How To Prepare Business Formation Documents: A Step-by-Step Guide

Preparing legal paperwork for a new business can be overwhelming, but it’s essential for setting up your company’s legal base. These files, from incorporation papers to operational contracts, are key in shaping your business setup, safeguarding your interests, and meeting local rules.

These papers form the basis of the business, detailing its mission, ownership setup, leadership roles, and other key aspects ^[1]. The exact paperwork required varies based on the company type and state of operation.

Types of Business Entities

There are several types of business entities recognized by state governments in the U.S. The most common options for small business owners include:

1. Sole Proprietorship: The simplest form, where personal and business finances overlap.
2. Partnership: Like sole proprietorships but with multiple owners. Two main types exist:
   • General Partnership (GP): All partners manage and share profits and losses.
   • Limited Partnership (LP): General partners manage, while limited partners invest.
3. Limited Liability Company (LLC): Blends corporation and partnership features, offering liability protection and tax benefits.
4. Corporation: A separate legal entity from its owners, with two primary types:
   • C Corporation: Taxed independently from owners.
   • S Corporation: A pass-through entity for tax purposes ^[2].

Key Components of Formation Documents

Key documents for business formation vary by structure and may include:

1. Articles of Incorporation/Organization: Officially establish the business with the state, including business name, purpose, registered agent, and initial directors.
2. Operating Agreement: Used by LLCs and partnerships to outline ownership, management, profit-sharing, and dispute resolution.
3. Corporate Bylaws: For corporations, detailing management by shareholders, officers, and directors^[3].
4. Stock Certificates: Record share sales and purchases in corporations.
5. Shareholder Agreements: Cover shareholder rights and duties not in corporate bylaws.

Preparing Articles of Incorporation/Organization

1. Required Information

To prepare articles of incorporation or organization, businesses must gather key details. This includes the company’s legal name, which must be unique and include appropriate identifiers like “Corporation” or “LLC”.

Corporations need to provide stock share details, including number and class ^[4]. LLCs must include member or manager information and management structure. ^[5].

2. State-Specific Requirements

Each state has unique filing requirements for articles of incorporation or organization. For example, Florida requires specific details from for-profit corporations, such as principal office address, mailing address, and registered agent information.

3. Filing Process

The filing process usually involves submitting completed articles to the state’s business filing agency, often the Secretary of State’s office. Many states now offer online filing, which can be quicker and more convenient. Filing fees vary by state, typically ranging from $100 to $500.

After processing, the state sends a certified copy of the articles, confirming the business’s approval to operate. Some states, like Arizona, Nebraska, and New York, require LLCs to publish a formation notice in a local newspaper ^[7]. It’s important to follow the state’s specific filing instructions and include the correct fee to avoid delays in the incorporation process.

Drafting an Operating Agreement or Bylaws

1. Purpose and Importance

An Operating Agreement or Bylaws form the basis for a company’s internal operations. These documents outline the business’s structure, management, and operating procedures.

For LLCs, an Operating Agreement is vital, even when not legally mandated. It boosts the LLC’s credibility and strengthens limited liability protection by clearly defining the company as a separate legal entity ^[8].

2. Key Sections to Include

When drafting these documents, businesses should address several key components:

1. Core Information: Include the company’s name, location, and mission ^[9].
2. Ownership Structure: Detail members’ ownership percentages and associated rights.
3. Management Framework: Specify if the company is member-managed or manager-managed.
4. Financial Aspects: Describe how profits, losses, and capital contributions are handled.
5. Decision-Making Process: Establish voting rights and procedures for crucial business choices.
6. Meetings: Outline the frequency and format of meetings.
7. Membership Changes: Address protocols for adding new members or handling exits.
8. Dissolution: Define the process for closing the business if needed ^[10].

3. Customization for Your Business

While templates are available, it’s essential to customize the Operating Agreement or Bylaws to suit your specific business needs. Consider having a legal professional review the final document to ensure state law compliance and comprehensive coverage of your business operations. Remember, these documents can be updated as your business grows, allowing for future adjustments ^[11].

