Briefly Speaking Series: Steps to Entity Formation

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Caitlin: Hello, everyone, and welcome to today's webinar, "Briefly Speaking: Steps to Entity Formation." My name is Caitlin Alaburda, and I will be your moderator.

Joining us today are Ruth Wilde and Helena Ledic. Ruth is a Delaware team leader at CSC. Some of her responsibilities include handling escalated issues, training, coordinating schedules, processing work, and assisting both internal and external clients with their questions. Helena is an associate general counsel for CSC in the Chicago office. And with that, I'd like to welcome Ruth and Helena.

Helena: Hi, everyone. This is Helena here. I'm so delighted to be speaking with you today and even more delighted that Ruth will be joining us. So she is an expert in Delaware, and we are so lucky to have her speaking with us today. Ruth.

Ruth: Hey, everyone. I'm very excited to be here with you all and share some knowledge on entity formation for Delaware and New York.

Helena: So let's now talk about our agenda for our entity formations webinar today. We'll be talking our introductions. Then we'll be going into name availability, reservations, and registrations. We'll talk about document retrieval, some different document types. Best practices in turnaround times for Delaware and New York. We'll also talk a little bit about the Corporate Transparency Act and then answer some of your questions today.

Before we get into the entity formations, let's learn a little bit about CSC. CSC is privately held and professionally managed with over 8,000 employees on 5 continents in 140 different jurisdictions, and we provide service and technology solutions for every phase of the business life cycle. Among all that we do, we help form entities and maintain compliance and execute secured transaction work. For alternative asset managers, we provide administrative and outsourcing solutions. And we also offer a comprehensive suite of services across a broad range of capital market transaction types, regions, and asset classes. We're the trusted partner for more than 10,000 law firms, 90% of the Fortune 500 and Best 100 Global Brands. We are the business behind business.

The first topic that we want to address today is name availability, reservations, and registrations, and Ruth is going to walk us through this.

Ruth: Thank you, Helena. One of the first things that you should do prior to forming a company is to check if the name is available. And once you know it is, you can either reserve the name or register the name to guarantee nobody can take that name from you. Please note that most of the common states do not allow for name registration, including New York and Delaware.

On this slide, you can see the different explanations of restricted words and words that would require department consent, like bank, trust, insurance, credit union. For Delaware, any name that's using a derivative of the word "bank" would need Bank Commissioner approval, which is a form that could be sent with the formation document. CSC submits that to the State, and then the State will send that to the Bank Commissioner's office. However, in New York, the clients do have to speak directly with the different departments to obtain the consent in order to use the name. Just remember, even though the name is available, it does not mean that it will be approved at the time of filing.

Helena: And if I can add on a little bit to this, Ruth, is that this is so very individualistic by states. There are the different rules in every state. For example, in Arkansas, the word "Razorbacks" associated with the University of Arkansas, the Razorbacks team, you can't use Razorbacks for anything unless you're associated with the university somehow. In Florida ,you can't use the word "Disney" in any way unless you're associated with the greater Walt Disney World. So that is just something that's so important for people to follow up on, if they have any questions, to double-check with their customer service professionals at CSC.

Ruth: If the name you want to use has a name conflict, we'll provide you the details of what that conflicting entity's information is, so that way you have the ability to obtain name consent if needed. For qualifications, you can use, of course, doing business as name if there's a direct conflict or you're unable to get consent. Just please note you will not be able to maintain the original file date if the name is not available.

If the entity name conflicts with an existing company and consent is an option, consent can be provided from one entity type to another entity type. Often we get questions like if a non-profit corporation can consent to a for-profit corporation, but the answer is no because, at the end of the day, they're both corporations. Another issue we see is just with the company letterhead itself to provide the name consent. The company letterhead doesn't have to be official letterhead, but it does need to make sure that it has the company's name, address, and phone number. Please also note that New York does not allow for name consent if there is a conflict.

Helena: Now that we've talked about name availability, let's now switch gears and go into retrieving documents. For our purposes today, we'll be talking about documents that can be retrieved that are considered to be public documents that are filed with the different types of government agencies. Some documents aren't publicly filed and can't be retrieved, and those are things, such as the bylaws, operating agreements, maybe affidavits.

