Founders spend a lot of time thinking about product, customers, and capital, but two unglamorous decisions can quietly shape the future of your business: where you form your company and how you maintain your corporate records. Make those choices without careful thought, and they can come back to bite you. So let’s talk about them.
Where Should You Form Your Business?
In my experience, most founders should either form in the state where they plan to operate or, if they have a compelling reason, in Delaware. Those two options are a good fit for most businesses. Forming in your home state (or the state where you plan to conduct most of your business) is almost always cheaper, cleaner, and far less complicated than choosing a distant “business-friendly” state. If your lawyer isn’t barred in the state you choose (other than Delaware, whose laws most corporate attorneys are familiar with), you’ll either need to hire one who is or pay your local attorney to learn that state’s rules. Let’s say you live in Minnesota and plan to run your business here, but you’d like to form your company in Delaware. Under current law, if you form a Delaware corporation, you’ll pay annual filing fees and franchise taxes in Delaware, plus foreign registration fees and annual renewal fees in Minnesota. If you form a limited liability company, you’ll pay an initial registration fee and annual flat fees in Delaware, plus a foreign registration fee in Minnesota, but you won’t pay annual renewal fees in Minnesota. In the grand scheme of company costs, these fees are small potatoes, but why not keep things simple to start?
Some people are drawn to Delaware because forming there feels prestigious or because its corporate law is famously well-developed, and that can be a perfectly valid choice in certain situations. Just remember that if you aren’t based in Delaware, you’ll need a registered office and agent there, which you’ll typically obtain through a corporate services provider. None of this is inherently bad; it just means you should make the decision intentionally, ideally after talking with an attorney who can walk you through the real pros and cons rather than relying on the AI-generated answer to the question, “I started a business, now what?”
Corporate Formalities: The Stuff That Actually Matters
The second topic founders tend to overlook is corporate formalities (the basic habits and documents that help separate you from your business). Even if your business is organized as an LLC rather than a corporation, governance and record-keeping practices help establish the company as a separate legal entity. I recently worked with a CEO of a decent-sized Minnesota company who asked why it mattered to prepare a written action approving revised bylaws I had drafted. Under the company’s governing documents, the revised bylaws could not take effect without shareholder approval. The CEO, who was also a shareholder, could have held a shareholder meeting to approve them, but a written action was more efficient. Both paths were permitted by the company’s bylaws.
Here’s how I think about it: corporate formalities are one of several practices that help reinforce the legal separation between you and your business. They help legitimize your operations and keep you organized as your company grows. These formalities include having bylaws or an operating agreement that governs how your business runs (and actually following it), holding shareholder or member meetings, holding board or manager meetings, keeping records of those meetings, and separating your business and personal finances with business bank accounts and separate lines of credit. It is also critical to define who has authority to bind the business and to sign contracts in the company’s name.
Who Can Actually Bind the Company?
On that point, when you sign a contract, always sign in your capacity as an officer, manager, or owner of the company, whatever your role is—not in your individual name. Your signature block should read something like “Jane Smith, Manager of [Company Name] LLC.” If you sign only as “Jane Smith,” you may create ambiguity about whether you intended to sign personally or on behalf of the company, increasing the risk of personal liability.
Bonus tip: If you have co-owners or employees, make sure your corporate records clearly identify who has authority to sign agreements for the company. Everyone on the team should understand who can bind the business to a contract. Just as important, make sure your actual practices match your written policies so third parties are not left with the impression that unauthorized employees can commit the company to agreements. This becomes even more important as you delegate responsibilities and empower others to act on the company’s behalf.
Your lawyer isn’t nagging you to do this stuff just to justify their hourly rate. These practices help maintain the legal separation that protects you from the risks your business takes on. Poor corporate housekeeping alone will not automatically result in veil-piercing, but it can be one factor courts consider when evaluating whether the business has been treated as a truly separate entity. These practices also protect the company from unauthorized actions.
Keep Your Corporate House in Order
Once you create your business, the state where you formed it may require annual reports and fees to keep the entity in good standing. For example, Minnesota requires LLCs to file an annual renewal with the Secretary of State each year. It’s currently free to file online, but if you forget, the state can administratively dissolve your company. Not a great look if prospective customers or business partners check you out online and see that the Secretary of State removed you from the chat.
Investing in professionally drafted governance documents is one of the most cost-effective legal investments a founder can make. AI tools are notorious for drafting documents that “look” functional but are riddled with internal inconsistencies or based on the wrong law or state. For corporations, core governance documents include bylaws and an initial written action appointing the board and officers. If there are multiple owners, a shareholder control agreement can help clarify voting and transfer rights. For LLCs, core governance documents include an operating agreement and an initial written action confirming the members and their ownership interests and—if your LLC is manager-managed or board-managed—appointing the managers or board members. Your initial written action should also include banking resolutions authorizing the owners and/or officers to open a bank account. Banks commonly request documents such as articles of incorporation or organization, a written action identifying who is authorized to sign and open accounts, a copy of your bylaws or operating agreement, your federal employer identification number (EIN), and, if applicable, your state tax ID number. Banks love paperwork almost as much as (maybe even more than?) lawyers do.
For the love of your business—once you have your documents, keep them organized and up to date. Name them clearly, store them where you can find them, and have your attorney revise them as your business needs change. If you shift from a member-managed LLC to a manager-managed structure, or raise capital and add a new class of stock with rights and preferences not reflected in your original articles, your documents should evolve with your business. My rule of thumb is simple: the paper should match the reality. Updated documents are lifesavers when you have a dispute with co-owners or you’re preparing for a sale. Clean records save time, money, and stress, and future-you will be grateful you kept things in order.
Next up in this series: the five most common mistakes founders make in their operating agreements, and how to avoid them.
I’m not your lawyer. This is not legal advice. This post is an oversimplified summary of complex topics. It is intended for general informational purposes only. Reading this post does not create an attorney-client relationship. If you want advice tailored to your unique circumstances, reach out and we can talk.