Free eBook on Lien-Related Post Funding Due Diligence

As a lender, you need to know immediately if your customer is experiencing financial distress that could result in bankruptcy or debtor default. In this FREE guide you will find:

  • Top 5 Mistakes to Avoid on UCC Financing Statements
  • What a Search to Reflect can do for you
  • When to File Continuation Statements
  • Lien Monitoring Programs
  • Importance of Monitoring to Reveal Name Variations

Download this free guide today!


Post funding due diligence eBook *Disclaimer

The Basics of Collateral Descriptions on UCC Financing Statements

Figuring out how to describe the collateral on a UCC Financing Statement to best protect your interests can be confusing. In fact, one of the most common questions FCS hears from customers and prospects is “What collateral language should I use on my UCC filing to make sure we’re protected?”

Bradley B. Clark answers that question and more in this webinar presentation.



Why Search for Tax Liens and Judgment Liens?

Judgment Lien and Tax LienThe short answer is that searching Tax Liens and Judgment Liens while conducting your due diligence might save you money and hassle, but let’s back up and explain the reasoning.

The first thing to understand is that both Tax Liens and Judgment Liens have priority relative to other types of liens, such as a UCC, based on the date of its filing, and this affects your ability to collect. For example, if your debtor has an outstanding Tax or Judgment Lien filed against him, those liens will most likely prime a subsequent perfected UCC in the event of a default.

In addition to affecting priority, it’s important to note that both Judgment and Tax Liens are involuntary liens, which means the debtor has not entered into the deal willingly. Neither of these liens requires a signature from the debtor, and there is no underlying agreement to which both parties agree. A debtor should not be relied upon to disclose these liens, and it’s even possible that they are not aware the lien exists. This is why a thorough due diligence search will reveal all types of liens.

Depending on the jurisdiction, Judgment Liens or Tax Liens can be filed in either the state or the county filing office. When conducting due diligence searches, make sure that you use a service provider that’s capable of finding name variations using broad-based searching techniques.

If you’re interested in learning more about this topic, download our reference guide What Liens to Search For today.



California Assembly Bill 2416

Assembly Bill 2416, a bill currently moving through the California Legislature, could have negative effects on California business owners. The bill will allow an employee to place a lien on the personal property of their employer. Many organizations are opposed to this bill and have been vocal about their opposition, including the California Escrow Association. Below is the CEA’s stance on the bill:

AB 2416 (Stone) would allow an employee, employee representative, or even a creditor of the employee to record a lien against an employer’s real and personal property for alleged unpaid wages, without any review by a court or the Labor Commissioner to determine validity.

AB 2416 provides no protections to innocent property owners against erroneously recorded liens, and grossly insufficient remedies for the property owner harmed by the actions of an employee or former employee.

As an escrow holder or title insurer, if AB 2416 were to pass, you would be faced with recorded “wage liens” filed by persons likely unknown to you and who are not parties to your transaction. You would then need to engage in further fact-finding to ascertain if the liens were valid, and possibly to assist with obtaining information to pay the lien(s), a surety bond to assure payment, or otherwise to obtain lien releases and instructions, or await action of a court or the Labor Commissioner, prior to closing a transaction.

We seek your help in defeating AB 2416, and ask that you fax, call, and email your California Senator and Assembly Member today to request his or her “NO” vote on AB 2416 when it next comes before them. We have provided talking points below.  The most effective letter includes a few of these points together with specifics of how this would affect both you as well as consumers in your transactions.  If you are unable to write a letter, please at least call and express your concerns and your request for a “NO” vote.  For your convenience, please click HERE to find your California Senator and Assembly Member and CALL or FAX (or both) today.

CEA, CLTA, and a substantial coalition (see our letter, attached) are opposed to AB 2416, which would:

– Allow employees, employees’ representatives, and third-party creditors, to file pre-judgment wage liens against the real property of innocent third party homeowners and the real and personal property of an employer.

– Interfere with financing opportunities and real estate transactions for third party homeowners and employers.

– Harm businesses, from small to large, by potentially flooding them with unsubstantiated wage lien claims.

– Violate due process as there is no realistic opportunity for an employer or third party to prevent the taking of their property through the recording of a pre-judgmentwage lien.

