It's worth mentioning that incorporation by itself doesn't get you very far in terms of protecting against personal liability. It's really just the first step in company formation. You'll want to appoint directors and officers as well. And to protect against departures, IP issues, etc., you'll also want to issue stock with vesting to founders, and have everyone enter into IP agreements.
We've automated all of this at Clerky - you can do everything completely online using our software. We do a ton of company formations. If anyone has any questions on the topic, feel free to ask!
The author raises 1 point that Clerky's services doesn't seem to include, Qualification of the Foreign DE C-Corp. I think this is a service/legal requirement applicable to almost any incorporated DE startup. Is this something Clerky does behind the scenes or something Clerky customers are advised to address with a local lawyer? Is there a chance some of these startups are not properly qualified in the States they are physically located?
Along the same lines, while it appears Clerky annually renews a DE registered agent for startups, I don't see anything regarding filing of the DE Annual Report/paying Franchise Taxes. Is this a service behind the scenes or something Clerky just prefers to defer to the startups and/or other professionals?
We definitely handle the "Register with CA" part of the checklist, and we have that as part of our checklist that we send to companies after incorporation. For companies not located in CA (where CA foreign qualification is usually not necessary), we partner with a third-party service that handles all the other states (we've negotiated a discount with them for our customers too).
DE Annual Report / franchise taxes - I personally think this is easy enough that founders can do this on their own. We have a support article for it here:
I think it really depends on your situation, in terms of how likely you are to receive external investment like you mentioned (and when), and how much that $175 / year matters to you. By external investment, I think venture capital is probably the most relevant category - other types of investors may not be as insistent.
For example, amending the certificate of incorporation to authorize more shares is probably going to cost around $500 a minimum (and definitely much more if you use a lawyer). That's roughly triple the $175 in tax savings you get from authorizing 5,000. But of course by then, you probably would have already issued shares to people, so you would probably want to do a stock split. That's going to definitely require a lawyer... my guess is at least a few thousand in legal fees.
So it seems like it could make sense if (1) you don't plan to ever raise venture capital or (2) you think it'll be at least 3 years or so before you raise venture capital and you can hold off on issuing stock until then (unlikely to be a good idea). I suppose the analysis would also be affected by the time value of the $175 / year. E.g. how much more that $175 means to your company now than it will a few years down the line.
I'm not familiar with Texas law, but it seems likely that there's more to it than that... at the very least, you probably need board approval before issuing equity.
But in any event, I was referring to authorizing more shares under the certificate of incorporation - which is basically setting the maximum number of shares that the company can issue. That's a different process than issuing shares (though every time you issue shares, you should make sure you have enough authorized and available for issuance).
tank you very much for your detailed answer.
Incorporating thinking ahead on the VC route do you think is a good idea to allocate prefered stock one or more series?
Most likely not - the rights and preferences of the preferred stock will get determined by the deal you negotiate with the VC, so anything you have before that will likely get thrown away anyways. It'd be very unusual to start off with preferred stock at formation.
Based on a cursory review of this service, which claims to be free, it looks like vesting, the appointment of directors/officers, an IP assignment agreement and even the 83(b) election letter is provided.
Does Clerky provide something other than the usual template documents startups should sign?
If you use any of the free document generators out there, you are left to your own to figure out what to do with the generated documents. It's not rocket science - you can definitely figure it out, with enough research. But it will take you a long time and it's cumbersome - consequently, you are highly likely to mess it up in some way or another.
We started Clerky exactly to solve this problem - as startup lawyers, every time we saw someone try to save money by doing paperwork on their own, there was some sort of issue with it. Yet we could definitely see why they wanted to do it on their own. So we built software to make it impossible to mess things up (as long as the information entered is correct).
It's hard to say why people reliably mess things up. I think part of it is that it requires of a level of attention to mundane details that is not natural to most of humanity. Another part of it is that it really helps to know some of the reasons behind why those mundane details are important - which requires some knowledge of how corporations work, contract law, etc. And it's one of those things where you don't know what you don't know.
I think the reliably messing up isn't so much the lack of attention to detail, but the second point: not knowing what the standard is, why it's the standard, and why something should be done in particular way.
Definitely a you don't know what you don't know and it's hard to test safely. Done wrong, this stuff doesn't immediately blow up in your face, that happens later, usually at some future inconvenient time.
I'm still sad that I don't have debuggers, test suites, sandbox environments etc for incorporation/legal work.