But those documents that can be retrieved, we collectively call them public documents, and those are what everyone would imagine here would be things such as good standing certificates, certified copies maybe of documents that were filed with the secretary of state, such as annual reports or something like that. But you can also have public documents, such as birth certificates, marriage certificates, probated wills. Now certain states have got restrictions on whether or not you can retrieve some of those kinds of documents and who it is that is able to retrieve those, but they are still considered to be publicly filed documents as opposed to documents that are not public.

The document that our customers are always asking us about happens to be the good standing document, and so we're constantly being asked to retrieve those from the different government agencies. And the most common reasons that you need to have a good standing document, a good standing certificate is that maybe you're doing business outside your home state and you need it for qualification purposes, or that somehow the entity that we're talking about is going into some type of a transactional event and needs to show the bank or whomever it is that the entity is in good standing with the state agency. You may need a good standing certificate to do a lease for office space, maybe for a credit card. So it can be all kind of things. Everyone always thinks it has to do with a deal, like an M&A type of deal, but it's not always that. Sometimes it can be much more basic than that.

Ruth: Delaware's good standings can be pulled rather quickly, provided that the entity is in good standing. Before requesting to order a good standing, it may be helpful just to check the entity's status first. For example, in New York, you could get a good standing that indicates the entity is active but past due. So it's not going to have that language that indicates the company is truly in good standing. All that would be needed in that case is to file one biannual report, regardless of how many years is past due.

There are two different kinds of good standings, the short form and the long form, which we'll get into next. Most entities do a short form that indicates they are active and in good standing. Delaware specifically states the name of the company when it formed and that annual reports have been filed and taxes have been paid and that it's in good standing as of the date it was ordered. What is nice about the long form good standing is that it includes everything I just mentioned plus the list of all the filings on record. In New York, the cost of a short form and long form good standing is the same, but in Delaware there is a price difference.

Helena: Now let's talk about another document that people might need, and that's a tax status certificate. You very frequently need tax status certificates as part of a due diligence search, as part of maybe an acquisition of some type of an asset or another. And these are typically obtained from the Department of Taxation or Department of Revenue, not the secretary of state. And this is a certificate or a letter that says that the entity is current with their filing requirements, their tax filing requirements and mentions if there's a delinquent status.

Now what's a little bit different about these is that the authorization to obtain a tax status certificate is almost always needed from an officer of that entity. So depending on what the type of entity is, so as I like to say is you cannot get the authorization say from the mailroom clerk. It has to come from an officer. But the wrinkle with this is that some states won't even allow CSC or any of the other service providers to actually get those, and the entity or whomever it is needs to order it directly. And New York actually just switched the rule on that, and they fall into that.

The other thing that you need to know is that these can take a really long time to obtain. It's not unheard of that the process to obtain a tax status certificate can take at least six months. In some states it may take as long as two years. So when we have that bullet point there that says "be aware of roadblocks," it's whether or not CSC can help you even obtain it, who gets that authorization, and then the time frame to be able to get it.

So let's talk about another document that we might be able to help you with, and that's going to be a bring down letter. But a bring down is something that CSC issues, and it's not a government document that's issued. So when do you need a bring down? What's the purpose of it?

So what I want you to think of is let's say that you're working on a deal and you've ordered a series of good standing certificates, and maybe the time that you ordered them from until the time that you're going to have the closing might be a period of two months. And you don't know if something may have happened with an entity or number of entities in that time period, and you certainly want to be sure about that as you're going to the closing table.

So what you can do is you can get a bring down letter, and what that does is it fills in that blank, that open space of that time period. And so you let us know on the day of the deal which entities are involved. It can be as little as one, or it can be a whole lot more. And every single separate entity will get a separate letter. And then we'll email them and let you know whether or not those entities are in good standing. And again, these are typically done for things such as at financial closings that some type of a transaction will typically do these or that they'll be requested for. And what they do is they fill in that blank over there from the time you ordered the good standing until the time of that transaction, or the need for that document.

Ruth: The certified copy is an official document from the secretary of state that attests to the filing being a true and correct copy of the filing. CSC does default to ordering certified copies for original filings. So if you choose not to have one and you just want the stamped copy evidence, please make sure you specify to your customer service specialist that you would only like a plain copy of the document.

Most people order certified copies as proof that a filing took place, while others will order it just to gather information historically. Remember, if you do want certified copies of all docs that are on file and there is a restated on file, we'll ask if you want the restated forward, as it will be cheaper for you and also the latest restated trumps the information previously filed.