– Force innocent third parties and the employer to incur costs and attorney’s fees to remove liens from real and personal property.

AB 2416:

– Is not limited to minimum wage violations – but includes all wage violations and all penalties under the Labor Code, as determined by the employee without having to prove the lien validity to an independent court or state agency that would normally require proof of validity BEFORE the lien is recorded.

– Is a threat to property owners – any remedies in the bill do not begin until afterthe lien is recorded.

– Provides opportunities for misuse with grave consequences and insufficient remedies.  Though the bill prohibits the use of the lien unreasonably or in bad faith, a disgruntled employee could effectively delay an employer’s sale, purchase, or refinance of real or personal property, to the great detriment of the employer. The maximum recovery by an employer against whom a lien is wrongfully recorded is a fine of up to $1,000 and possible recovery of attorney fees and costs, at the discretion of the court.

Under AB 2416, if an employer was selling, buying, or refinancing real property (or personal property subject to a security interest), the filing of a lien by an employee, agent of the employee, or third party creditor of the employee (“lien claimant”) would effectively stop that transaction from proceeding, resulting in delays and potentially terminating otherwise successful transactions.  California’s real estate market, recovering in some places and still tenuous in others, can ill afford this uncertainty.

Beware that proponents of AB 2416 will falsely assert:

– That there are not adequate remedies for recovery of unpaid wages without costly proceedings.  Just last year, the business community supported AB 1386, which provided the Labor Commissioner with an earlier opportunity to review and lien property, to protect the interests of employees. The Labor Commissioner launched the corresponding campaign against wage theft on April 30, 2014 (

Insufficient time has elapsed since the passage of AB 1386 to suggest a problem remains, and the legislature should allow adequate time to determine the effectiveness of those remedies rather than acting hastily with further changes

– That the bill will not result in erroneous recordings of wage liens on the wrong property, or against the wrong party.  Though the bill provides that a lien may not be filed on the employer’s primary residence, filers of wage liens will likely not search the county records adequately to determine the correct property on which to file the lien.

– That the bill provides for adequate safeguards against the filing of invalid liens.  Though the bill currently provides that an employer may “bond around” a lien or that liens are not valid where there a collective bargaining agreement is in place, AB 2416 would place an undue burden on property owners, escrow holders, title insurers, and others, to ascertain non-public information to determine the validity of the lien.


Model Administrative Rules (MARS) and Search Logic

Following up on our post from earlier this week, What are “Standard Search Logic” and the Model Administrative Rules?, here’s a behind-the-scenes look at how we created an online UCC search system that follows MARS guidelines. 

An FCS online search report is intended to satisfy the requirements under the UCC Revised Article 9 Model Administrative Rules (MARS), which provide state filing offices with a set of guidelines for producing a legally compliant UCC lien search report. The FCS Online Search System was designed to satisfy the requirements under MARS while providing the searcher with increased flexibility.

Flexible search logic generates a more inclusive search report and addresses the inconsistencies in searches performed within states that did not effectively adopt the MARS guidelines. Further, these specially designed broad-based searching features aid in locating involuntary liens such as Federal and State Tax Liens, Judgment Liens and liens that may not be located in state databases limited to the MARS guidelines for the reporting of UCCs.

We recommend that users structure their search strings so possible variations of the name including abbreviations, alternate spellings and initials may be located. A successful search begins before the name is ever keyed into the system by considering what possible variations may exist and then using the proper search string to locate those name variations.

From the International Association of Commercial Administrators

T503 Search methodology – Search results are produced by the application of search logic to the name presented to the filing officer. Human judgment does not play a role in determining the results of the search.

503.1 Standard search logic – The following rules describe the filing office’s standard search logic and apply to all searches except for those where the search request specifies that a non-standard search logic be used:

