Choice of State
If the entrepreneur decides to form a legal entity rather than operate the business as a sole proprietorship or general partnership, the clinic will have to recommend a jurisdiction in which the entity will be formed. The usual choice is between Delaware and the state in which the business is located.
The advantages of Delaware are a very well-developed and widely-respected General Corporation Act, the credibility that attaches to a business incorporated in the state in which the great majority of Fortune 500 companies have incorporated, and the perceived “neutrality” of Delaware particularly when the owners are from different states or different countries. The disadvantages are double filings and double costs (because the corporation will have to register or “qualify” in its home state even though incorporated in Delaware), and the possibility that the corporation may be subject to service of process and suit in Delaware which may be inconvenient and expensive to defend.
A related consideration is the necessity of having a registered agent and registered office in Delaware (such as CT Corporation System) and another registered agent and registered office in the home state (usually one of the founders).
Regardless of the type of business entity chosen, the clinical student must conduct research to determine if the preferred business name is “available” for use. First and foremost, this requires the student to examine the records of the Secretary of State in the jurisdiction of choice to be certain that there is not already in existence a corporation, LLC, or other entity with the same name. If so, the Secretary of State will not permit the new entity to be formed. In some jurisdictions, the prohibition applies to any name that is “similar” to the preexisting name in appearance, sound, or meaning. The applicable test varies from state to state.
Proposed names can be searched in most jurisdictions through the Secretary of State’s online data base. See, for example:
State laws permit an entrepreneur to “reserve” a business name with the Secretary of State (if the entrepreneur is not quite ready to form the entity) on the payment of a prescribed reservation fee. In most cases, the entrepreneur will not wish to postpone forming the entity, and reservation of the name will be unnecessary.
If the business is to be operated as a sole proprietorship or partnership under a name that is different than the name(s) of the owners(s), state law may require that the “assumed” or “fictitious” name be publicly recorded, e.g., in Illinois, with the clerk of the county in which the principal office is located.
Even though a search of the official data base indicates that there is no preexisting corporation or LLC with the same name that would preclude formation of the entity that should not be the end of the student’s inquiry. Further searches should be conducted to determine if there is a preexisting business name or trademark that might be considered confusingly similar to the name that the entrepreneur wishes to use. If there is, the clinical student must advise the client of the risk of an action for trademark infringement or unfair competition lawsuit and perhaps recommend that another name be chosen.
In addition to the search of corporations and LLCs in the home state, online searches that might be employed include (a) the data base of corporations and LLCs maintained by Secretaries of State in states adjacent to the state in which the new entity intends to conduct business; (b) the record of trademark registrations and applications maintained by the U.S. Patent and Trademark Office, (c) telephone directories in the area where the new business is located; and, (d) a general search through Google or Yahoo.
These online searches by the student are not comprehensive, and the client should be urged to order a company name search from a commercial searching organization, such as Thomson & Thomson, if the client can afford the service charge of several hundred dollars.
The on-line search of applicable data bases is only the first half of the job. When the search is complete, the student will be required to exercise his or her judgment about the likelihood of confusion and the possibility that a prior user or registrant may assert a meritorious claim for trademark infringement against the new business. This usually requires the student to write a letter or otherwise communicate to the client (a) the results of the search; (b) each prior use, registration, or application for registration that presents a risk of an infringement claim; and, (c) the clinic’s opinion regarding the seriousness of the risks presented. See Opinion Letters for an example of how this might be done.