So you decided to take the leap to start your first startup? Congratulations!
One of the first steps you'll need to take is incorporating your entity. Startup incorporation is important to reduce liability (i.e. your personal assets can't get sued), claim tax benefits, accept outside investments, and more!
But how should you go about it? Below, we outline how to pick an entity structure and incorporate your startup.
What is the best business structure for startups? (C Corp versus LLC)
Most startups file as a Delaware C-Corporation. This is the industry standard and if you plan to raise venture capital funding, you’ll likely need to file as a Delaware C-Corp or convert to this structure when you do.
Why Delaware incorporation? Investors and legal professionals are used to the laws and regulations governing Delaware corporations. This makes it more efficient to create templatized legal documents and understand legal ramifications.
That being said, if you aren’t planning to raise capital for the remainder of the year, it may make sense to file first as a LLC and later convert your entity to a C-Corp (since C-Corps are typically a bit more complicated).
The differences between a LLC and C-Corp are outlined below:
Pros & Cons of being a LLC
Pros
- Easier and quicker to set up while protecting your personal assets
- Less legal governance requirements
- Simpler taxes (lower state fees in some cases)
Cons
- You may need to convert to a C-Corp later on if you decide to raise capital
- Difficult to transfer ownership via stock
Pros & Cons of being a Delaware C-Corp
Pros
- Necessary to raise venture capital funding
- Can issue stock options to employees
Cons
- Taxation can be more complicated
- Require more legal overhead (bylaws, board of directors, shares)
Additionally, there are other types of incorporation (nonprofits, S-Corp, etc) that may make sense but are less common. You may want to consult a legal expert if you believe that one of these structures would be a better fit.
When in the year should I incorporate?
An important tidbit to keep in mind is when in the year you should incorporate. You will have to pay taxes, and in some cases, file annual reports for both the year you incorporate and every year thereafter. Therefore, if it is already the end of the year (November / December), it may make more sense to wait until the start of the new year if you can to avoid having to deal with taxes and legal paperwork for both years instead of only the upcoming year.
Similarly, if you’re filing as a LLC and there’s a chance you’ll need a C-Corp by the end of the year, it may make more sense to forego the LLC and file straight as a C-Corp. When you make the transition, you’ll potentially have to file additional documents and a final tax return for the old entity.
Because of these extra steps involved with the conversion, it could also make sense to transition the entity at the new year from a LLC to C-Corp to minimize redundant filings.
Ok...I got the business structure. How do I incorporate my business?
In the early days, we were a bootstrapped startup so we welcomed any opportunity to save money. One way we decided to do this was by filing the incorporation ourselves. “It’s just a form… how hard could it be?” –– we thought.
And, we messed it up. We filed a California LLC initially and ended up “trying” to convert it to a Delaware C-Corporation ourselves. When we brought on corporate lawyers, they had to fix a bunch of aspects of the legal structure which ended up costing us more time and money than if we had done it correctly from the get-go.
Luckily, there are many reputable tools and services out there to make incorporating as an LLC or C-Corporation super easy.
What is the best way to incorporate a startup?
There are a number of great tools out there for startup incorporation! Below are a few that our Stable customers use and have been recommended by lawyers.
- Clerky, C-Corporation, $799 one-time fee
- Stripe Atlas, C-Corporation, $500 one-time fee
- Doola (formerly Startpack), LLC, starts at $349 billed annually
- FirstBase, C-Corporation or LLC, $399 one-time fee
These services will take care of your incorporation filing and in some cases, any additional filings that need to occur. If you aren’t ready to commit to corporate lawyers, these are good options.
Wrap up
Incorporating your startup is a huge milestone! This should be a great first step on how to open your startup company. If you have any additional questions, feel free to reach out to hello@useStable.com and we’ll do our best to help.
--
At Stable, we provide permanent virtual addresses and mailboxes so you never have to worry about mail or changing addresses again. We’ll digitize all mail that you receive here, and you’ll be able to scan, forward, shred, (and even deposit checks!) from anywhere in the world.
Get started with Stable here if you’d like a virtual business address + mailbox in less than 3 minutes.
Disclaimer: Stable is not a legal or accounting firm, therefore we cannot provide legal or tax advice. You should consult legal and tax professionals for advice on how to meet ongoing obligations that apply to you and your company.