  • 503.1.1 There is no limit to the number of matches that may be returned in response to the search criteria.
  • 503.1.2 No distinction is made between upper and lower case letters.
  • 503.1.3 The character “&” (the ampersand) is deleted and replaced with the characters “and” each place it appears in the name.
  • 503.1.4 Punctuation marks and accents are disregarded. For the purposes of this rule, punctuation and accents include all characters other than the numerals 0 through 9 and the letters A through Z (in any case) of the English alphabet.
  • 503.1.5 The following words and abbreviations at the end of an organization name that indicate the existence or nature of the organization are “disregarded” to the extent practicable as determined by the filing office’s programming of its UCC information management system: [Insert the filing office’s own “Ending Noise Words” list here.]
  • 503.1.6 The word “the” at the beginning of an organization debtor name is disregarded.
  • 503.1.7 All spaces are disregarded.
  • 503.1.8 For first and middle names of individual debtor names, initials are treated as the logical equivalent of all names that begin with such initials, and first name and no middle name or initial is equated with all middle names and initials. For example, a search request for “John A. Smith” would cause the search to retrieve all filings against all individual debtors with “John” or the initial “J” as the first name, “Smith” as the last name, and with the initial “A” or any name beginning with “A” in the middle name field. If the search request were for “John Smith” (first and last names with no designation in the middle name field), the search would retrieve all filings against individual debtors with “John” or the initial J as the first name, “Smith” as the last name and with any name or initial or no name or initial in the middle name field.
  • 503.1.9 If the name being searched is the last name of an individual debtor name without any first or middle name provided, the search will retrieve from the UCC information management system all financing statements with individual debtor names that consist of only the last name.
  • 503.1.10 After using the preceding rules to modify the name being searched, the search will retrieve from the UCC information management system all Unlapsed Records, or, if requested by the searcher, all Active Records, that pertain to financing statements with debtor names that, after being as provided in this rule 503, exactly match the modified name being searched.

Want to see our online UCC system in action? Sign up here for a free demo. If you have any questions, please feel free to contact us here or by calling 800.406.1577. As always, if you are unsure of any definitions or procedures, consult your legal counsel immediately.


What are “Standard Search Logic” and the Model Administrative Rules?

The amount of liens filed in a given state’s filing office can number in the millions making accuracy, and the ability to uncover name variations,  paramount when analyzing search results. Each individual Secretary of State filing office has a set of rules called “standard search logic” that determines what search results will show for a given search. Here’s the official definition:

Standard Search Logic: The search logic used by a filing office to determine which filings will appear on an official UCC search of that jurisdiction.

iacaThe Model Administrative Rules (MARS) were developed by the International Association of Commercial Administrators (IACA) to standardize search logic for all state filing offices, which was one of the goals of Revised Article 9. Adoption of these rules is, unfortunately, not mandatory, but MARS are still important because they set the framework for standard search logic. Standard search logic sets rules for how words, abbreviations and symbols will be interpreted and delivered as search results by a search engine.

Here are a few examples of MARS search logic:

  • Spaces and punctuation are disregarded
  • “&”equates to “and”
  • No distinction between upper and lower case letters
  • Words and abbreviations at the end of an organization name that indicate the existence or nature of the organization (“noise words”) such as inc, llc, association, incorporated etc. are disregarded (but note that MARS leaves it to the states to determine what constitutes these “noise words”). Most if not all states recognize the following as “noise words”: Corp., Corporation, Incorporated, Inc., Limited Liability Company, L.L.C., Limited Partnership, L.P .

Keeping track of each state’s standard search logic can be a chore, and many people choose to use a UCC service provider to ensure they’re getting the most out of their search results. The FCS online UCC search system has the broad-based search tools (like wild cards and truncated search) you need to uncover name variations and assure you’re getting the results you need.

[Image Source: Official IACA Logo]


Why Would a Lender Establish a Security Interest for a Loan?

Secured TransactionsIf you’re new to the Uniform Commercial Code (UCC), you’ll need a few basic definitions before we answer that. We’ll start you off with a few terms that are the building blocks of UCC search and filing procedures.

Secured Transaction: This is a loan in which the lender acquires a security interest in collateral that belongs to the debtor.

Security Interest: This is a lender’s claim to collateral that a debtor has provided for a loan. A security interest in granted once a security agreement is reached between the debtor and lender (secured party) via a financing statement.

Financing Statement: This is a form (UCC-1 / Fixture Filing) that a creditor files to post public notice of a security interest for the purpose of perfecting the interest. This also includes any subsequent records relating to the initial filing.

Collateral: This is an asset (or assets) that guarantees the loan will be repaid. If the debtor forfeits the loan, the creditor will claim the collateral to cover the debt.

