The Incorporation Process

• Author: James D. Cox/Thomas Lee Hazen
• Profession: Professor of Law at Duke University/Professor of Law at the University of North Carolina, Chapel Hill
• Pages: 36-50

§ 3.1 Selection of the Corporate Form

After considering t he relevant business and financial exigencies of a

formative business, the attorney must weigh the relative advantages and

disadvantages of the corporate form a nd then must give caref ul thought

to the cho ice of a su ita ble bus in ess for m. If t he ent erp ri se i s to be p ubl ic ly

held, the corporate form is practical ly foreordained. A real choice exists,

however, in a closely held enterprise, and the decision to be made is an

important one. This sect ion discusses in broad outline the prelimi nary

considerations involved in determining whether a particular closely

held business can be conducted most effect ively as a corporation or in

some other business form. These comments, it is bel ieved, are suff icient

to put the lawyer on notice regarding a reas in which a more detailed

exploration may be desirable.

Giving advice on how to choose a business form for a closely held

enterprise is extremely difficult. Much of the difficulty arises from

the limitless var iations in the characterist ics of businesses and the

circumsta nces of the business part icipants, and from the probabilit y of

cons tant ch ange i n those variabl es. Thu s, an org aniz ational form ma y be

adapted to a particular business today, but be unsuited to it tomorrow.

These changing needs are not a problem, because the entity can trans-

form itself into the ty pe of entity best su ited for its contemporary needs.

Beginning in the last quarter of the twentieth centur y, new forms

of business entities developed that have dramatically changed the choice

of entity decision. The Wyoming legislatu re in 1977 enacted the first

statute authorizing the limited liability company.1 The limited liability

company form of doing business in essence allows the participants to

establish what formerly would have been a general partnership with

the unlim ited liability of its part ners but with a full l iability shield. All

states now provide for limited liability compa nies. During t he last five

years of the twentieth century, another new form of business became

recognized. Most states now permit a general par tnership to operate

under a full liability shield by electing to be organized as a limited

liability partnership.2

The limited liability company and limited liabilit y partnership are

likely to be the entities of choice for many start-up businesses. This is

so because the owners wil l have the protection of limited liabil ity but

will not be subject to the burdens of formalities that are necessar y to

establish and mainta in the corporate form.

36 | C C  G: C  L

cox85509_03_c03_p035-050.indd 36cox85509_03_c03_p035-050.indd 36 6/28/12 9:16 AM6/28/12 9:16 AM