Understanding Formation

Understanding Formation

One of the greatest questions we receive from startups and small business owners is “Where do I form my company?” and that is an important question but the more critical question is what is the business?! Why? Because the business model determines formation.

Startups

For example, say Jane wants to create a new startup company in which she will be seeking outside capital (angel investors, venture capital, or institutional investors) throughout the life of her company. Well, because Jane is going to need initial/seed capital to get the ball rolling then it is best to start a Delaware C-corporation. This allows any investor, whether it is Jane’s aunt to Sequoia Capital to understand what are the laws of Delaware. The reason everyone loves Delaware is because the business laws have been fleshed out so much that they are easy to understand and provide numerous case law for when something goes wrong. There are a couple important caveats to this rule, for example all Real Estate Investment Trusts (REITs) should be formed in Maryland as a C-corp for the same reasons companies form startups in Delaware. The law has expanded to provide ample case law for REITs in Maryland.

Small Businesses

Small businesses vary greatly from ecommerce to brick and mortar retail stores. However, because they are generally geographically limited in their scope and the “nexus” of the business is easily discernible, most small businesses should form in the state they are located and doing business in.

 

The foregoing discussion does not establish an attorney-client relationship with Dunsmoor Law, P.C. and the educational information is qualified by the limited facts presented above. This information should not be relied upon as legal advice. To obtain definitive legal advice and counsel please contact us at +1 (716) 371-1936 or Info@DunsmoorLaw.com.

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