The main reason that a lender would establish a security interest for his loan is to achieve priority over additional creditors. A secured transaction generally has priority over an unsecured transaction, and priority between multiple secured lenders is determined by who filed his financing statement first.

If this topic interests you, check out our free, on-demand webinar The Basics of Lien Priority, presented by Attorney Bradley B. Clark.

As always, consult your legal counsel if you are unsure of any definitions or procedures.


How Does UCC Secured Party Representative Service Work?

Secured Party Representative ServiceUCC Secured Party Representative Service is a new service from FCS that provides protection for secured lenders by using a representative’s name (instead of their own) on the Secured Party box on UCC Financing Statements. We’ve had some questions about how it works so we’ve outlined the process in this blog post. But before we get to that, we wanted to point out part of the RA 9 Amendment that makes our UCC Secured Party Representative Service possible. 

Under Revised Article 9, UCC Section 9-502(a)(2), a financing statement must provide the name of the secured party or representative of the secured party. They key to FCS Secured Party Representative Service is that the code allows “a representative” of the secured party to appear on the UCC financing statement, which is where we come in. Here’s the excerpt from RA9:


(a) Subject to subsection (b), a financing statement is sufficient only if it:

(1) provides the name of the debtor;

(2) provides the name of the secured party or a representative of the secured party; and

(3) indicates the collateral covered by the financing statement.

When you file a UCC-1 with our UCC Secured Party Representative Service, we put our representative’s name on the financing statement. In the instance of an inquiry, FCS will promptly forward all authenticated inquiries to you, the secured party, to respond directly.  You’ll still perfect your security interest when you file a UCC-1, but we’ll help limit your exposure to competitors’ secured party searches.  Secured party searches will no longer be an option, which keeps your client list secure from competitors. You will be able to keep track of all your UCC filings within our UCC portfolio manager just the same as without the service.

To learn more about UCC Secured Party Representative Service, click here or give us a call at 800.406.1577. 


What’s the difference between a “lapsed” and “purged” UCC filing?

Lapsed vs. Purged UCC filingWe’re back at it with more UCC terminology and definitions! Last week, we discussed the difference between “active” and “effective” UCC filings, and this week we’re moving on to the definitions of “lapsed” and “purged” filings.

Lapsed UCC filing: The filing has passed its effective period and no continuation has been filed.

Purged UCC filing: The filing has been removed from the index and is no longer searchable in most state systems.

While neither filing is sufficient to perfect your security interest, there is an important difference between the two terms. A lapsed UCC filing will often remain in the state’s index (or within a third party’s database, such as the FCS online UCC system) for up to a year after its lapse. This means that a lapsed UCC filing is (most likely) still searchable, and UCC searchers will often searched for lapsed, or inactive filings, within a database for reference purposes as part of their due diligence process.

A purged filing has been removed from the state’s index, which means it is no longer available for search. Some state filing offices do keep records of purged filings in a separate database, but it is not mandatory for states to do so. A service provider may not be able to provide information on purged filings, depending on the capabilities of the provider and the state filing office’s practices.

As always, if you are unsure of any definitions or procedures, consult your legal counsel immediately.


Cloud Computing in the Legal Industry

Cloud Computing

The use of cloud-based services has been a huge topic in the legal field for the last couple years. We’ll examine several issues surrounding cloud services for legal professionals using data from recent studies, as well as anecdotes from legal professionals, to discuss ethics involved with the use of cloud computing.

A major concern for legal professionals and law firms when it comes to adoption of cloud services is security. More specifically, many of their concerns revolve around the ethical code they could potentially violate if their data is breached.

When people outside the legal industry use cloud services, they understand that there might be some level of threat to the security of their data, but they choose to use them anyhow because of the convenience or cost savings offered. For lawyers, however, there are ethical concerns to the data they have been entrusted to keep confidential. In the 2013 International Legal Technology Association study, the threat of data leaks to government entities was a concern to those surveyed who felt cloud services are generally unsecure.

Another grey area when it comes to ethics in the cloud is ownership of data. In the same ILTA study, ethics was the second most voiced concern about cloud computing, just behind security. Legal professionals need to feel secure that they hold complete ownership of their data, no matter where it’s stored. This is a valid concern, given that only 44% of legal professionals admitted to reviewing the service provider’s privacy policy, according to the 2013 American Bar Association Tech Survey.

