Virtual Incorporation in Vermont

by | Nov 9, 2009 | Uncategorized |

Vermont amended its corporation and limited liability company statutes in 2008 to eliminate many of the traditional strictures of the business entity, to make incorporation more electronic- and internet-friendly, and to create the animal known as the “virtual corporation.”

In Virtual Incorporation: A Lawyer’s Guide to the Formation of Virtual Corporations (2009 by the American Bar Association), Julie Tower-Pierce, Paul Gillies, and Linsey Krolik review the changes to the law and how Vermont is anticipating and reacting to changes in actual business practices.

The changes to the Vermont statutes eliminate the requirement for a physical corporate address, although a registered agent for service of process is still necessary. Electronic filing of documents, digital signatures, and virtual meetings between and among shareholders are all authorized and encouraged.

However, it seems like much of the “innovation” in the Vermont statutes are already taking place in other states. The authors point out that details of the business formation don’t have to be filed with the state in the form of bylaws, but that the key (and private) organizational document is the operating agreement. That is already the case in New York, with a limited liability company.

The authors note that Vermont now allows one shareholder to hold all the offices in a corporation – again, New York already authorizes a single-member corporation or LLC. And there is also reference to a “hosting company,” which seems to be a physical brick-and-mortar corporation performing all the administrative tasks of the “virtual” corporation.

Touted as new and innovative is the theory that the organizational ownership, management, and compensation can be based on intellectual capital contributed by the shareholders or members, not just dollars and cents. I fail to see how this is particularly revolutionary – many of my clients have organizational structures where one shareholder contributes dollars and the other contributes technical skills, and they have not been limited by New York’s statutory requirement.

There are also references to forming legal entities in SecondLife (a virtual world) and “opening a bank account on behalf of a World of Warcraft guild” (a role-playing computer game) (pg. 42). I am still not sure whether the authors are serious about that bank account.

For all of the novel breakthroughs Vermont’s new law supposedly represents, there are problems inherent with the virtual company as well. There is the ever-present problem of data security – and when there is no requirement for paper copies of any documents, when everything is in electronic form, what happens in case of a loss or a breach? There are considerations of data policies, standards, and guidelines, as well as ethics and privacy on the internet, although these are things that all companies need to take into consideration, not just the virtual ones.

As an example of the virtual company as the wave of the future, the authors cite the writing of this book: apparently they never met in person during the project, but used e-mail, teleconferencing, and Twitter to keep in touch and update the book. However, the book itself is copyrighted by the American Bar Association, which, although it may have used outsourcing and technology extremely well, is still a very real, brick-and-mortar corporation.