Businesses are formed or incorporated at the beginning of their existence. This happens through an act called "incorporation" or "formation," which is typically handled through a state's Secretary of State. A business owner files the required paperwork with this government body, and the Secretary of State issues a set of Articles of Incorporation or Organization to commemorate the act of creating the entity. That state of incorporation is referred to as the entity's domestic jurisdiction.
At the time of formation, the entity owner also decides the formation type of the entity. The formation type determine the personal liability of the founders, how taxes are paid, and other important details.
The main formation structures are:
- Sole Proprietorship
- Limited Liability Company (LLC)
A business must also decide in which states to establish themselves. While a business forms in a domestic jurisdiction, it is not required to operate only in that market. For example, more than 65% of Fortune 500 firms incorporate their business in Delaware, despite residing elsewhere.
Understanding the formation of an entity is key to evaluating the risk profile of a business. When creating a Business in Middesk, we evaluate the Business in all U.S. markets to determine the entity's footprint, including its domestic and all foreign jurisdictions.
Determining the actual formation of a business is important to answer questions like:
- How long has this entity been in business?
- Where did this business establish itself?
- What type of entity is this business?
Middesk Formation Example
"How long has Middesk been in business?"
Given Middesk is based in California, you might think the best place to look to pull our formation record would be California. However, Middesk was set up as a Delaware Corporation in March of 2018, and registered to do business in California in December of 2018.
This simple example shows the importance of evaluating an entity in all U.S. markets to uncover an accurate and complete picture of a business.
Updated about 2 years ago