We just created some new templates for these kinds of scenarios, but it really depends... could you email us at support@clerky.com so we can learn more about your situation? Just mention this thread :) Thanks!
Some other resources that have served me well - not for incorporation per se, but the next few steps in setting up a healthy corporation:
- Docracy.com has some good templates (contributed by some incubator I can't recall) for bylaws, ip assignation, founder terms, terms of service and privacy policy and customer contracts, etc.
- Listing a phone number with one of the large online directories helps with various verifications (including EV SSL if you need it and facebook page)
- insureon.com to shop for insurance.
- Get bookkeeping software. Right away, and keep it up to date
Setting up a corporate entity (any kind) in California gives you a mandatory minimum $800/yr bill from the CA Franchise Tax Board.
So if you are planning to incorporate in CA, be sure you are serious and don't mind an automatic $800 on the expense side without anything on the revenue side.
Please correct me if I am wrong on this.
Also, does anyone know why this is the case? I haven't seen this in a few other states where I have resided. What does this buy my company in terms of benefits? Was there some ballot proposition that got passed to levy/enforce this fee?
Yes, that's correct - although for corporations, you typically don't have to pay it for the first year (as long as you foreign qualify in CA for that year). So at least you get a small reprieve there :)
Awesome experience. We were already incorporated in India and had gone through a month long process of back and forth to finally get the company registered. Scanning copies, attaching it to emails. Re-sending the documents when something was a miss. Lot of pain.
While in stripe it was a breeze. We got incorporated + a bank account in 3 days, I guess. Signatures were online, no hardcopy or anything. (and the 15K aws credits)
edit: Hey @cmadan, my email is <my_username>@gmail.com
Hm -- can you drop me a note? (patrick@stripe.com.) I'd like to dig into why. It's still invite-only but you shouldn't have been turned down because you're in the US.
I haven't done it yet but I just found that Gust offers a similar service to Atlas with a notable difference being that Atlas opens the back account for you.
But, based on Patrick's comment, maybe Atlas is now open for everybody.
I was invited to try it but haven't pulled the trigger yet (I'm currently working on simex.io, an A.I. related project, on the side and am trying to get closer to launch and monetization testing before incorporating). I am very, very interested in people's thoughts regarding it!
It sounds like there was some confusion here -- you do not by any means have to be from a "disadvantaged" country. Can you email me (patrick@stripe.com) and tmf@stripe.com so that we can investigate what happened?
All this legal tape and bureaucracy is really an impediment to a young startup, especially if you're trying to bootstrap. I was personally hit with the california LLC fee of $800 a year (was three years behind) and one day I logged into my Silicon Valley bank account and saw $3,300 withdrawn by CA Franchise Tax Board. Not the happiest day of startup life.
That California business AMT ("franchise tax" of $800 a year, even if your business earns $0, or negative dollars, even if your business is a nonprofit) is a small business assassination program. I moved to California unaware of it, and was unable to migrate my non-profit to help fellow combat veterans with civilian reintegration, because the AMT was around my operating budget for the year. That's not a lot, but I can tell you that combat veterans have come to me asking for help, and I am unable to provide assistance except from my own pocket. California is infuriating.
Thank you. Thats exactly what I would classify it as. Drown the startup in a bathtub (using a bit of Grover Norquist rhetorical flourish there). I am just not bright enough to see what the upside of this fee is, especially in CA which I thought was a business/startup friendly state.
The "upside" of the fee is nothing more than feeding the voracious appetite of the state of California. The explanation for this AMT franchise tax literally uses the phrase "for the privilege of doing business in California". The state tax board knows what it's doing, and it doesn't care, because the truth is that loads of people want to start a business in California or run a business from within California as a resident, and have no other choice but to pay the AMT franchise tax (even if the business is incorporated in Nevada or Delaware, if most of the business occurs in the state of California, the tax man still cometh).
Warning: there's a really important point missing from this list - pay taxes in California. There's a minimum "Franchise Tax" of $800 plus a percentage of California-derived revenue. All entities doing business in California (be that selling to customers based there or having employees there) must register with the state and pay this. The first year is free though - the minimum is waived.
HN has a global audience. Might be worth noting that this advice is aimed at Americans. This could be very bad advice for non-Americans.
I'm a lawyer who deals with startups in Toronto. Quite a few people ask about how to set up a Delaware corporation because they've seen online that that's how you create a startup.
