You will need to incorporate your startup. This means that you will create the legal entity that will hire your employees, own any intellectual property created, and act as a counterpart to all customer and vendor interactions. This is the first step in creating your business.
Types of Corporations
A startup company or startup is a company or organization in its early stages, typically characterized by high uncertainty and risk. A startup’s success or failure depends largely on the quality of its team, ideas, and business model. startup, A startup is usually a company, such as a small business, that is initially created to develop a product or service that addresses a particular problem. A startup is often founded by one or more entrepreneurs who have an innovative idea for a new product or service and seek to develop it into a successful business. Many startups are venture backed, which means they receive funding from venture capitalists. These investors provide the startup with capital in exchange for equity in the company. Startup companies can be either bootstrapped or funded by angel investors or venture capitalists. A bootstrapped startup is one that is self-funded and does not rely on outside investment. An angel-funded startup is one that receives funding from one or more wealthy individuals (angel investors). A venture-funded startup is one that receives funding from venture capitalists.VC-funded startups typically have a higher risk of failure than bootstrapped or angel-funded startups because they often have to give up equity in exchange for capital. However, VCs often offer more than just money; they also provide mentorship and connections to resources that can help a startup succeed. In addition to the three main types of startup companies, there are also incubators and accelerators. Incubators are organizations that help startups by providing them with resources, such as office space and access to mentors and investors. Accelerators are similar to incubators but typically have a more structured program, often involving an intensive 3-6 month period of mentorship and support followed by an opportunity to present their business to potential investors.
What is a C Corporation, and how do you define it?
C Corporations are the norm for most startups. Most U.S. businesses have C Corporations as their standard. They are governed by Boards of Directors and can issue shares when they grow. However, they also have to pay corporate taxes. They are responsible for all legal and financial liabilities, apart from the founders and stockholders. Most venture capital investors or accelerators will require a corporate structure that is a C Corporation to invest.
What is a Limited Liability Corporation?
Limited Liability Corporations (LLCs) are another option. This type of entity does not have to be subject to corporate taxes and protects you from personal liability as the founder. The profits and losses of the company “pass through” to their owners. However, they are protected from any legal or financial exposure. Although LLCs sound great in theory, they are not very scalable. Pass-through taxation is a good option for those who own large shares in the LLC (i.e. While it makes sense for founders and early investors, it becomes difficult (and often impossible!) to pass through the LLC’s profits and losses to those with smaller ownership stakes. Imagine that an employee owns a small portion of the company, and that the company has a profit for the year. An LLC structure would require that the employee report the annual profit and pay taxes even if it was not distributed to them as a dividend.
What is a Benefit Corporation (B Corporation), and how do they work?
A benefit corporation (or B Corporation) is another option, especially for mission-driven startups. These are similar to C Corporations in structure and tax, but they also have a formal commitment to corporate purpose and accountability at the time of their charter. More information is available online about Benefit Corporations.
Separate liability companies receive Employer Identification Numbers from the Internal Revenue Service. This is in contrast with sole proprietorships, which have personal liability. Sole proprietorship owners report their business activities on their tax returns using personal Social Security numbers.
Choose a jurisdiction (state), in which you want to incorporate
Even though they do not have any commercial operations, Delaware is home to the majority of startups. Delaware has a set of well-defined corporate laws. This is mainly due to the state court’s reputation for being fair and efficient in corporate legal matters. There are many precedents in Delaware’s corporate law and governance. This includes protection from lawsuits for members of the company Board of Directors. With more Delaware companies incorporating, the state is able to adjudicate more business law cases. This makes the standard set more solid and mainstream for U.S. corporations.
Another natural place to incorporate your company is in the state where it has its headquarters. This is less common and investors will expect you to incorporate Delaware due to the favorable legal environment.
One downside to incorporating in Delaware is the annual franchise tax requirement (https://corp.delaware.gov/frtax/). While some states may not have it, the annual franchise tax for startups in Delaware (which is based on either assets or shares) is usually small (under $1,000)
Advantages of Incorporating in Delaware
According the Delaware Division of Corporations 66.8% of Fortune 500 corporations are incorporated in Delaware and 1.5 million corporations have been registered in the state.
The State of Delaware has done a lot to establish itself as the best place to incorporate a business. Here are some benefits to incorporating:
- There are some tax benefits that the state offers. Delaware does not impose income taxes on corporations registered in the state, but do not conduct business in the state. Delaware does not tax shares owned by shareholders who aren’t Delaware residents. Delaware is often referred to as a “tax haven” because of these reasons.
- A corporation court is available. Delaware has a Court of Chancery that handles only corporate cases. These judges are experts in corporate law, and their decisions tend to be more predictable than those from other states.
- Filings are processed quickly. Because Delaware is committed to being corporation-friendly, they will process your filing the same day.
- Your privacy is protected. You don’t have to reveal the names of your officers and directors to Delaware. This allows anonymity.
- No requirement for residency. Delaware residents are not required to be Delaware residents for officers, directors, or shareholders.
- A slimmed down corporate structure is possible. Delaware law allows only one person to be an officer, director, or shareholder. This is a great option for small businesses.
- Angel investors prefer Delaware. Venture capitalists will prefer Delaware.
Delaware Registration: Disadvantages
Although Delaware has many advantages, there are some serious drawbacks to incorporating there. In almost all cases, it is financially best to register your business in your own state.
These are just a few of the other things to keep in mind:
- Small businesses don’t get tax savings. Your home state will tax you company.
- Filing costs more. The filing fee for Delaware is significantly higher than the fees charged by other states.
- Your company will be subject to a franchise tax. The Delaware franchise tax is based on shares’ value. It is usually minimal for small businesses. However, it will rise as you increase your share count and your share price. A franchise tax may be required in your home state.
- You must comply with your state’s requirements. Annual reports must be filed in both places. This is twice as much work and twice as expensive.
- It is necessary to have a Delaware registered agent. You will need to give your Delaware registered agent’s address when you file. This is a person or company that can accept legal filings on behalf of you. This is an additional expense for your company if you have to hire someone to do this.
- You will need to travel to Delaware in order to resolve any legal disputes. A Delaware attorney will be assigned to your case.
Delaware offers many benefits for companies that incorporate in the state. However, the most beneficial is to large corporations. Before making a decision, small businesses need to weigh the costs and benefits of incorporating in Delaware.