1. The legacy process

How are LLCs born?

Limited Liability Companies are widely used in the US as "pass through" vehicles for tax reasons: its revenue is taxed - or passed through - at the level of its Members and not at the Corporate level itself.

At the extremes, they're being used as single purpose vehicles, e.g. to hold a property or a trademark, or as the operating entity for large enterprises, and any purpose inbetween.

In Delaware, home of most US LLCs, a simple Certificate of Formation is filed with the Delaware State Registry with mention of the chosen name and the name of the first Member(s).

If the desired name is not taken, a new LLC will typically be formed on the same day or within a day of filing, without any verification whatsoever of the identity of the first Member.

The only requirement is for the entity to keep a registered office in the State where it is incorporated, and to pay an annual franchise tax to keep it in good standing.

As a result, filing agents are typically used to provide a business with its registered address and maintain it during its lifetime.

Why is this process still largely paper-based?

We believe there are two main reasons:

1. Inertia

Companies formation is still largely done by lawyers and accountants. Their rituals go back to a time when companies were set up for a privileged class in society that could afford to surround itself with advisors and experts.

Resistance by middlemen combined with a reluctance to move away from the way things have always been done often conspire against the adoption of new technologies.

It is not so long ago that we booked our flights through a travel agent, whilst now we all buy tickets online and download our boarding passes on our smartphone.

Company formation will inevitably go the same way!

2. Legal validity

Secondly, new technology brings old fears. Will a company formed entirely online, without legal intermediaries, still be legally valid? And if it can be done so cheaply, can it be good?

These fears may be justified and deserve a closer look.

The source of all legal validity is self-evidently the law. In the realm of company formation, Governments have by law monopolized the issuance of new incorporation certificates - legal "birth certificates" for companies - to official Registries.

Some of these Registries may be privately run however typically they are part of Government. In the United States, each State has its Registry.

It is by filing with such Registry that a new company is validly constituted: the new entity will have gained separate legal status from its founders and - if so chosen - will benefit from limited liability.

Typically, not just everybody can file: in some countries, only licensed entities can do so. In other jurisdictions, most notably the UK, anybody who wishes to form a new company can file directly with the Government Registry, in paper form or online.

In summary, there's due process in forming a new legal entity. Legal validity doesn't come from lawyer involvement - though lawyers like us to believe it does! - but from respecting due process.

As long as new technology follows due process, it can disintermediate away the analog and anachronistic rituals administered by the legal profession.

The result will be a process that can be condensed in both speed and cost. Before we examine how, we need to have a summary understanding of how US LLCs are created.

Last updated