Helena: Now let's talk about documents that are going to be used outside the United States. So let's say that what we have is a Delaware good standing certificate and what we want to do is we want to take that over to France because we've got some business going on over there. We just can't take that document over typically and show it to the French authorities or whomever it is, whatever country we're dealing with. You have to get still first what is called an apostille or a legalization.

The apostille is the easier one to talk about. And an apostille is when both parties are actually, or I should say an apostille is a separate document that's issued that says the other document can be used in a foreign country. Now the key to this is to be able to have an apostille is that both countries, the issuing country, the United States, plus than the receiving country, in our example France, have to be members of the 1961 Hague Convention abolishing the requirement of the legalization of foreign public documents. And so both parties have to be part of this. The way to think of it is that you can have a handshake that goes on. And this is pretty simple. You just order a separate document. You can use that go over.

But if the country that you're taking your document to is not part of the Hague Convention, and there's still about 60 or 70 some countries that are not part of it, you have to go through the authentication and legalization process. And that's when you're taking that original document and maybe what you're having to do is taking it to the U.S. State Department, where they're going to do a certification on it. That's part of the authentication process. And then what you do is you take it to the foreign consulate or an embassy for that country of where it's going to, and then they review it and then they do a notarization and all types of different stamping with it. So this can certainly be a longer process to know about or that it can take longer. Apostilles are much quicker.

So some countries such as or I should say like the United Arab Emirates, you still need to get legalizations for. Recently, China and Canada both joined the Hague, so you can now do apostilles with them.

So far today we've talked about how to choose a name. We've talked about different types of documents. Let's now talk about different entity types.

Listed on this slide we have just some of the different kinds of entities that are out there. You can see we've listed over here the LLC, the limited liability company. We've got corporations, different forms of partnerships. And, of course, among all of these, with our customers and people who are listening to our webinar today, the LLC is probably the most popular entity type out there.

Here we've got a business entity chart, and of course I'm not going to read off all of this for you. But to be aware that if you go into our Resource widget, you can end up printing off our presentation over here today, and this will be part of that. And if you're a newer legal professional, this is really a handy little chart that tells you about what are some of the key differences between the different entity types. So if somebody asks you about an LLC, just so that you have a comparison of how is that maybe different from a C corp.

Ruth: On this slide, you can see the different steps to an entity's formation. A lot of these things here are by request. But in my experience, the things that we see typically are checking for name availability, ensuring you have the right documents, and that it's submitted to the state properly, and then just doing research and asking questions to your customer service specialist for the other information for the jurisdiction that you do want to conduct business in.

For example, in New York, just forming your LLC is not the end of it. You do have to submit a publication within 180 days, and the county that you choose to run in will run two periodicals for 6 to 8 weeks. And when you receive that publication affidavit, it has to be then submitted to the New York Secretary of State.

Forming the company is just one part of it, but also understanding how to keep it in good standing and in compliance is another.

Helena: Now that we've learned about names, about ordering documents, different types of entities, let's now talk about best practices for Delaware and New York.

Let's first talk a little bit why Delaware is so popular as a place to form your entities. And really for the people that are in Delaware, who work with Delaware, it comes down to three things. It's the Court of Chancery, the Division of Corporations, and the Delaware General Corporation Law.

The Court of Chancery has got the Chancellor and Vice Chancellors. They're all appointed, have to be approved by the Delaware State Senate, and they all have business backgrounds. The Court of Chancery hears almost nothing but business disputes, except for a couple of other small areas of jurisdiction.

The Division of Corporations tends to be run a little bit more like a business. We'll see some slides coming up with things like turnaround time so you can see all the different options that Delaware gives you over there.

And then, of course, the Delaware General Corporation Law has got a very advanced and flexible business formation statute. It gives a lot of certainty to officers and directors.

Ruth: In front of you, you can see the different processing methods that Delaware offers, what that turnaround time is, and what time CSC needs to have your documents so that we can get it over to the State in a timely manner. For the most part, Delaware is pretty good with sticking to the turnaround times. However, at the end of the month, end of quarter, and definitely by year end, things tend to fall behind. So just please keep that in mind when choosing your processing methods. Your customer service specialist should also have up-to-date information regarding the turnaround times.

If a filing is pre-cleared with Delaware, it certainly helps to speed things along. But please note there's only two options for filing that way, a pre-clearance. That's the 2 hour and the 24 hour.

