11.2 Entity Formation and Dissolution

Formation is how an entity becomes a legal person (or how a sole proprietor or partnership starts operating). Dissolution is how that person stops being an ordinary going concern. The PCCE tests the document, the filing office, and the sequence. Paralegals do not decide which entity to form — that is legal advice and a UPL risk — but they run the checklist the lawyer designed.

Public organic filings

A corporation is formed when articles of incorporation (in some states, a certificate of incorporation) are filed with the secretary of state or equivalent and the state accepts them. Articles typically state the name, authorized shares, registered agent, registered office, and incorporator. An LLC is formed by filing articles of organization or a certificate of organization. A limited partnership is formed by filing a certificate of limited partnership. Those public instruments are organic documents. They create the entity.

A general partnership and a sole proprietorship generally do not come into existence by a creation filing. They may still need licenses, tax registrations, and an assumed-name certificate. Do not confuse “we filed a DBA” with “we formed a corporation.”

Name availability. The name must be distinguishable on the records of the filing office and must contain the required entity ending (Inc., Corp., LLC, L.P., and the rest — statutes vary on exact abbreviations). Many states allow a name reservation for a limited period. The paralegal searches the state database, flags conflicts, and does not tell the client “the name is legally yours forever” after a search. A trademark search is a separate, optional project the lawyer may request; it is not a substitute for the secretary-of-state name check.

Bylaws vs operating agreement vs partnership agreement

After the public filing, the owners adopt an internal governance document. These are usually not filed with the state:

• Bylaws — corporation. Meeting rules, officer titles, quorum, and share procedures.
• Operating agreement — LLC. The members’ contract on voting, distributions, buyouts, and management.
• Partnership agreement — general partnership, LLP, or the limited partnership agreement of an LP.

If the exam asks which document is filed to create the entity, the answer is the articles/certificate, not the bylaws or operating agreement. If it asks which document tells members how to vote on a buyout, the answer is the operating agreement. Default statutory rules fill gaps when the owners never signed anything — another reason the lawyer wants a signed agreement in the book on day one.

EIN, assumed names, and promoter contracts

An Employer Identification Number (EIN) is issued by the IRS (Form SS-4), not by the secretary of state. Banks, payroll, and most information returns need it. A sole proprietor with no employees may use a Social Security number, but many still obtain an EIN. Getting an EIN does not create a state entity and does not confer limited liability.

An assumed name, DBA, or fictitious name filing lets a person or entity operate under a trade name. It is public notice. It does not, by itself, create an entity or confer limited liability. “Chen Baking d/b/a Sunrise Cakes” is still Ana Chen if she never formed an LLC or corporation.

A promoter is a person who acts for a corporation before it exists. Pre-incorporation contracts — a lease, an equipment purchase, a founder’s services deal — bind the promoter unless the other party agrees to a novation after the corporation is formed, or the agreement clearly releases the promoter. The new corporation is not automatically a party. It may adopt the contract after formation; adoption makes the corporation liable but does not always let the promoter off the hook. Exam tell: a lease signed “for NewCo Inc.” two weeks before articles are filed, then the company moves in and pays rent.

Dissolution: voluntary, administrative, judicial

Dissolution is the legal event that ends ordinary business and starts winding up. Three labels appear on national exams:

• Voluntary dissolution. The owners or the board (and, for corporations, often the shareholders) authorize dissolution under the statute and the organic documents. The entity files articles of dissolution (names vary). Tax clearance may be required — states vary.
• Administrative dissolution. The secretary of state dissolves the entity for failing to file an annual or biennial report, failing to pay a franchise tax or fee, or failing to maintain a registered agent. This is the “we forgot the paperwork” dissolution. Many statutes allow reinstatement if the entity cures within the statutory window.
• Judicial dissolution. A court dissolves the entity — deadlock on the board, oppression of a minority owner, illegal or fraudulent activity, or another statutory ground. The lawyer litigates; the paralegal organizes the minute book and the ownership ledger the court will want.

Bankruptcy is a federal proceeding. It is not a substitute label for these three dissolution types, and a discharge does not automatically mean the state entity has been dissolved.

Winding up and surviving liabilities

Winding up is the process after dissolution: stop ordinary new business, collect assets, notify known creditors, pay or provide for claims in the statutory order, and distribute any surplus to owners. Officers or a designated liquidating person may finish the work. Filing articles of dissolution is not the same as “nobody can ever sue us.”

Surviving liabilities. Claims that arose before dissolution can often still be asserted for a statutory period. Insurance may still respond. Owners who received unlawful liquidating distributions can be asked to return them. A judgment against a dissolved corporation is not automatically a judgment against shareholders — unless there is a guarantee, a veil-piercing case, or an unlawful distribution. Do not tell a client that dissolution “wipes the slate.”

Paralegal formation and dissolution checklists

A typical formation checklist the PCCE expects you to recognize:

1. Confirm name availability and any required entity ending; reserve the name if the lawyer directs.
2. Identify a registered agent and registered office in the state of formation (an individual resident or a commercial agent authorized there).
3. Draft and file the articles/certificate; calendar the filing date and keep the stamped copy.
4. Prepare bylaws or the operating agreement for the lawyer; organize the initial consent or organizational meeting.
5. Obtain the EIN; open the bank account only with a proper banking resolution.
6. File any assumed name, any still-required publication, and an initial report if the state requires one.
7. Build the record book on day one (see 11.4).

A typical dissolution checklist: locate the authorizing resolution or court order, file the state dissolution form, notify the IRS and state tax agencies, send creditor notices, collect the minute book and stock or membership ledger, and track claim deadlines. The paralegal calendars. The lawyer decides what legal effect the filing has.

Worked path. Two founders want an LLC. You search the name, the lawyer picks a registered-agent company, you file articles of organization, the members sign an operating agreement, and you apply for an EIN. Two years later they ignore the annual report. The secretary of state administratively dissolves the LLC. Curing the report and applying for reinstatement is not the same as a judicial dissolution for oppression, and it is not voluntary just because nobody sued.

Trap. Calling bylaws the “formation filing.” Treating a DBA as limited liability. Assuming a promoter is off the lease because the corporation later moved in. Calling administrative dissolution “voluntary.” Treating winding up as optional if the bank account is already empty.