The use of cloud services is up among legal professionals, and it will be interesting to see the movement in 2014. Check back soon as we examine some of the best and brightest cloud-based technology tools for legal professionals.


Image via marabelo 

Kentucky UCC and Lien Data Added to FCS Online UCC System

Kentucky State FlagFirst Corporate Solutions is pleased to announce the release of Kentucky data and image library to our online UCC search system. As of Monday, August 4, 2014, active online users can log on to and search our reliable state-direct UCC and tax lien data complemented by an expansive library of clear, downloadable document images.

FCS adds value to Kentucky data by including data on expired filings (not currently available on the state website) and providing a clean, consistent user experience.

Not an FCS customer? Contact us today for a free consultation and system demonstration at 800.406.1577 or If you’re new to online UCC and lien systems in general, check out the blog post Evaluating State UCC Search Options.

If you have any questions please feel free to contact us at 800.406.1577 or


What’s the Difference Between an “Active UCC Filing” and an “Effective UCC Filing?”

Definitions The Uniform Commercial Code contains many terms and phrases that are esoteric to the commercial lending industry—they have a very specific meaning within the code. The definition can be crucial to your due diligence efforts, so it’s important to know the difference. One instance we’ve come across is the difference between an “active UCC filing” and an “effective UCC filing,” which can have an affect on your due diligence. First, let’s cover the definitions.

  1. Active Filing: The filing is indexed and discoverable within a jurisdiction’s searchable indexes.
  2. Effective Filing: The filing is sufficient to perfect a security interest according to Revised Article 9 standards.

For a UCC-1 to be considered an effective filing it must meet the following criteria:

  • Filed in the correct jurisdiction
  • Not lapsed or terminated
  • Conditions of creating a security interest are met
  • Minimum filing standards for UCC-1 are followed

The key point is that not all active filings are effective filings. Since RA9 has been implemented, a UCC-1 is usually displayed in a filing office as active until one or more years past the lapse date, regardless of termination. Many filing offices will purge filings after the one year cushion after the lapse date. If a UCC-1 has been properly terminated, it would of course not be considered an effective filing. The status of an effective filing is not determined by UCC searchers, and can often only be interpreted by a court.

As always, if you are unsure of any definitions or procedures, consult your legal counsel immediately.


Control Agreements Effect on Priority Position

This is a guest post from attorney Bennett Cohen of the law firm Cohen, Salk & Huvard, P.C. You may also want to check out his eBook Important Revisions To Article 9′s Rules Regarding Individual Debtors.

Control Agreement for Pledged Deposit Account: Does the depository bank
need to subordinate its security interest in the pledged deposit account to a lender’s
security interest granted in the pledged deposit account?

Answer: Yes. The depository bank has an automatic first priority security interest
in the pledged deposit account by statute (Code Section 9-327), and should be required
to subordinate its security interest in the control agreement. If the depository bank will
not agree to subordinate its security interest, the only other way for the lender to obtain
priority in the pledged deposit account is to have the account titled in its name.

Security Agreement for Pledged Securities Account. Does a lender need to
obtain a separate security agreement in addition to obtaining a control agreement
signed by the account owner/pledgor, the securities intermediary (brokerage house or
bank where the pledged securities account is maintained) and the lender?

Answer: Yes. The control agreement serves to vest “control” of the pledged
securities account in the lender, and is not intended to serve as a security agreement.

Control Agreement for Pledged Securities Account. Does the securities
intermediary need to subordinate its security interest in the pledged securities account
to the lender’s security interest in the pledged securities account?

Answer: Yes. The securities intermediary has an automatic first priority security
interest in the pledged securities account by statute (Code Section 9-328), and should
be required to subordinate its security interest in the control agreement.


Will a lender’s notation of its lien on a certificate of title for a vehicle always perfect the lender’s security interest?

Vehicle TitleWe continue our guest blog series with commercial lending attorney Bennett Cohen of the law firm Cohen, Salk & Huvard, P.C. You may also want to check out his eBook: Important Revisions To Article 9′s Rules Regarding Individual Debtors.

Perfection in Titled Vehicles: Will a lender’s notation of its lien on a certificate of title for a vehicle always perfect the lender’s security interest?