Although I appreciate this list is aimed at a narrow case (incorporation in Delaware with operations in California), I'd still pay a little more attention to the "choose a name for your business" stage to avoid surprises.
At the very least, check the name isn't a registered trademark in a similar business (at uspto.gov), and that there isn't another significant company with the same name globally (opencorporates.com is a good starting point, as well as Google).
You don't want to limit international expansion later by picking a name that is a well-known company already. For example, when Burger King expanded to Australia in the 1970's the name Burger King was already trademarked locally, so they had to rebrand as Hungry Jack's.
Of course also do a Google search to see if words in the name are widely used, perhaps meaning something unsuitable in another language.
Finally, although maybe becoming less important, it's useful if the .com domain is available (either unregistered, or at a reasonable price).
Better to do all this before spending the money on incorporating with a name you might need to change later.
I've heard that for small businesses in California, incorporating in Delaware for tax reasons doesn't legally make a whole lot of sense because California will want to tax you anyway. Is that the case? If so, why are so many people still set on incorporating in Delaware?
You're right. If you plan to build a business and raise VC money for it, Delaware is the standard place to incorporate (which is the case for my company and checklist, btw).
California does add an extra layer of burden and compliance that I did not expect, but if you plan to have employees in California you must incorporate there as a foreign entity (also my case).
I've also heard from a fellow entrepreneur who has a distributed workforce that you need to incorporate in every state with an employee. This is certainly outside the scope of my checklist.
Being that I'm not in California I can't think of any good reason to incorporate in Delaware. Many other states are just as friendly to corporations if not better.
Nice thanks, I'd like to see such lists or guides for other countries such as Canada or European ones, if it makes sense. Of course it doesn't replace a good lawyer but at least to get an idea on how hard it is for founders.
I'd love to see other guides pop up as well. Still shocked at the number of agencies, documents, forms, and faxes that are required just to set up a simple company.
You can save on the incorporation services by downloading forms directly from a given state's Secretary of State site. Most states have clear instructions on how to fill everything out and where to submit the paperwork and payment. Incorporation service companies are great, but if you're trying to bootstrap a startup every dollar counts.
Additionally, if there will be multiple owners/members of the new entity I strongly suggest buy/sell agreements (basically a contract stating who can sell their interest and when and to whom - saves a lot of headache later to figure these things out up front).
HelloFax has been a great service in my incorporation process (and I listed it in the "Tools & Resources" part of the checklist!).
In my case, I used the InCorp service to file my DE docs since I needed an expedited service and they could walk the documents over on my behalf. In the past, I did that portion myself.
Thanks for building a great service and down with the fax machines!
Thanks! Glad you liked it. This checklist is what I've been going through for the past many months with my startup. Creating the list was a cathartic process and my original audience was meant to be friends who are building their own businesses. Glad to see it's getting more attention now.
I'd be fine with it getting added elsewhere as a more usable checklist as long as there's a link back to the github repo. I plan to update the checklist as I learn about new requirements and/or get pull requests.
This checklist is a fine first step in completing the externalities of corporate formation. However, it is only the first step. There is a whole second step of issuing stock, appointing directors, holding a first meeting, electing officers, adopting bylaws, and a whole slew of internal items that should be on the check list as well. Most of these are forms that could be handled by a lay person as well, but you won't get any corporate liability protection without them. There are also annual meetings and such that are required to maintain the corporation. If you are serious about DIY incorporation do some research, you could probably find some good manuals out there with forms and everything.
If my company won't be making money or revenue for quite some time, what does that mean for me in terms of the IRS? Will we get penalized for NOT having revenue?
It's worth pointing out that California imposes a MINIMUM tax of $800/yr on LLCs (even if you have zero revenue). This disincentives you from going and forming an LLC "just because".
If a C or S corp, you still need to file a Form 1120 [1] U.S. Corporation Income Tax Return:
"Who Must File
Unless exempt under section 501, all domestic corporations (including corporations in bankruptcy) must file an
income tax return whether or not they have taxable income. Domestic corporations must file Form 1120, unless they are required, or elect to file a special return. See Special Returns for Certain Organizations, below"
InCorp is referenced in the non-free tools section but not in the recurring fees section. Is this an oversight ?
