The Incorporation Process

AuthorJames D. Cox/Thomas Lee Hazen
ProfessionProfessor of Law at Duke University/Professor of Law at the University of North Carolina, Chapel Hill
§ 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.
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