Entity document definition: Why do you need them?
The excitement of a new business venture can be intoxicating. But nothing will bring you down faster than the sea of red tape you must wade through to really get your business started. To help, we've detailed the most common entity documents entrepreneurs need and what each must contain.
The paperwork you'll need to file to start your business properly will vary based on a number of factors. First, you have to take into consideration your location. Certain states and localities have specific requirements to establish a business, so it is always best to check for local regulations.
The second set of variables concerns the type of entity you've chosen to create. The needs of a sole proprietorship or a partnership differ from those of a limited liability corporation (LLC) or corporation.
This article will give you a head start on your next business venture by explaining:
- What entity documents are
- Common examples of entity documents
- The required documentation for entity formation
- Additional documents you’ll need
What are entity documents?
Entity documents definition: Entity documents are legal papers establishing that an entity — a corporation, partnership, or LLC — exists.
These documents vary according to which entity you’re creating, but they all outline the entity’s name, purpose and management structure. Some documents, like bylaws, may go further and detail the rules governing the entity, any partners and even shareholders.
Examples of entity documents
Though bylaws and articles of incorporation are synonymous with entity formation, there are more entity documents than you might think. Generally speaking, corporations and LLCs require more documentation than a sole proprietorship, and those documents can vary by state.
That said, some entity documents you should have on hand if you’re preparing to form an entity are:
- Form reserving your business name
- Articles of incorporation
- Articles of organization
- Bylaws (for corporations)
- Operating agreements and/or partnership agreements
- Shareholder agreement
Required documentation for entity formation
Entity documents for sole proprietorship: Certificate of Assumed Name
If you are opening a sole proprietorship or an unincorporated partnership, the paperwork you must complete is relatively light. One thing you will need to do, however, is fill out a Certificate of Assumed Name.
In most states, these forms can be found in the county clerk's office, and registering them involves a nominal fee. This form aligns the assumed name (the name you have chosen for the business) with the business owner’s name, certifying no separation between the personal and the professional for tax and liability purposes.
The form works the same for unincorporated partners, but such partners should have a signed partnership agreement established before filing a Certificate of Assumed Name.
Limited Partnership entity: Certificate of Partnership
If two or more business owners wish to form a Limited Partnership, they must complete a Certificate of Partnership. Limited Partners have limited management input, but, in turn, they take on limited liability for legal claims.
The details of a Limited Partnership are spelled out in the Articles of Partnership. Here, each party enters into an agreement concerning the purpose of the partnership's business, the level of contribution demanded of each partner, how the partnership's profits will be divided, how the partnership will be managed, and under what circumstances partnership rights can be transferred and sold.
Certificates of Partnership are typically filed with the Secretary of State in the state where the partnership will do business.
Limited Liability Company (LLC): Certificate of Organization
A Limited Liability Company (or LLC) is a company that can be owned by one or more people, known as members. As the name implies, the LLC limits the amount to which individuals are personally liable, protecting business owners from litigation.
LLCs also offer some flexibility on taxation, making them a very popular choice. To form an LLC, business owners must file a Certificate of Organization with the Secretary of State. This document is also known as the Certificate of Formation in some states. Each state's filing requirements may vary somewhat, but the overall process is similar.
After filing the required paperwork, the state sends back the legal certificate, which states when the LLC was duly formed and recognizes it as a legal entity within the state. Commonly required information on the Certificate of Organization includes:
- LLC name. Most states require that your business name include the designation LLC or similar wording.
- The effective date of the LLC.
- The name and address of the registered agent working on behalf of the LLC.
- The company's principal office address or the address of the registered agent.
- Whether the LLC is managed by members or managers.
In some states, the required documentation is known as Articles of Organization, rather than a Certificate of Organization but there exists very little practical difference between the two.
Entity documents for a corporation: Articles of Incorporation
A corporation is perhaps the most complex business type, representing an independent legal entity owned by shareholders rather than a group of partners, members or sole proprietors.
Corporations can take advantage of their ability to raise capital through stock sale, pay taxes separately from their owners, and protect their shareholders from the responsibility of debts or the threat of legal action.
To initiate a corporation, business owners must file Articles of Incorporation with the Office of the Secretary of State in the state the business chooses to incorporate.
