An attorney spoke at the recent Phoenix Startup Week here and addressed this a bit. Basically, he said it doesn't matter EXCEPT ... be sure there's nothing in your Corp Articles or LLC papers or anything that would prevent the entity from being converted to a different entity and/or moved to another domicile. He said that for simplicity, you can work as a proprietorship, or even an LLC. But, he warned that if you find any investors, they'll probably want you to change to something else. Sure, lots of folks are incorporated in Nevada or Delaware, but you are going to go to wherever your investors want you to go, unless there's some overriding reason not to. In particular, he said Arizona is a BAD state to be incorporated in if you're going to get investors. Note that he didn't say NOT to incorporate in AZ, only that if you get any investors, expect them to require you to re-incorporate elsewhere.
In other words, don't expect a one-and-done approach, and ensure there's nothing in your paperwork that prevents that.
Beyond that, he recommended talking to a business attorney familiar with the needs of startups, and especially one who deals with investors.
Also, if you ARE planning on getting investors, then he suggested avoiding giving away some percentage ownership in the company, and instead always give away a certain number of shares.
So someone might come along and you decide you'll split the business 50/50, and write up something that says they own 50% of the business. You just screwed yourself, because investors will end up taking their equity out of the OTHER HALF, which is YOUR HALF.
That is, never EVER write up a document saying somebody has xx% of the business. NEVER!
That's because it's subject to dilution with every round of investment capital you take in.
This lawyer told us that scenario tends to be the most gnarly and upsetting to founders when it happens.
He also advised to have a solid Buy/Sell Agreement in place BEFORE you solicit investors. Especially if any of the founders is married and they live in a community property state.
(Imagine splitting a company 50/50 with someone who's married. They get divorced, and now their ex holds 25% of the company. You're about to close a $1M round of investment capital, and the ex is only interested in cashing-out. You won't get a dime from the investors if 25% of it is going to an ex right off the top who'll end up tying the business up in a lawsuit if the deal closes.)
Instead of allocating percentage
of stock, come up with some way to allocate equity based on value contributed, such as what's described in the book Slicing Pie
. This approach has you divvy up the equity proportional to the value each person has contributed since the last valuation event occurred.