A session at the end.

Before we jump into the presentation, a little bit about CSC. We work with more than 180,000 corporate customers, including 90% of the Fortune 500. We work with 10,000 different law firms customers throughout the United States. We've got more than 3,000 financial market customers. And then we work with brand protection with 65% of the best global brands throughout the world, including 7 of the top 10.

And now, to jump into our presentation, we're going to cover name availability, reservation, and registration. And Pat is going to begin talking to us about that.

Patrick: Thanks, Helena. The first topic we're going to talk about is name availability. It's a very simple thing, but very important, and it's usually the beginning of every formation. What we do is a verbal check, or if it's a live database, a check of the database to see that a name is available and no other party is using it. This does not guarantee that the name will be available at the time of filing, so what you might want to consider is a name reservation filing. Every state permits you to reserve a name for a specific period of time, which can vary from 30 days to 60 days, 90 days, up to 120 days.

The last bullet point there is a more permanent way of protecting a name. It's good for one year. The caveat is that the company has to exist somewhere in order to register its name. So it's commonly used by companies that are already doing business in a great many states but wish to make sure that their name is available if they expand into other states without having the hassle of changing their name from a prior name.

And now, we're going to discuss name availability. State statutes greatly affect the selection of a name. Some states place restrictions on words used in a name.

Names cannot contain a word or a phrase prohibited by law that indicate a type of business that the company is not authorized to pursue by their articles of incorporation. Common restricted words are: bank, finance, trust, insurance. An example of that is, in New York, I recently formed a company called 123 Bank Street Holdings Corporation. It clearly wasn't a bank, but because the word "bank" appeared in this entity, which probably was a real estate vehicle, the state said it was not available and it was prohibited.

Most states require a corporate indicator in the name. So, for example, if you're forming a corporation, it should have the word "corporation" or "corp." the abbreviation, "incorporated" or "inc" or another such ending, like "company" some states allow. LLCs would have limited liability company, L.L.C., or LLC.

The name of a corporation has to be unique. It can't be the exact same or in some cases deceptively similar to other names on file already with the state.

Now, one thing to remember is that if we check a name and even reserve a name or even form the entity with that name, that does not mean that there may not be a possible trademark infringement. If you're marketing or selling a product or a service, it's always a good idea to do a trademark search.

Okay. Now, what do we do if we've checked the name and the state has told us it's not available? When we do this, CSC will always obtain as much information possible on the conflicting entity: the name, obviously, the state of incorporation, the date of its incorporation or qualification, the name and address of the registered agent and registered office, and whether or not the state will accept a consent to use of name or whether they will accept the use of a fictitious name if their true name is not available.

Now, why would we obtain the name of the registered agent? Well, if the state tells us that they will accept a consent to use of name, more often than not you can approach the company for their consent through their registered agent. That's why we get their name and address.

There's also the concept of qualifying under a fictitious name. That applies when not every state will accept the consent to use of name, but they all want you to get into their state. So there's always ways around it. A fictitious name is a name that's chosen that you will do business under in lieu of your true name. So, for example, it may be as simple as if you had CSC Industries, Inc. was in conflict with CSC Industries Corporation, you could come into the state as CSC Industries of Delaware, and that would be enough for the state to distinguish it on their records and let the company in.

Okay. So if the state says that they will accept a consent to use of name, what do you do? Some states have specific forms, and if those states do, that's the form that has to be filled out and signed by the other party and accompany the filing document to get you the name.

For those states that don't have a specific form, and Delaware is a great example, they require a letter on the letterhead of the entity that's giving the consent. The letter should be specific as to who is the entity giving the consent and exactly to whom they are authorizing the use of the name. It should be signed by the appropriate authorized signer. So if it's an LLC, it should be signed by a member, manager, or an authorized person. If it's a corporation, it could be signed by any officer. Or if it's a limited partnership, it should be signed by the general partner.

Helena: Thanks, Pat. And now, Rob is going to take us into talking a little bit about document retrieval and what are some of the steps that we have to go into and some of the things that we need to look out for.

Robert: Thank you, Helena. Some of the most common documents that can be ordered from states or counties are certificate of good standing, certified copies of formation or qualification, birth certificates, marriage certificates, or probate wills. So one thing to note are not all documents are public documents. By-laws, operating agreements, and affidavits are all private and not on record with counties or secretary of state.

Why would you order a good standing certificate? Either the company is going to be doing business in another state, so just qualifying. A company might simply want to know its status with the secretary of state, whether it's in good standing or active. Or the company might have a financial closing and need to show a bank that they are in good standing with the secretary of state where they're currently doing business.

