Chapter 1. Overview & Federal-State Framework
1-1. The US Has 51 Corporate Law Systems
There is no federal corporate formation statute in the United States. The US Constitution reserves business entity creation to the states under the Tenth Amendment. Each of the 50 states plus the District of Columbia has its own:
- Business corporation statute (forming C-corps and S-corps)
- Limited liability company statute (forming LLCs)
- Secretary of State (or equivalent) as the filing office
- Filing fees and renewal requirements
What is federal is taxation under the Internal Revenue Code (IRC) administered by the Internal Revenue Service (IRS), plus securities regulation under the Securities and Exchange Commission (SEC) for offerings to the public.
This bible covers:
- The Model Business Corporation Act (MBCA) — adopted in modified form by approximately 30 states, providing the baseline corporate framework
- Three popular formation states — Delaware (DGCL) for C-corps, Wyoming for LLCs, Nevada for both
- Federal layer — EIN application, tax classification election, federal compliance basics
1-2. Choice of State — Three Common Patterns
| Pattern | Best For | Reasoning |
|---|---|---|
| Form in home state | Single-state operations, brick-and-mortar small business | Avoids dual filing fees and foreign qualification |
| Form in Delaware (C-corp) | Tech startups planning VC raise | DGCL court of chancery, predictable case law, VC familiarity |
| Form in Wyoming or Nevada (LLC) | Asset protection holding companies, online businesses | Strong charging order protection, no state income tax |
Critical caveat: Forming in Delaware/Wyoming/Nevada and operating in California still requires California foreign qualification (CA Corporations Code §2105) plus California franchise tax (minimum USD 800/year). The "tax savings" myth is widely misunderstood.
Primary Source — Delaware General Corporation Law: https://delcode.delaware.gov/title8/c001/sc01/
Primary Source — Cornell LII DGCL: https://www.law.cornell.edu/wex/delaware_corporation_law
Primary Source — Wyoming Secretary of State: https://wyobiz.wyo.gov/Business/RegistrationInstr.aspx
Primary Source — Nevada Revised Statutes: https://www.leg.state.nv.us/NRS/
1-3. Three Entity Choices
| Entity | Federal Tax (Default) | Liability Shield | Best For |
|---|---|---|---|
| LLC | Pass-through (single = disregarded; multi = partnership) | Yes (member liability limited) | Small business, real estate, holding companies |
| C-Corp | Entity-level tax (21% federal, IRC §11) + dividend tax | Yes (shareholder liability limited) | VC-backed startups, public offerings |
| S-Corp | Pass-through with special status (Form 2553) | Yes | Small business avoiding double taxation, with US shareholders only |
Key constraint — S-Corp eligibility under IRC §1361(b):
- Maximum 100 shareholders
- All shareholders must be US citizens or US-resident individuals (no non-resident aliens)
- Only one class of stock
- Only US domestic entities
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Quick Decision Matrix
Choose the right business structure in 5 seconds.
| Your Goal | Recommended Structure | Key Consideration | Go To |
|---|---|---|---|
| Solo founder, low risk | Sole proprietorship or single-member LLC | Simplest setup, limited liability | Chapter 3 |
| Partnership with co-founders | LLC or Limited Partnership | Operating agreement essential | Chapter 3 |
| Seeking venture capital | Corporation (C-Corp equivalent) | Investor-friendly structure | Chapter 3 |
| Small local business | LLC or local equivalent | Balance of simplicity and protection | Chapter 3 |
| Asset protection priority | LLC with strong veil | Jurisdictional differences matter | Chapter 4 |
5-second answer: Most small businesses should start with an LLC (or local equivalent). Read Chapter 2 for requirements, Chapter 3 for step-by-step setup.