Isn't there a DE requirement that you have an agent(?) operating within the state if your HQ is in CA ? Incorp currently charges me $100+ a year to do this.
i always incorporate in my home state when starting a new venture, its much easier to manage.
all assets can later be sold to another LLC or Corp as the need arises, but doing all these steps in advance can just cause undue headache and complexities.
also, california is about the least small business friendly state in the union. and AFAIK, having a delaware corp doesnt save you all that much in taxes anyways. so glad i no longer have to deal with that state.
complex corp setups also confuse some investors, certainly if you are raising capital from those not savvy in the plethora of ways corps are setup to circumvent taxation and game the domicile game. they basically think you are a scammer(been there)
How relevant is this to a single person wanting a corporate front to make small amounts of side money from a website or app? Is an in-state LLC more preferable in that situation? Is any type of incorporation even necessary?
You should be fine just forming a disregarded-entity LLC in your state.
There's no reason to do it in Delaware, except want to part with a lot more of your money. Even if you form the LLC in Delaware, you will have to register it as a foreign entity in your home state, so you're only doubling your paperwork and annual costs.
It's worth chatting with an accountant about this. Many of them offer a free 30- or 60-minute consultation to new clients (or potential clients).
For your case incorporation is not necessary. Being in a single-member LLC doesn't necessarily limit your liability all that much. Declare your earnings on your tax return and pay state and federal self-employment taxes. Simple.
That'd be a great list! I guess this depends on multiple factors like how many employees you have, how many investors, etc.
I've heard that for pre-funded DE corporations you can basically ask your registered agent to formally "resign" as your agent and then the corporation is orphaned. The proper way involves filing paperwork to dissolve the entity along with paying some filing fees.
What's the difference between a orphaned corporation and a dissolve corporation? Will Delaware still come after you for the annual $350 franchise tax if your corporation is orphaned?
That might work with some registered agents, but it won't with Incorp - they will require you to either have a new registered agent in place, or you need to dissolve your company.
Good to hear... we repeatedly ran into this issue with them over the course of several years. I can't tell you how many times we argued with them over this. But it sounds like they may have reformed their ways!
How we can open checking account in SVB? They rejected to open account for us saying that we are not tech vc-backed startup, but we are! Or any other possibilities?
FWIW, you can easily open a business checking account at any bank and they usually have better online services than SVB. Often you can ask your personal bank to waive the fees on a business account if you've been with them for a while.
I'm from the EU and opened an LLC in the US. I think this list just applies. Except for the visa, that is actually the biggest hurdle. Unless you invest > $500k.
This is great. Just what I need. My non technical co founder and I are starting a company and I want to make it a real company before we start meeting 3 days a week.
Yes, agreed. No need to incorporate just to get together and hack on a project. That said, I would certainly consider (at the very least) signing an agreement with your hacking buddy before launching anything that might generate revenue.
I've seen and heard multiple co-founder friendships fall apart once things started to get "real". Good luck!
Yes, please take this advice. It's worth noting that California imposes a MINIMUM tax of $800/yr on LLCs (even if you have zero revenue), which, if you're on a true shoestring budget or are only half-serious about the business, is significant.
This effectively encourages you to not form a company in CA if it's only expected to produce a tiny amount of income.
It doesn't matter where the company is incorporated, you will have to register it as a foreign entity in your state (in this case, CA).
Take the time to read about this before doing anything. One impulsive action could lead to thousands of dollars in annual fees and even more in filing costs (accountants, lawyers).
One reason to incorporate as a C or S-corp is that it's easy to add 4-year vesting to founder shares. This protects you if your co-founder walks away after 6 months. It's much harder (if it's even possible) to vest "shares" in an LLC.
In your case of a 50/50 split, make sure your agreements also have a clause that deals with disagreements. IT's likely you'll come to a point in your business where you do not agree and 50/50 ownership can make your business stall. Codify how those disagreements are solved before you get there.
Write that fact down on a piece of paper and both sign it. Then get it stamped by a public notary. Right now you're looking to make an agreement, not operate a company. Most likely your only ownable asset for the foreseeable future is copyright, which you can agree to share equally with just a piece of paper - having a business entity won't actually help you unless you have either income or are ready to take on investors.
There are a number of "Sales tax as a Service" businesses like Avalara out there, which honestly ANY small business that can afford it should partake.
I worked for a company that tried to build an in house sales tax rule calculator, it's damn near impossible unless you want to devote a team of people just to sales tax, and certainly not worth the risk.
We've automated all of this at Clerky - you can do everything completely online using our software. We do a ton of company formations. If anyone has any questions on the topic, feel free to ask!