The good standing is the most common document ordered from a secretary of state. It's also known in most states as a good standing, but in every state varies. It could be called a certificate of existence, status certificate, or certificate of authorization. One thing to note, time frames vary greatly from state to state. For example, in Delaware, we can get a good standing in a matter of minutes, but in California it could take a matter of days.

On the next slide, I'm going to talk about the difference between short form and long form. Now, I'm going to talk about good standing short forms versus long forms. Short form good standing is a certificate that states an entity is in good standing and active to transact business. Some states will include tax language saying that all taxes or all annual reports have been filed. A good standing can usually be obtained in one to three business days in most states. A long form good standing includes the same language as a regular good standing, but also lists all the filings for that entity, such as certificate of formation, any amendments, or any taxes that have been paid. One thing to note with the long form good standing is the documents or the copies of the actual filings are not included.

Patrick: Okay. Thanks, Rob. Another type of certificate that's ordered with some frequency is a tax status certificate. Not all states issue them, but those that do, they're always obtained from the Department of Taxation or the Department of Revenue. And it's usually a certificate that states if an entity is current with their taxes. Sometimes states will issue them, but will not issue them to a third-party. So the company itself would have to obtain them by a request on their letterhead, signed by an officer, the controller, or the treasurer of the company.

So there are certain things you should be mindful if you've been asked to get a tax certificate. One, they, for the most part, take a very long time. In our state of New York, they can take three to four weeks. In some states they can take six months. So they're very rarely ordered for a financial closing, but it's good to know that they can be ordered and you can check with us to see what those roadblocks are.

Okay. Now, we're going to discuss the concept of a bring down. A bring down is a letter that bridges the gap between the issuance date on a certificate of good standing and the date of a financial transaction. So, for example, a prudent legal professional would order his documents for a closing in advance. So you might have a certificate of good standing that is dated two weeks before the date of the closing. This bring down letter bridges the gap, as I said, between that date and the date of the closing. And how it's done is you make the verbal check with the state by phone, or if they have a real database, real online database, a check of their database. And that information is relayed on a letterhead, which is then sent by email to the client.

On the right-hand side gives examples of when you might use a bring down letter for a financial closing, as we mentioned, due diligence search, for a real estate transaction, or some others.

Okay. Now, we're going to spend a little time just discussing a certified copy. What is a certified copy? A certified copy is a document that's obtained from the secretary of state or whatever official keeps track of corporate documents. It's usually the document that was filed by the company, that's certified by the state with a certification page saying that it is a true and correct copy of the document that is on file. It takes different names depending on the type of business entity it is. Corporations might file a certificate of incorporation, as they do in Delaware, or articles of incorporation. Or LLCs, their formation document is called articles of organization, or it could be a certificate of formation as it is in Delaware. LPs usually always file a certificate of limited partnership.

That last bullet point is a very important thing to know. A lot of times, companies that have been around for a while will have a tremendous amount of documents on file. So if you're tasked with getting a certified copy, it could be very expensive and it could be very strainful on the back because there could be hundreds of documents on file.

I like to use the example of General Electric Company. It's a New York corporation that was formed in the 1800s. So what their board of directors does from time to time is file a restated certificate of incorporation, and this restated, in effect, takes the place of all the previously filed charter documents and is usually acceptable for any financial transaction. Although you should check with the other side to make sure they will take it. But what would happen then instead of going back to the original charter from the 1800s, you would begin with the last restated on file and order that plus any subsequently filed documents.

Okay. Now, why would you order a certified copy? In most cases, it's obtained for some type of financial transaction. But in other cases you might be reviewing the minute book and see that you're missing a document that was filed previously. So you could order that specific document, or you can order the entire set of charter documents. Another reason to order it would be in certain states, when you go to do business, to qualify to do business, you're required to present a certified copy. There may be other cases where you have to show that your name was changed or that your stock changed. And those are also examples of when you would order a certified copy.

Robert: Authentication, legalization, or apostille is the process of obtaining documents that are certified for use in a foreign country. Apostille is usually a quick step of getting a document certified by the secretary of state, and it's usually a one to two-day process. Apostille applies to most Western European countries and the United States, Mexico, and Central America. Legalization or authentication is getting documents verified by the U.S. Department of State and the embassy where those documents are on file. One thing to note that there are long delays at certain consulates and applications processes are can be complicated.

Helena: Thank you, Rob and Pat. Now, what we're going to do is we're going to transition into talking about some of the different entity types that are out there. As you can see listed, we have things such as the limited liability companies, the limited partnerships. We also have the corporations, LLPs the limited liability partnerships. But I also want to draw your attention that we also have closely held businesses listed here and also not for profits. So, depending on your jurisdiction, you, of course, might see different requirements as you're forming entities.