Securing Necessary Licenses and Permits

1. Federal Requirements

Most small businesses don’t need federal licenses, but certain industries require specific federal permits. These include investment advising, drug manufacturing, meat processing, broadcasting, ground transportation, and selling alcohol, tobacco, or firearms.

2. State and Local Regulations

While Texas doesn’t require a statewide business license, it has specific licensing requirements for certain professions. These include healthcare professionals, attorneys, accountants, construction contractors, barbers, cosmetologists, insurance agents, architects, engineers, and real estate brokers. For example, real estate agents in Texas must obtain a license from the Texas Real Estate Commission.

Most Texas cities and counties don’t mandate a local business license, but exceptions exist. It’s important to check with your city or county clerk for local licensing requirements. Fees for local licenses can vary from $15 to several hundred dollars, sometimes based on expected gross revenue ^[13].

3. Industry-Specific Licenses

Depending on your business activities, you may need additional registrations, licenses, and certifications from other state agencies. For example, businesses in regulated industries like food or alcoholic beverages require industry-specific licenses ^[14]. These licenses are essential for maintaining public health standards and ensuring compliance with state regulations.

To determine which state-level business license or permit your business needs, refer to the Texas Business Licenses & Permits Guide ^[15]. It’s also crucial to meet all local permitting requirements by contacting.

Are Business Formation Documents Important For You?

Preparing business formation documents is a crucial step in establishing a solid foundation for your company. By understanding the different types of business entities and their corresponding paperwork requirements, you can make informed decisions that align with your business goals.

The process involves gathering essential information, meeting state-specific requirements, and following the proper filing procedures. This careful preparation sets the stage for your business to operate legally and efficiently.

Creating comprehensive operating agreements or bylaws and securing necessary licenses and permits are equally important steps in the formation process. These documents and authorizations not only ensure compliance with regulations but also provide a clear roadmap for your business operations.

By taking the time to carefully craft these documents and obtain the required permissions, you’re setting your business up for success and demonstrating your commitment to running a legitimate and well-structured enterprise.

References

[1] -gov- Government Digital Service – Set up a private limited company https://www.gov.uk/limited-company-formation/register-your-company
[2] – GovDocFiling – Form a business Easily File New Business Government Documents https://www.govdocfiling.com/
[3] -sba- U.S. Small Business Administration – Register your business.  https://www.sba.gov/business-guide/launch-your-business/register-your-business
[4] – Legal Zoom – What are articles of incorporation? https://www.legalzoom.com/articles/articles-of-incorporation-what-are-articles-of-incorporation
[5] – Investopedia – What’s Included. https://www.investopedia.com/terms/a/articlesofincorporation.asp
[6] – Indeed – Career development articles of Incorporation: Definition and Importance https://www.indeed.com/career-advice/career-development/articles-of-incorporation-definition
[7] -Thomson Reuters Law – What are articles of incorporation? What should be included? https://legal.thomsonreuters.com/blog/what-are-articles-of-incorporation-what-should-be-included/
[8] – Business News Daily – Articles of Incorporation: What new business owners should know. https://www.businessnewsdaily.com/4038-articles-of-incorporation.html
[9] – Thomson Reuters  – What is an operating agreement? Do I need one for my LLC? . https://legal.thomsonreuters.com/en/insights/articles/what-is-an-operating-agreement
[10] – BizCounsel – Custom Operating Agreements for LLCs: When do you need one? https://bizcounsel.com/Custom-Operating-Agreements-for-LLCs-When-Do-You-Need-One
[11] -law cornell- Law Cornell Legal Information Institute. https://www.law.cornell.edu/wex/operating_agreement
[12] – LegalZoom – What information must be put into corporate bylaws? https://www.legalzoom.com/articles/what-information-must-be-put-into-corporate-bylaws
[13] – Investopedia – LLC Operating Agreement: Definition, Purpose, Format, and importance. https://www.investopedia.com/terms/l/llc-operating-agreement.asp
[14] -collective- Collective Hub – Texas Business License: What you need to know. https://www.collective.com/guides/texas-business-license-info
[15] – Findlaw – Federal Business Licenses By Amber Sheppard, Esq.  https://www.findlaw.com/smallbusiness/starting-a-business/federal-business-licenses.html