Incorporation or LLC Formation Checklist
Incorporation or LLC Formation Checklist
Incorporation or LLC Formation Checklist
• Non-Compete Agreement
o Does your current employer’s Non-Compete Agreement or Employment
Agreement impede your starting your business? To what degree?
o Applicable after you leave? What if they fired you?
o Consider perhaps negotiating a supplement or waiver to the agreement that
would allow you to start your business. Perhaps you can carve out a narrow
exception, and can compete in their space, but not approach their customers or
employees?
• Intellectual Property
See an intellectual property lawyer about protecting your rights in: Copyrighted
materials (writings, software, etc.), any Business Method or process that might be
patentable, or any invention, device or composition; Your Trade name, Trademark,
Logo, packaging, sound. If writing software based on others such as MS, get the
developer’s kit, which licenses you to do so. Do not publicly disseminate your work
or your idea until your legal rights are protected, or you may permanently loose
them. IP rights are applied for in individual name, so you can take this step first,
before you incorporate.
• Trademark Issues Triggered by the Corporate Name Selection & Search Process,
and by Product Name Selection. Key to avoid “confusingly similar” words used in a
similar industry. Importance of proper name searches and mechanisms for
accomplishing them. “First to Use – Wins”. See separate document “Name Search and
Selection Check List” for critical name selection issues before incorporating.
• Website and IP Issues. Website Development. Start sooner than you think. It takes
longer, requires more time, attention, thought and revisions than you think.
Informational websites are inexpensive and generally fast; however, any type of
product or service website or e-commerce transaction can be very expensive and take
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• Due Diligence, Conduct it on any party with whom you will do business, customers,
suppliers, and any employees or officers you hire. You are judged by the company you
keep. Importance of conducting it, on your own partners, any business associate, any
alliance partner, any employee, and any investor or any business you buy into.
Background checks are $150 or less, worth their weight in gold so you walk into
anything knowing your “partner”.
• Accountant (Tax Professional) – Involve your tax accountant early on, at least at this
point, to weigh in on entity choice, “taxed as” status, and fiscal year ending date.
o LLC: LLC ongoing legal costs are a bit more for LLC than for corporation
Formation is $325 more in filing fees. (However this $325 higher cost
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should not be a deterring factor if LLC is the right form of entity for you,
but ongoing legal fees might be.).
Operating provisions are intentionally omitted from the LLC statute, to
allow for flexibility. Instead, they are to be included in the LLC
agreement. Much flexibility in taxation, payments of profits, however.
LLC agreements (with flexibility) are therefore custom, and therefore can
be more costly in legal fees.
Less case law, in the event of litigation; some unfamiliar issues. Though
cases now becoming more and more prevalent, thorough and analyzing,
so we are no longer shooting in the dark on legal interpretation issues.
However, anything out of the ordinary, including litigation or dispute
resolutions may be costly, perhaps more costly than corporation?
Often not appropriate to waste limited corporate assets of a start-up
company on LLC structure, if solely for the personal income tax benefits
to the founders, because legal fees can be higher (unless flexibility and
tax savings are higher priority over legal fee spending).
Most transactions have tax implications, which are often recited in the
LLC agreement, or other agreement with the LLC. (More costly legal fees
and then accountant or tax lawyer must review LLC.)
• Issue Stock Certificates, including type printed certificates and legends on the back.
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• Prepare Stock Issue Ledger (who owns what shares of stock, names addresses).
• Prepare Capitalization Table (who owns what % of stock, and who paid what for
stock). The founders must make their capital contribution, or the corporate veil may be
able to be pierced.
• If shareholders are in other states, make Blue Sky Filings (even if they are family or
close friend shareholders).
• Selection of Officers and Directors – Avoid use of family members without proper
background as owners, officers, directors, unless they will truly be heavily involved in
the business and have the background to qualify for the role. Will be subject to scrutiny
for their competence. Presumed incompetent and overpaid if a family member.
• Avoid Piercing the Corporate Veil; following corporate formalities, use of signature
blocks
• Formation Documents to File: BCA 2.10 or LLC 5.5, IRS SS-4, IRS 2553 for S
Status, Illinois REG-1 for IL Taxpayer registration, County filing, Business License,
Professional Licensing
• File Illinois BCA 2.10 for incorporation (or Delaware Certificate of Incorporation if
Delaware) or Illinois LLC 5.5, or Illinois LP 201
o Use the “expedited filing” service, through an incorporation service, which hand
delivers the documents for same day filing. (Extra $100); Otherwise the
incorporation will be delayed by 4-6 weeks, and the filing date is uncertain.
o Use Yourself as the registered agent, no lawyers or accountants, because you
may change them, and because they are not always in your same county
o If Delaware, chose DE registered agent, and file in the county where registered
agent resides.
• IRS Form SS-4 application and filing (applies to the IRS for FEIN # (your company’s
tax id # or Federal Employer ID #) (Estimate a very long date for your first employees,
so IRS will not expect employer tax returns soon.). (Landmine questions on this form,
consult accountant and attorney before filing this form online, or allow attorney or
accountant to file it for you.)
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stock or add entity shareholders; you will merely quietly loose S status,
which is no problem.
o Must file within 75 days of forming business, or blows the exemption.
• Payroll? Employees? How many, when? Decide whether you will pay yourselves
salary? If so when? We need this info for the tax ID application
• Register your employees, part-time and full-time, under the “New Hire Registration”
national registry. https://secure.myhfs.illinois.gov/NewHireWeb/newhire.htm?
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• Sales in Use Tax – When you least expect it. Sales Tax applies when you sell
ANYTHING, even with your service, even server rack and bolts for IT Firm installation,
or shampoo with a hair cut. Use tax applies when you buy goods, even for your
company’s own use, from out of state and don’t pay sales tax on them.
• County Recorder Filing required in county in which your business is located. File in
multiple counties if you have multiple locations.
• City or Local Business License. Most cities and villages require business license,
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including Chicago.
o A simple, limited license is required for consulting or office type business, even
in the home
o A more expanded license is required for a business that sells goods/products, or
has employees
o An even more complex license is includes for retail space, or for food service.
o More complex still if business will conduct manufacturing, make noise, give off
emissions, have busy deliveries, or sell liquor.
• Qualify to Do Business in other states in which you are doing business. Doing
Business includes owning real estate, renting office space, having employees or other
types of physical presence in the state. In some states, "doing business" includes
selling into that state. Check with your tax accountant and lawyer on whether your
activity is considered “doing business”.
• Corporate Resolutions (the engine that makes the car work), and Operating
Resolutions, (interim substitute for bylaws or operating agreement, Minute book of
corproate records
• Importance of Contracts
• Insurance / Liability
o Obtain relevant business insurance, from a good business insurance provider,
not from your homeowner’s insurance provider.
o See NFH website www.nfhlaw.com for referrals to business insurance agents.
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• Payroll
o Establish who will pay payroll, payroll taxes and payroll tax returns.
o Will you have employees? How many? When? Need info for the Tax ID
application.
• Shareholder Agreement (if more than one shareholder running the company).
• Document all agreements with all parties in form of Contract, even if simple.
Contracts are business issues, more than legal issues, but they have legal implications.
The business parties must record their thinking in order to prevent misunderstandings.
o Including Consultants
o Employees
o Vendors/Suppliers
o Customers
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o Financing Transactions
o Stock Options to Employees
o Medical Expense Reimbursement Plan
Post-Incorporation