Incorporating Your Startup: Why Is It Important?

Incorporating a startup means creating a legal entity that can make intellectual property, create employment opportunities, and engage in the trade business. And it comes with a lot of legalities and paperwork. So while enterprises can function without being incorporated by the founding members, it is always advisable to incorporate to limit liabilities and protect intellectual property.

There are plenty of reasons you should incorporate your startup in the US. VCs always prefer a legally operating startup for investments, incorporating your firm helps you win investors’ trust. Also, suppose you choose states like Delaware to incorporate your startup. In that case, the state's business-friendly laws reap several benefits you would be missing out on by not incorporating your startup. In addition to this, you get tax benefits and can access US-based talent pools, incorporating helps you build credibility, and you can also open a physical office anywhere.

First Step Towards Incorporating Your Startup: Choose a Type

There are five types of corporations that you can from in the US:

• Sole Proprietorship

• Partnership

• C-Corporation (C-Corp)

• S-Corporation (S-Corp)

• Limited Liability Corporation (LLC)

While incorporating a startup, you should consider which model suits the best for your business. In the US, the most preferred forms are LLCs, S-Corps, and C-Corps. When it comes to saving on taxes, entrepreneurs prefer LLC or S-Corp as they must go through taxation only once. On the other hand, C-Corps are taxed twice, one at the corporate level and another at the shareholder level. Out of all models, LLC is the easiest to form.

The model you choose is based on how you intend to structure the ownership and leadership of your startup, your business goals, and potential tax obligations. Another important factor that plays a role in choosing the business model is the nature of your business. For example, if yours is an eCommerce business, opting for LLC could be the best choice. If you plan to raise funds and open an IPO, C-Corp should be your go-to choice.

Where to Register Your Startup

Once you have chosen the corporation model, the next step is to choose a state where you intend to register your startup. LLCs, C-Corps, and S-Corps can be registered in any of the 50 states of the US. There are three ways to do this:

1. Delaware: An entrepreneur's favorite destination, Delaware is a startup-friendly state and home to millions of startups. As per the records, in 2020 alone, over 250,000 startups were registered in Delaware. It offers legal security to the firms incorporated there, making startups attractive to the investors. Apart from security, Delaware offers privacy, robust corporate statutes, and tax advantages.

Other than Delaware, Nevada and Wyoming are two more states preferred by entrepreneurs to register their entities. But if you are looking forward to a high-growth startup, Delaware should be your first choice.

1. Resident State: If you choose LLC for your startup, registering it in your home state should be the case. But in other forms of corporations, it is better to check for state laws before registering your business. Each state in the US has different corporate laws and statutes, and some of the Secretaries of State offer better legal environments.

2. Offshore: The offshore world is changing dramatically and will continue to do so. These days, tiny islands offer lucrative tax rebates and other incorporation benefits to attract entrepreneurs to operate in their states. You will find simple custom formalities here, get capital and asset protection, and experience better profits while operating business. But before you choose an offshore state, make sure to check for the political and economical factors in that particular state.

Allocating Stocks

Once you’re done with registering your business, the next step is to authorize and issue the shares. Deciding on a number of shares as per the valuation of your startup is the first thing you do. For example, a common pattern seen in Delaware startups is 10 million. It is a big enough number and easily divisible to be allocated to each employee. An employee would get a large volume of shares which will play a great role in making them feel satisfied and secure, psychologically. This will help you with retaining them for a longer period, which means you’ll be spending less money and effort in your hiring process.

Similarly, the founders and the co-founders can authorize and issue a certain amount of shares for each one of them to secure your startup from failing in the initial stage. A very important aspect to take care of is locking in these shares for a period before the startup matures and any of the founders or co-founders want to leave the venture.

Defining vesting periods by creating a legal document under Section 83(b) that you need to sign within 30 days with the Internal Revenue Service. Doing this will save you from being hit by huge amounts of tax bills later. It’s a strict deadline and with new ventures being set up, several important things go missing. A solution for this is to keep a track of all the procedures through a digital platform for legal operations that reminds you to sign a document or remind you of a crucial meeting.

Final Step

Deciding upon the incorporation form, choosing a state to legalize your startup and allocating shares are done. The last step is to begin your legal formalities. Now how do we go about that? There are a couple of ways:

Seeking help from a legal professional: Hiring an attorney for company formation is an important step. They will take you through the things we have highlighted above. Then, they’ll help you generate documents related to incorporation, file a Certificate of Incorporation with a jurisdiction, set up an Employer Identification Number, and arrange for a registered agent to represent your startup on your behalf. With so many processes and documentation going around while you register your venture, it is mandatory that you track the progress using a legal operations software. You can connect with a legal expert to help you guide with managing your information virtually.

Do-It-Yourself: If you want to save on the funds and have a little bit of knowledge regarding incorporation laws, you can go ahead with the formalities all by yourself. All you need to do is:

1. Apply for a Federal Employer Identification Number with the IRS

2. Arrange for a registered agent

3. File for Certificate of Incorporation

4. Arrange for all the necessary documents

Voila, your startup is all set to fly off!

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FAQs

What is a sole proprietor?

A sole proprietorship is a business owned and run by an individual. It is the most straightforward form of business and is not considered a separate legal entity. The proprietor, or owner, is the sole person responsible for the business.

Does a startup need to be incorporated?

Before entering into any contracts, such as office, equipment, and vehicle leases or agreements for services with clients, it is important to incorporate your startup. If you do not, you will be personally liable for fulfilling those contracts and unable to protect yourself from potential financial loss.

What is the difference between a corporation and a startup?

Startups tend to be young, inventive, cooperative, and intent on expanding, whereas corporations are typically well-established, sluggish, organized hierarchically, and devoted to efficiency.