Answer: No. The general rule is that perfection in titled motor vehicles is achieved by registering the lender’s lien on the certificates of title. However, a significant exception is that if the vehicles are classified as “inventory” in the hands of the borrower, perfection is achieved solely by filing a UCC against the borrower covering such inventory. Vehicles held for sale or lease (or which are leased) by a borrower who is a vehicle dealer or leasing company would be classified as “inventory” under the Code and require a UCC filing for perfection. When dealing with vehicle inventory, registering a lender’s lien on the certificates of title is ineffective to perfect a security interest in the vehicles. Without the required UCC filing on a borrower’s vehicle inventory, the security interest is unperfected with regard to all creditors, including a bankruptcy trustee.


How to Protect Your Client List From UCC Secured Party Searches

Secured Party Representative ServiceUCC searching and filing service providers go to great lengths to keep their customers’ data secure. Technology and in-house procedures provide safeguards to keep your data protected from outside sources. Since service providers, along with state and county filing offices, are the gatekeepers of public records containing transactional information, this is good thing. The nature of the Uniform Commercial Code, however, exposes an important part of a lender’s confidential data to the public:  their client list.

Lenders rely on security interests to manage their risk and perfect their security interest by filing UCC’s, but this means their client list is public record; every debtor on a UCC is that secured party’s customer! With every UCC financing statement filed, lenders basically open up their client list to the public, including competitors.

Some lenders get around this by using a DBA, or trade name, on their financing statement. For lenders that submit a lot of filings, this is not usually the best option. We covered the disadvantages of filing a UCC under a DBA in a previous blog post.

Another solution is to use our UCC Secured Party Representative Service, which we rolled out in July 2014.

When you file a UCC with FCS UCC Secured Party Representative Service, we put our representative’s name on the financing statement. FCS will receive all authenticated inquiries and forward them to the secured party to respond directly, all while still perfecting your security interest. Reverse UCC searching will no longer be an option for your competitors, which keeps your client list secure. You will still be able to track all your UCC filings for pending lapses within our portfolio manager in the same manner as before, except now the public record will not reveal your customers and expose your portfolio to attack from competitors through the simple use of secured party searches.

For more information on UCC Secured Party Representative Service, click here or give us a call at 800.406.1577.


If a lender discovers that its borrower/mortgagor has transferred ownership of the mortgaged property to a trust or other person or entity, does the lender need to do anything to preserve its mortgage lien?

Real Estate TransferWe continue our guest blog series with commercial lending attorney Bennett Cohen of the law firm Cohen, Salk & Huvard, P.C. You may also want to check out his eBook: Important Revisions To Article 9′s Rules Regarding Individual Debtors.

Real Estate Transfer: If a lender discovers that its borrower/mortgagor has transferred ownership of the mortgaged property to a trust or other person or entity, does the lender need to do anything to preserve its mortgage lien?

Answer: The mortgage will remain a valid mortgage on the property, however, the unpermitted transfer will likely trigger an event of default under the mortgage, giving the lender the right to accelerate the debt and foreclose the mortgage, if the lender desires to do so. If the lender is willing to accept the transfer of the property to the new owner (and obtains the necessary internal bank approval), it is recommended that the following minimum steps be taken:

  1. Appropriate loan assumption and modification documents should be executed.
  2. The executed loan assumption and modification agreement should be recorded against the property.
  3. A date down endorsement to the lender’s loan policy should be obtained to insure the mortgage, as modified by the recorded loan assumption and modification agreement and to reflect title to the property is vested in the new owner.
  4. Updated evidence of insurance would need to be obtained to reflect the new owner.


[Important] Notice of Change – New UCC Filing Forms

Beginning July 1, 2014, California state law requires use of the revised forms below to be accepted for filing. The following revised UCC filing forms are available on the Secretary of State’s Forms and Fees webpage found here:

Here is a list of the revised forms:

If you have any questions please contact us at 800.406.1577 or write us here.


What Is the Best Legal Structure for Your Start-Up?

This is a guest post from Bettina Eckerle of Eckerle Law. She specializes in corporate law and helping companies at every stage of their life cycle.