We've included in here a business entity comparison chart, and this will cover the different types of businesses that we typically, or I should say, different entities that we most commonly encounter and some of the requirements of who may own it, restrictions on the number of owners, and things like that. A lot of our customers find this to be a very helpful chart for them to print off and keep that handy.

And now, we're going to transition into some of the troubleshooting aspects or some of the specific challenges that you may be encountering between doing filings in both Delaware and New York, and Pat is going to be taking us through those.

Patrick: Thanks, Helena. Now, we're going to spend a little bit of time just talking about formations. Your domestic state is your state of formation, where you're incorporated. It's also known as your home state. A company is formed in one state, and then when it's branching out and doing business in other states, that's considered a foreign state or the state of qualification.

Some other topics that we'll be talking about are supporting documents. A supporting document is a document that's attached to a qualification application to show that you have existence in your domestic state. We'll also talk about cut off times, filing dates, evidence, pre-clearance, and a concept that is very vital to know about in New York for LLCs and LPs.

Why choose Delaware? The State of Delaware is the home to the most Fortune 500 companies. The reasons for this are, one, is their Court of Chancery. It's a unique, centuries-old court that has written most of the modern U.S. corporation cases. And it's usually very favorable to big business.

The Division of Corporations is extraordinary in that they work almost like a service company. Their hours are very expandable, and they also offer a lot of services that other states do not. For example, if a state is closed for a holiday, you can secure a filing date for that date by paying an extra service charge, but you can secure that date. They also have the most flexible business statute in the country.

Okay. As you can see from this chart, this is an example of Delaware's flexibility. They offer six different types of service. You can have it filed anywhere from routine, which typically takes 3 to 5 business days, to 30 minutes, which if you send a document to the state at 7:55, it can be back to by 8:30.

And now, we're just going to touch base on the most common errors in documents that are submitted to Delaware for filing. The execution date is left blank, very simple thing. The officer will sign the document and just forget to date it. An inconsistency in the name of the entity, you might have in the header the name one way, and then in article first, the name is slightly different way. The document is not signed. That's also a problem. Or an inconsistent use of the registered agent's name or address. For example, you might have an old address for your registered agent listed.

Okay. On this slide, we're going to look at the cut off times and filing options for the State of New York. Not quite as many as Delaware, but there's still three or four that can be chosen from. One thing to remember about New York, though, is if you submit a document for filing and it is rejected, once you correct the document and resubmit it, it may not have the same date of filing. In Delaware, however, if you submit a document and it's rejected, that date is locked in or secured. Once the document is rejected, you have up to five business days to resubmit it and you retain the original date. That is another unique quality or characteristic of the State of Delaware.

Now, we're just going to spend a minute or two discussing best practices in New York and the major reasons why filings can be rejected. In New York State, any document filed, formation document or qualification document, you have to insert the county where the office of the corporation is located. A lot of times that's left out or just misstated, like one might put down Manhattan when the county where Manhattan is located is, in fact, New York County.

In the state of New York, the Secretary of State is the agent for all corporations. The minimum requirement is that you set forth a service of process address, and that address can be anywhere in the United States. And that is mandatory, so it should not be omitted.

Another reason for getting the document rejected is the name and capacity of the signer is not typed below the signature line. Or you might, if you designate a registered agent, put a care of which cannot be done.

Also, if it's a qualification document, an application for authority, you have to have the home state and the date of your incorporation on the document.

Another thing unique to New York is that every document filed has to have a backer, a separate page or the end of the document at least that states the title of the document, for example, certificate of incorporation, the section of the law, Section 402 of the Business Corporation Law, and the name and address of the filer behind the document. That usually is either the law firm or the company itself and usually can't be a third party. If it's an application for authority filing, you have to have a good standing certificate attached to that application, and the names have to match identically.

Robert: The steps for formation are the following. Check for the name availability. Check whether a trademark clearance search is applicable. Domain name registration. Prepare and file documents. Prepare any minute books, bylaws, stock certificates, or corporate seals. Obtain any federal tax ID requirements, that is the name, the FEIN. And obtain any business licenses if you're going to have a physical presence in a state.

Registered agent representation. Registered agent forwards any service of process, compliance notices, such as annual reports or tax notices from the Secretary of State.

Another way CSC can act as agent is through a contract agency representation. That is an agreement, such as a loan between a bank and a foreign corporation that does not have a U.S. domestic presence.