How to Incorporate a Startup? Founder's Guide
Since the burst of startups, the innovative entrepreneurship wave has never stopped. Kickstarter alone has helped raise funding for over 248K startups, and it's an ongoing business. Starting a new venture is an exhilarating journey, and for many aspiring entrepreneurs, incorporating a startup is the crucial first step.
But where do you begin when starting a startup, and what legal structures should you consider?
In this guide, we'll walk you through the intricate world of startup incorporation, breaking down the process step-by-step and helping you make informed decisions on how and when to incorporate a startup. You will get a good high-level overview of all the available legal structures, their pros and cons, and the best startup context for their application.
So, if you're ready to make your startup a legally sound reality, read our founder's guide to incorporating a startup.
What Is Startup Incorporation?
Incorporation is like giving your startup its own ID card in the business world. It's that legal moment where your idea becomes its own independent thing. This move puts a shield around your personal assets, keeping them separate from any mess-ups. Your startup gets its own set of rules and protections, setting the stage for your entrepreneurial path and giving you a limited liability safety net.
As for the other perks, being incorporated opens doors to selling shares or a piece of your business to gather funds. Many big-money investors won't even look at businesses that aren't incorporated.
Even more, getting your business officially registered with the state can increase your credibility with potential customers. It shows you mean business and have your ducks in a row.
Now, check out what shapes and forms are available for your startup in the legal world and how to pick one that'll come with benefits, not constraints.
Why It's Important to Choose the Right Business Structure
Alright, let's dig into the cores of various business structures. They seriously shape how to incorporate a startup and make it run legally. But before we jump into the specifics of each type, let's start with a quick intro to why picking the right business structure is a bigger deal for your startup than you might realize.
Incorporation involves the issuance of shares, which are like ownership certificates for your startup. Shareholders are people or entities holding these shares. Their role matters, as it revolves around decision-making, and their sway often corresponds to the number of shares they possess.
For startups, this ownership structure isn't just a formality. It's an incredibly dynamic force. Why? Because it allows you to entice investors by offering them a slice of your startup dream. By doing so, their interests become deeply linked with the success of your venture. This alignment can inject capital and valuable expertise with a network that fosters your startup's progress.
But it's not just about raising money; it's also about shaping the balance of power and responsibility. Shareholders, as the startup's owners, might have a say in critical decisions, and a board of directors typically takes charge of making those big calls.
So, as we keep peeling back the layers of startup incorporation, remember that the ownership structure and the role of shareholders are more than just formalities. They're the fundamental elements of successful entrepreneurship in the US.
Major Types of Legal Entities for Startups
Business structures vary, each with its own perks and constraints. We will review the three most typical structures that startup owners pick for their operation as all of them offer limited liability: LLC, C-corporation, and S-corporation. Your final choice of entity carries significant weight for where your startup heads eventually.
Limited Liability Company (LLC)
The first and the simplest possible business structure on the agenda is an LLC, which stands for Limited Liability Company. It's like a mix of the best parts of a corporation and the flexibility of a simpler partnership. Many small and mid-sized businesses love this setup. It protects your personal assets (usually up to the amount you invested) in case of startup failures and keeps taxes simple.
The big draw? LLCs are easier to set up and manage. They've got fewer rules and are less of a hassle, which some startup owners prefer. With an LLC, you've got more choices for who can be part of the business. It's flexible, allowing different types of members – individuals, other companies, or even foreign players.
Additionally, LLCs are a tax-friendly option because they have what's called pass-through taxation.
Here's the deal: the business itself doesn't pay federal income taxes. Instead, the profits and losses of the LLC pass to the members, who report them on their personal tax returns. This avoids the double whammy of corporate taxation, where a company's earnings get taxed both at the business and individual levels. It's a way to dodge that extra layer of tax that corporations often face.
So, for startups that want more freedom in operations, who they team up with, and how they split profits, an LLC might match their business style and long-term plans better.
Now, let's move to corporations.
A C-corporation stands as a separate entity from its owners, fully protecting them from personal liability for business debts, unlike an LLC or S-corporation.
Taxes are a bit different here. The company pays its own federal taxes, and if it hands out dividends, those get taxed again on the shareholders' personal returns. It's a double taxation, but it can be a good option for certain businesses looking for big growth.
Starting a C-corp involves a bit more paperwork and formalities. You've got to choose a unique name, file articles of incorporation, draft bylaws, and hold meetings to keep things official.
While a bit more complex, C-corps offer separate legal existence and the potential for greater growth. It might be the right fit for a startup eyeing major expansion or seeking investment from outside sources.
