Company formation, or entity structuring, is among the first steps of startup corporate due diligence, which typically involves forming a company, structuring, and following formalities.
During entity formation, it is important to designate the Initial Incorporator. Under Delaware state law, any person, partnership, association, or corporation may incorporate in the State of Delaware regardless of the entity’s residence or domicile. 8 Del. C. 1953 § 101(a). This is accomplished by filing a certificate of incorporation (“COI”) with the Delaware Department of State’s Division of Corporations. Id. § 101(a).
The COI must include the name and mailing address of the incorporator or incorporators (if there are multiple). Id. § 102(a)(5). The COI (and any other instrument that is to be filed with the Secretary of State) must be signed by the incorporator(s) or an authorized agent. Id. § 103(a)(1). Any administrative missteps in the filing process can lead to significant delays in the incorporation process.
Duties of Initial Incorporators
The designated incorporator(s) has the duty to manage the affairs of the corporation until the directors are elected. Id. § 107. The incorporator is also required to hold an organizational meeting to appoint the initial directors and adopt bylaws. Id.§ 108(a).
Designating the proper incorporator is important because the incorporator has the ability to adopt, amend, or repeal the bylaws of the corporation. Id. § 109. Making sure that this authority is in the hands of the correct individuals can be critical to the success of a startup company.
These steps seem fairly straightforward, but the Delaware state law is very clear on what must be done to incorporate a business, and failure to follow these steps correctly can be detrimental to incorporation. Hiring an experienced corporate attorney can help ensure that all procedures are correctly followed to avoid delays in incorporation.
Tech Startup Incorporation Through Legal Zoom
These statutorily mandated duties of initial incorporators are especially important to be aware of when a startup uses Legal Zoom to form a company. Using Legal Zoom to incorporate a startup company is highly discouraged by attorneys.
Incorporating through Legal Zoom can be enticing to startup companies as it can seem like a cost-effective way to start the incorporation process. Legal Zoom’s incorporation services start at $149 plus filing fees. However, if Legal Zoom designates itself as the initial incorporator, getting them to designate the founders or directors as the initial incorporator can prove to be a tricky process.
As the designated incorporator, Legal Zoom is required to either hold an initial meeting to appoint the initial directors, or to include the directors in the COI. In a situation where Legal Zoom does not perform either of those tasks, it can be very difficult to remedy the situation. The law for incorporation in the state of Delaware as cited above is clear on these requirements, and any breach of these statutory requirements can lead to lawsuits that could have been avoided had the startup hired an experienced corporate attorney to handle the incorporation process.
Any entrepreneur looking to incorporate their startup business should consult with an experienced startup corporate lawyer before taking any action. While Legal Zoom may seem like an attractive option at the price point, incorporating this service can lead to problems that could have been avoided if the startup had hired a law firm experienced in corporate structuring for startup entrepreneurs.