Summary

  • A business entity's life cycle begins with the legal process known as "incorporation" or "formation."
  • Once formed, a business entity is not automatically ready to start doing business. Most businesses must also obtain proper business licenses and permits to operate. It is critically important to understand these obligations in each jurisdiction where you operate.
  • A business entity must also stay "in good standing" with the Delaware Division of Corporations to maintain its legal status. This is an annual process called "corporate compliance" and involves an annual filing process.
  • If you plan to open an office in the U.S., find out why Delaware is an ideal location.

Some businesses in the United States operate as sole proprietorships. But, most businesses find that there are a variety of liability, tax, regulatory and other business advantages to forming a legal business entity. Businesses that are already legal entities outside the United States often decide to create a legal entity in one of the U.S. states to operate in this country [See Beyond the Borders: Delaware's Benefits for International Business]. This process of entity formation – sometimes known as "incorporation" depending on the type of entity – is an important first step in starting a business. But it is not a license or permit to conduct business.

Understanding this difference and the obligations your business is under in each jurisdiction in which it operates is critically important to ensuring your legal compliance... and your success.

What is entity "formation"? What does "incorporation" mean?

If you decide that your business should be a corporation and you intend to operate in the United States, then you must file a "Certificate of Incorporation" with an American state. If you choose another type of business entity, such as a Limited Liability Company (LLC), Limited Partnership (LP), or another alternative entity, then you must file a "Certificate of Formation." This filing process creates a legal entity—it's almost like a birth certificate.

The choice of state for this process is extremely important because that state becomes the "corporate home" or "domicile" for that business entity. It is then subject to that state's statutory business entity laws regardless of where it operates . Delaware's corporate law is reputed to be the most advanced and flexible in the U.S. [See Delaware's Sound and Enabling Statute.] These laws govern the "internal affairs" of a business, meaning issues related to ownership and management, including the liability of shareholders, the role of board members, and transactions (including mergers and acquisitions). By contrast, the operational effects of a business upon society (in terms of labor, the environmental, taxation, land use, etc.) are regulated by the jurisdictions where business operations take place.

Once a business has gone through the incorporation or formation process in Delaware, it exists and its internal affairs are then governed by the Delaware corporate or entity law that governs Delaware entities of its kind . But that doesn't mean the business has the right to actually conduct business until it obtains the licenses and permits required by each jurisdiction in which it operates.

What licenses and permits are typically needed before starting business?

Before starting to operate, a business often must file registrations and obtain permits or licenses that may be required in the countries, states, and municipalities where it intends to conduct business. In the United States, these registrations and approvals are typically required in any jurisdiction where the business has sales, employees or physical assets. Depending on the company's industry, operations, location, products and services, a variety of registrations and approvals will be necessary.

Some of the more common requirements include:

  • General business licenses
  • Tax registrations
  • Employer registrations (unemployment insurance and workers compensation)
  • Public health permits
  • Environmental permits
  • Occupational and professional licenses
  • Liquor licenses
  • Lottery licenses
  • Zoning and land use approvals
  • Building and occupancy permits

A company that fails to comply with its licensing and permit requirements can face a number of consequences including fines, notices, and forced closure of its business. Many licenses must be renewed annually.

To find out what business licenses may apply to your company, contact state and local officials in a jurisdiction's economic development or commerce department. A state or local Chamber of Commerce can also guide you in the right direction.

Although Delaware entities are not required to have operations in the state, Delaware is an attractive place to start and grow your business. Interested companies based outside the United States should contact Delaware's International Trade and Development Office. U.S. businesses should directly contact the Delaware Economic Development Office to help you understand and apply for any licenses and permits that would be needed in Delaware. The State of Delaware is constantly working to streamline this process.

How do you keep a business entity in compliance?

After incorporation or formation, a business must periodically renew the various licenses and permits described above.

A corporation established in the State of Delaware must also file publicly an annual report listing all of the corporation's directors and pay an annual franchise tax. Limited Partnerships, Limited Liability Companies and General Partnerships formed in Delaware do not need to file an annual report, but are required to file an annual tax of $250. The filing and tax payment can be completed online.

Summary

Completing the process of incorporating or forming a business entity is just one of several steps required to form a business. A business entity is often also subject to regulation, including requirements for permits and licenses, in all of the jurisdictions where it operates. A business must also take action on a regular basis to ensure that all permits, licenses and legal entity status are in good standing. Understanding these obligations is critical to business success.

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