An S-corporation is like a mix between a C-corporation and an LLC, built for small to mid-sized businesses. It offers the limited liability of a corporation but enjoys the pass-through taxation of an LLC.
Similar to a C-corporation, it typically protects the personal assets of its shareholders from business liabilities. However, the big difference is the tax setup.
With an S-corporation, the profits and losses "pass through" to the owners' personal tax returns, just like in an LLC. This dodge-the-double-tax approach keeps things simpler, as the company itself doesn't pay federal income taxes.
Setting up an S-corporation involves similar steps to a C-corporation – choosing a unique name, filing articles of incorporation, and handling more formalities.
S-corporations are popular for small businesses aiming to combine the benefits of liability protection and a prestigious look with a simpler tax structure. It's a good choice for startups planning growth but staying small to mid-sized, maintaining a simplified tax setup.
Let's now compare a C-corp vs S-corp vs LLC and finally give you a good framework to incorporate startup entities correctly and in their very own shape.
What Business Structure to Choose for Your Startup?
Take a look at all business structures together compared in the vital aspects to pinpoint the one that aligns with your entrepreneurial dreams. We've compared LLC vs S-corp vs C-corp and also highlighted the funding potential typically associated with each entity type.
Note: While we can offer general advice for mainstream scenarios, remember that your specific situation depends on your personal life and business circumstances.
Startup Business Structure Comparison
Which one should you consider for your business, and what are the S-corp vs C-corp vs LLC advantages and disadvantages? Now, buckle up to weigh the pros and cons of different structures for your startup.
How to Choose a Startup Business Structure
When deciding on the best business structure to incorporate startup entities, aim for one that fits your long-term vision. Think about where you want your business to be in five, ten, or even twenty years down the road. Do you plan on staying small and independent, or do you dream of substantial startup scaling, growth, and attracting investors?
These nine questions are here to help:
- Where do I see my business in the long run?
- Am I cool with taking this level of personal liability?
- What tax setup suits my business best?
- How much control do I want over the business?
- Do I plan to bring in outside cash or investors?
- What industry rules and regs affect my business?
- Am I looking to have co-owners or partners outside of the small circle?
- What's the deal with paperwork, ongoing obligations, and costs?
- How much flexibility do I need in the business structure?
Asking and answering these questions helps you get clear on your goals, risk tolerance, and business needs, making it easier to pick a structure that fits your startup's vision and future plans.
12 Steps to Incorporating a Startup
Armed with insights on how to incorporate a startup, you're geared up to establish your very own company. If you're asking yourself "When should I incorporate my startup?", the following steps will help you find out where you are on the startup company formation roadmap and lead you to your inaugural day at the office.
1. Define Your Business Concept and Objectives
Begin by painting a clear picture of what your startup is all about. Craft a rock-solid business plan that spells out the details – who your customers are, how you'll make money, and your grand plan for growth. Maybe even go all the way down to building an MVP. Once you have everything in place and clearly see the shape of the business, that's where on the roadmap you decide when should you incorporate your startup.
For an LLC, the setup allows a flexible structure with less formal requirements, whereas C-corps and S-corps may demand more formalities due to shareholders and board meetings. You need to be clear about your company's goals — that's the starting point for deciding when to incorporate.
2. Choose the Right Business Structure (Right Here, at Step 2!)
After you've got a good grip on the differences between these business structures, you can choose the one that's the best fit for your demands. With a solid understanding of their pros and cons, you'll be on track to pick the perfect type even in the early stages of startup development.
Again, LLCs are all about flexibility — they're simpler to form and manage, ideal for small startup incorporation. C-corps are more complex but offer the potential for substantial growth and investment opportunities. S-corps are quite similar to LLCs but have certain limitations, like the number and type of shareholders.
3. Select a State for Incorporation
Settle on the state where you want to make your startup official. Delaware and Nevada are top picks for many because they've got some sweet business laws that give you privacy, protect your assets, and keep those corporate income taxes low or non-existent. But you're not stuck – you can go for any state that suits your game plan.
4. Pick a Distinctive Business Name
Choose a name for your startup that's not only unique but also one that people can easily remember and associate with your product or services. Check if it's up for grabs in your state's business registry, and give it a listen with the "LLC" abbreviation to make sure it's got that cool factor.
Your company's name, logo, color scheme, and overall brand identity also add to your success. Many businesses choose to handle startup branding by opting for brand development services from creative studios. This way, they'll ensure that their brand reflects the company's intentions and values, elicits the right emotions, and connects with customers both physically and emotionally.