The Articles of Incorporation outline the governance of the corporation and the corporate statutes under which the corporation operates. The articles may vary from state to state, but typically they include:
- The name of the corporation.
- The name and address of the registered agent working on behalf of the organization.
- The type of corporate structure chosen by the organization, e.g., profit corporation, non-profit corporation, professional corporation
- Name and address of initial board of directors
- Number and types of authorized shares
- Duration of the corporation
- Name, signature and address of the incorporator responsible for setting up the corporation.
Additional documents for entity formation
Professional licenses
In addition to formation documents, many states require specific licenses to conduct business in a particular trade. The occupations requiring licenses vary widely, so it is best to check with local restrictions if you are uncertain.
For example, those in construction work, such as builders, carpenters and plumbers, are typically members of licensed professions, as are doctors, lawyers, private investigators and child-care providers.
A growing number of states have added massage therapists to that list, and in some states, like Texas, geoscientists and interior decorators are license-only occupations. For details about which businesses require specific licensing, consult your state's business services office.
Local licenses
One last bit of red tape before you can get your company off the ground: Ensure you have filed any appropriate paperwork necessary for local licensing.
This may be issued by the county or the city in which your business is located and can involve such details as zoning or alcohol sales. For example, your business may need a special license to conduct business within the city limits or a specifically zoned neighborhood.
Business insiders are advised to pay particular attention to sales tax permits within their area. Most states and local governments assess a tax on selling different goods and services.
To be fully prepared, verify whether your business is obligated to collect these taxes and obtain the necessary permits. These permits and other local licenses can be found at the county, township or city clerk's office.
How to manage entity documents
The difficulties inherent in tracking countless documents put decision-makers in a compromising position if their advisors — namely the general counsel and their legal strategists — do not have immediate access to the most recent entity documents.
In the old days, things moved much more slowly, as these documents were not available digitally; largely, as technology has evolved, so have how — and the speeds at which — business may be conducted. This also allows documents and filings to be updated quickly and on the fly, with the newest version easily separable from the previous one.
Effectively managing entity documents requires:
- A digital system: When decision-makers have a central repository to track entity documents, they have access to those documents at any given moment.
- A customizable database: That system should also fit the organization’s specific needs. After the initial customization of the database, it should also be available for further modification pertaining to any changes in the organization itself. That is, the database should be able to be characterized as a reflection of the structure underlying the corporation and its subsidiaries. As previously mentioned, many corporations are restructuring or participating in mergers, acquisitions or dissolutions regularly. Without the ability to easily modify a directory of documents, the system becomes more of a burden than a boon.
- Ongoing maintenance: Once the structure is established, the system should be rendered so that the addition of documents to the database will clarify instead of clutter. Each entity requires a special touch in its record-keeping, so the initial filing of documents will often be localized to those directly responsible for the upkeep of the entity itself, as opposed to the corporate umbrella of which it is a part.
- The ability to update the entity: Each entity will require multiple annual filings, potentially including annual reports, corporate tax returns and domain name renewals – these tasks are occasionally outsourced, but this can become very costly in no time at all given the sheer number of entities some corporations possess. The maintenance tasks that most often involve in-house execution can involve other tasks beyond upkeep, such as multiple filings to impose the dissolution of an entity. To accomplish this, it is often necessary to file withdrawal or dissolution notices, file taxes, retire domains and trademarks, and obtain a tax clearance so there is no mistake to be made about the dissolution during the next tax period.
- Security and controls: Security is a major concern in any entity management system. The most robust systems allow permissions to be assigned so that the right people can view the right documents at the right time. In this way, only personnel with the correct authority can act on documents relevant to their specific job function. Workflows can be established so that compliance and legal tasks are accomplished on time and correctly, avoiding missed deadlines or incorrect filings.
Master entity documentation with technology
Depending on the entity you’re forming, you could have nearly a dozen different documents to contend with — not to mention the many more you’ll create in the course of doing business. Whether you are a sole proprietor just getting your business off the ground or a well-established financier looking to start another corporation, entity management software can help you stay on top of your business needs at formation and beyond.
Entity Subsidiary Management, part of the Diligent One platform, helps you form an entity efficiently and compliant and centralize all entity documents moving forward so you can confidently make strategic decisions for your business.