Trying to avoid these errors will definitely ensure that your document can be returned in a timely fashion. So one thing that you want to make sure is that your document is executed properly. And what I mean by that is having a complete execution date that's not in the future, making sure that you have a live or conformed signature, the printed name of signer, and the appropriate signer title. So for corporations, the appropriate title is incorporator. For LLCs, it could be organizer, member, authorized person, pretty much anything as long as it's not incorporator. For the limited partnership, they have to have the general partner sign, and if that general partner is an entity, then the appropriate title for the signer on behalf of that entity. Please note the CSC cannot secure the file date if the document is not signed. So we don't want anybody to lose their file dates just simply because a signature is missing.

Another error that we tend to see is people using the wrong form or referencing the incorrect sections of law. So the best way is to get the documents right from the Delaware Secretary of State site so you can ensure you're using the correct, up-to-date form. Ideally your documents should be typed. But if it is going to be handwritten, please ensure that it is legible.

And lastly, CSC's name must be listed as Corporation Service Company, and the address must be listed properly as well, which is the 251 Little Falls Drive in Wilmington 19808. And only corporation filings require the county to be listed, which is New Castle County.

Now in front of you, you can see the same chart, but for New York. Given that routine filings can take up to six months, we do caution clients of choosing that as a processing method because you can wait that long only to find out that someone who chose the quicker processing method can take your entity name. The costs for expedite are pretty reasonable. Like a 24-hour, for example, is just $25. So it may make sense just to choose to expedite the filing.

The reasons listed here for rejection are very similar to Delaware. It's the same incorrect signature formatting, the agent's information not listed correctly, or that the qualification form is not completed accurately. For example, Section 5th of the qualification form, it should be the first box with CSC's Delaware address and Article 7th should be that of Delaware Secretary of State's address. But the number one reason that filings do get rejected is because the backer is missing altogether, or it's not completed properly.

Helena: Something else that all entities need to do when they're forming or qualifying, that is to have a registered agent. So that registered agent receives and forwards process and has to have an actual physical presence in the jurisdiction. Sometimes they receive different communications from the state, such as annual reports and things like that, and forward them on.

If there's one tip that I can give to our less tenured legal professionals who are listening to this is that when you're helping to form entities, if you're doing qualifications or whatever it should be, get a contact person from that entity and include that with your order with CSC. And then this way we can ensure that the proper contact person is listed, they're getting those emails, they're getting the communications, things like that. So that is just a huge tip to give you is that helps things out immensely on the backend of things.

Helena: Now let's talk about something that is important these days as part of entity formations, and that is the Corporate Transparency Act. The Corporate Transparency Act, also known as the CTA, went into effect at the beginning 2024, with the intent to make it harder for bad actors to hide their ownership of shell companies and other ownership structures. It's regulated by FinCEN, which is part of the U.S. Treasury Department.

The CTA applies to corporations, LLCs, and other entities that fall within the CTA's definition of a reporting company. Now there are 23 entities that are exempt from reporting requirements, and they typically include companies that are somehow regulated in one fashion or another. However, most smaller companies do need to report.

So reporting companies have to provide personal identifying information about the individuals who own or control the company, as well as the individuals who form the company. Only entities formed in 2024 have to report the individuals who form the entity. The required information includes names, birthdates, addresses, driver's license or passport numbers, and then the image of that driver's license or passport. And depending on when the entity was formed, entities may need to report by the end of 2024, or they have 30 to 90 days to report. And unfortunately, willful violations may result in civil or criminal penalties. FinCEN is still doing a lot of FAQs with this, so it's important to check back on these requirements.

Of course, CSC offers an end-to-end CTA filing service. Our team of CTA experts will help securely collect required beneficial owner and company applicant information, such as passports and driver's licenses, manage the outreach necessary to obtain all the supporting documents and the beneficial ownership information, prepare and file those BOI reports with FinCEN, and deliver your order submission confirmations and then the related evidence. And you can submit your CTA filing request to us in one of two ways, by logging into cscglobal.com and using the smart form, or completing a CTA Excel template and emailing it to us.

We do encourage you to really regularly double-check the web page that we have over here, the CTA Resource page that's listed over here on the right side because that'll have the latest information and guidance from FinCEN that we collect, and we'll have it over here on this page.