5. Register Your Business
Next up, it's time to get those important papers in order to officially register your business with the state. The forms you'll need to fill out depend on the type of business structure you've chosen. Or, if you want to keep it hassle-free, you can also bring in a registered agent to help you incorporate startup initiatives into an official business.
A registered agent is a reliable point of contact responsible for receiving all legal documents on behalf of your startup.
The logic behind this is simple. Important documents can land in your mailbox when you least expect them and get lost in a stream of useless newspapers and propositions to recruit people for you. Whether it's a lawsuit, tax notice, or regulatory communication, you want to ensure nothing goes unnoticed. That's where your registered agent steps in as the go-to recipient for these important papers.
How do you appoint a registered agent? It's not as complex as it might seem. Your options include designating yourself, a trusted member of your team, or even hiring a professional registered agent service. Choose someone or a service that will reliably fulfill this role, as you definitely wouldn't like to miss a random compliance violation notice and surprisingly find the notice of the lawsuit, right?
6. Obtain an EIN
Next up on the to-do list to incorporate startup ventures is securing an Employer Identification Number (EIN). This nine-digit number, issued by the Internal Revenue Service (IRS), is like your business's social security number. You need it for tax purposes, and it's a requirement if you have employees, operate as a corporation or partnership, or plan to open a business bank account.
Obtaining an EIN is relatively straightforward. You can apply online through the IRS website, by mail, or even by phone. The key information you'll need includes your business's legal name, the structure of your business (e.g., LLC, C-corporation), and a brief description of your startup activities.
Pro tip: A registered agent will do it for you.
7. Make Up Bylaws or Operating Agreements
If you're incorporating a startup with an LLC, put together and approve corporate operating agreements to set the vibe for running your startup. For C-corps and S-corps, drafting bylaws is a bit more formal as they outline how the business will be operated and managed.
8. Open a Dedicated Business Bank Account
Set up a business account to keep a clear record of your income and expenses. All covered entities require distinct business accounts to keep finances separate from personal funds to ensure the safety of your personal assets.
9. Secure Necessary Licenses and Permits
Depending on where you're based and what kind of business you're running, you could be in need of particular licenses and permits to stay on the right side of the law. Be sure to reach out to the local, state, and federal authorities to make absolutely certain you're playing by the rules.
However, the terms vary from state to state, and most likely, you'll require additional licenses and permits if you're striving for one of the following niches:
- Food and Beverage
- Healthcare and Medical Services
- Childcare and Education
- Construction and Contracting
- Financial Services
To make sure your startup complies with the required regulations, you want to search for an industry-specific consultant, Certified Public Accountant (CPA), or Small Business Development Centers (SBDCs).
Typically, LLCs have less stringent requirements compared to C-corps and S-corps in terms of formal licensing and permit obligations.
10. File for Trademarks and Patents
If your startup has come up with some one-of-a-kind ideas, it's a smart move to think about getting trademarks and patents. These legal steps can help protect your innovative creation and be sure that you'll be the one presenting such a solution.
11. Secure Funding
Figuring out how much cash your startup needs is the first step. Then, check out your funding options, like venture capital, angel investors, loans, or even going the DIY route (bootstrapping). Go with the one that fits your financial needs and matches up with your long-term goals.
Pro tip: When it comes to seeking funding for your startup, here are the stages of the business, on which you can receive the funding. Stages in probability increasing order:
- Forming a business plan
- Pitch deck creation
- Making a clickable prototype
- Putting together an MVP
- Revenue-generating business
The sooner you're thinking about applying for funding, the more critical it is to have a well-defined, accurate, and dependable plan in place. Hence, learn about the ways to incorporate startup ventures and take care of the matter before pitching to investors.
12. Build Your Dream Team
Put together the ideal team for your startup by actively recruiting and bringing on board essential talent. The startup team structure may include developers, designers, marketers, and administrators. Your team is the main asset on your path to success.
With all the groundwork done, you're all set to go entrepreneurial and navigate the business landscape in pursuit of valuable opportunities.
Still Stuck with the Legal Side of Things?
With this founder's guide, you're well-prepared to navigate your startup toward success. If you haven't found the path yet and still need things to get clearer, consider finding a dependable legal partner, working to alleviate the stress and overwhelm that can sometimes accompany the startup incorporation process.
We hope you've gained a solid understanding of the vital aspects and determined when to incorporate a startup. It's worth noting that this path is dynamic and replete with opportunities, hurdles, and uncharted territories. If you still need a tangible product MVP before going legal, feel free to reach out to us. Upsilon has ample experience in providing MVP development services for startups, and we'll be happy to design the winning product together!