The questions that invariably come up for all my start-up clients is: Do I have to form a legal entity, if yes, what kind and why? Entrepreneurs have a number of legal structures available when seeking to capitalize on a million dollar idea. Because each type of entity has distinct advantages and disadvantages, it is important to thoroughly explore your options.  While there are a number of different kinds of entities, I am focusing here on sole proprietorship, the LLC, the S-Corporation and the C-Corporation.

Sole Proprietorship

This is the simplest legal structure.  It is not even really a legal structure: you just conduct your business under your own or a business name and do not form a separate legal entity. There is no paperwork required, and there are no formal corporate housekeeping rules to follow. However, you and the business are one and the same, which means that you are responsible for all of the liabilities of the business. In addition, any business income or losses must be reported on your personal tax return.

If you want to establish a one-person business quickly and don’t foresee significant re-exposure, the sole proprietorship may be for you.  I would caution you, though. The lack of formality is usually far outweighed by the risk.  So I would advise you to explore other options.

Limited Liability Company (LLC)

I know, the LLC is the entity of choice among start-up now.  Members of an LLC jointly own and manage the business, and share the profits/losses and any appreciation/depreciation in value of the business.  An LLC is a cross between a partnership and a corporation. As in a partnership, owners enjoy pass-through tax treatment, meaning that profits and losses flow directly from the business to the individual owners. In an LLC, income and loss can be allocated disproportionately among the owners. In contrast, with an S-Corp, income and loss are assigned to each shareholder according to their pro-rata share of ownership. It is important to remember that every business has different financials, so you should consult with a tax advisor regarding your own unique situation.

Like a corporation, an LLC is a separate legal entity that can own assets, sue and be sued. It provides limited liability to its owners, which means your personal assets are shielded from court judgments and debt collectors. However, an LLC may not provide owners with 100% protection from personal liability, especially if fraud or misrepresentation has occurred. LLCs must also follow business formalities, such as registering with the state and adopting  an operating agreement. Still, these tasks are still simpler than the requirements for forming a corporation.

If you are looking for a low-key, flexible, informal solution with pass-through tax structure, an LLC may be a good option. However, if you plan to seek capital from outside investors, such as venture capitalists, you likely need a more rigid business structure.


A C-Corp is a distinct legal entity, with an existence apart from its owners. It is the most complex and costly business structure, primarily because it requires the most corporate housekeeping and record keeping obligations. However, it also has several key advantages. Most notably, it is not a pass-through entity, so it is taxed separately. In fact, C-Corps have their own tax brackets, which is commonly lower than individual tax rates. Owners are only liable for taxes on profits they receive in the form of salaries, bonuses, and dividends.  Anyone can own shares in a C-Corp and you can create different classes of stock, allowing owners to have varying shares in terms of voting, profits and losses, etc.

C-Corps are the preferred business structure for companies that see fundraising in their near future, whether through seed rounds or from  VCs.

As a draw-back, any corporate structure, including the C Corp involves formalities and compliance obligations, which can be burdensome for people just starting out, i.e: may be infra-structure-deprived. If you incorporate as a corporation, you need to set up a board of directors, file annual reports and other business reports, hold shareholder’s meetings, keep records of your meeting minutes, and generally as a matter of corporate law operate at a higher level of compliance than your business might need or want to deal with. With the LLC, this isn’t the case. LLCs just use an informal operating agreement.


The S-Corp is a variation on the corporation.  So most of what I said above for C-Corps (other than tax treatment) applies to them as well. An S-Corp is typically chosen for the way taxes are treated — like the LLC, the S-Corp is a pass-through entity with profits and losses flowing directly through the corporate entity to the individual shareholders. S corporations must follow certain requirements:  the number of investors must be limited to 100 and all investors must be individuals and legal residents of the United States..

The S-Corp is preferable when a startup expects to make a profit soon after incorporation and most of that profit will be distributed to the shareholders as a dividend. All shareholders will be taxed on the profits individually. If you intend to reinvest profits back into the company, you should consider a C-Corp.

If you desire pass-through tax treatment and are ok with its limitations, you may want to explore an S-Corp. You can also always change your mind and convert the business to a C-Corp later on.

These are the highlights and should give you something to start with.  Needless to say, do consult an accountant and/or lawyer before you take the first step.  As always, if you have questions or comments, please call, e-mail or tweet me @Bettina Eckerle.