Filing Services

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Many entrepreneurs and startups are very concerned when they go to start their company because they’re not sure what type of business entity (Corporation, S-Corporation, LLC, etc.) a venture capitalist (VC) would want their company to be formed as, which state they should incorporate in and the types and number of shares.

However, many entrepreneurs and startup advisors believe that this should not be the primary concern. For example, if you incorporate in California when you start out, you can then “re-incorporate” in Delaware later should your investors require this. Or if you don’t authorize enough shares, then you can amend your original articles of incorporation later to reflect more shares, or different classes of shares (common shares vs. preferred shares).

There may be an exception in regards to the LLC – sometimes this entity is more difficult to modify for a venture capitalists needs – VC’s almost always prefer to work with the C-Corporation.

So, in essence, many companies start out in one structure, based in one state and eventually end up being changed considerably later. Instead, it might be advisable to work on working on your product or service, getting the company going in whatever form and then worry about these corporate formalities later – if you are at the point where they are modifying your company, you will probably receiving significant funding and these formalities will be handled by seasoned lawyers.

If you want to do the Delaware option at startup, see how a lawyer would set up a Delaware company now if were a startup. Almost always this is a Delaware C-Corporation.

If you’d like to see some of the typical venture capital agreements or how they typically modify the articles of incorporation, then view these “Model Series Seed Agreements“. This includes documents like Investors Rights and a “Term Sheet”.

Long story short, it’s ultimately up to you how you want to structure your company in the beginning, but the links mentioned above will show how a VC or startup lawyer might eventually structure your corporation.

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The Startup Lawyer has a fantastic post detailing exactly how he would setup a company in Delaware (like he does for his clients). This includes:

• Incorporating in Delaware as a C-Corporation.
• Authorizing 10,000,000 shares of common stock at $0.0001 par value.

He details other issues like the appropriate amount of stock he would issue to the founders, vesting schedules and even how he would raise capital. Highly recommended.

The only thing I would add is that a startup doesn’t have to start by issuing that many shares, you can save money by starting with a smaller amount, for example, one thousand shares and then if you get to the point where you need to raise money or venture capital, you can amend your “Articles of Incorporation” for higher share amounts later.

It is a fairly simple procedure to incorporate a business and as a professional you will benefit from the advantages of incorporation such as personal liability protection, taxation benefits and business credibility. When you incorporate a business you are required to complete a few necessary steps including filing your Articles of Incorporation with the state, drafting your Corporate Bylaws, obtaining a Federal Tax I.D. Number (also known as an FEIN or EIN) and choosing a registered agent. An online incorporation service can help you with each step or you can work with your state’s filing office, usually the Secretary of State, to incorporate a business.

You will need to select a state in which to incorporate a business whether it be for profit or nonprofit. Most often, small business owners will incorporate a business in their home state or the state where the business will be operate and be physically located. It might be of some benefit to your particular business to incorporate out-of-state, but virtually every state requires that an out-of-state company also incorporate in its home state, so make sure you have done your research prior to choosing your state to avoid paying  more money than necessary.

In addition to choosing your state, you will need to choose a unique name for your business. The name will need to be available in your state and you should also know that some states have their own guidelines for business naming, so it is a good idea to have a few names picked out in case your first choice is not available for whatever reason.

You will need to wait until you have received the filing paperwork back from your state before your company is officially incorporated, but there are things you can do while you wait such as prepare a business plan for operating your business. Your business plan can be simple or comprehensive depending on the complexity of what your company will do and the requirements of your bank, if you are applying for a business loan. Other things to do while you incorporate a business include opening your company bank account, leasing office space, obtaining any permits or special licenses you will need and hiring employees.

Your corporation will be structured with Shareholders owning the company stock. Often, a small business owner operates a company on his or her own so exists as the company’s only Shareholder. It is also common for a small business owner to be the corporation’s one Director and hold all Officer positions (President, Secretary, Treasurer, etc.). A corporation is operated by rules set forth in the Corporate Bylaws, which are completed after you incorporate a business and can be modified in time as the business changes or grows. Operating a corporation requires, at the minimum, holding an annual Shareholders and Directors meeting, keeping written minutes of any decisions affecting the company and following general corporate rules as dictated in your Corporate Bylaws.

By completing the steps outlined to incorporate a business, your business idea will become a reality. An good online incorporation service will charge reasonable fees and assist you through the process of starting your own company.