Legal · Incorporation

Incorporating your startup

Anonymous

April 13th, 2012

I would be curious to hear about people\'s experience incorporating
their startup. Some potential questions are:

What state (Delaware, Nevada, home state)?
LLC, C Corp or S Corp?
Who to use for incorporation (lawyer or standalone service)?
Initial ownership structure?
Any "add-on" services like a corporate seal or operating documents?

Specifically I looking for experience here, not opinion. How did you
actually incorporate and did it work well or result in problems later
on?

Jessica Alter Entrepreneur & Advisor

April 13th, 2012

I\'m not a lawyer, so this is just my experience from the couple times I\'ve done it:
- If you\'re just playing around with stuff and doing side projects (but have IP - code, etc.) you\'re OK doing an LLC
- If you\'re ready or think you\'ll soon be ready to go to investors, etc. they\'ll want you to have C Corp, in fact, not even sure they can invest in an LLC
And if if you\'re doing the latter I wouldn\'t go with a legal zoom, etc. I\'d go to a lawyer/firm that does this all the time and make sure it\'s done right and in the way people are accustomed. You can get them to defer your legal fees for a year or until you raise a certain amount of money. that\'s pretty standard in the tech/startup world. They aren\'t making their money of your incorporation anyway.

From my experience, as soon as you think you need to incorporate you do and waiting has only caused problems and disagreements down the line. Not sure what you mean by "ownership structure"? Equity split? That\'s a totally personal thing, but also better to have those conversations early.

JA
On Apr 13, 2012, at 6:49 AM, Dan Abdinoor wrote:

Gaurav Sharma

April 13th, 2012

I am not a lawyer, this is just my experience so far:

- I have created 3 legal entities (1 in Nevada and 2 in Delaware).
- For the first one, I used LegalZoom, it went well it was just an LLC. For
the next 2 I used law firms and had good experience with them.
- For questions like state and entity type, I\'d suggest checking this blog
out http://www.startupcompanylawyer.com/ It hasn\'t been updated in a while,
but my assumption is these things still hold true.
- Based on my experience, I will not create a legal entity unless required
(such as stock grant, IP assignment, raising money, etc.) Once a legal
entity is formed, person managing the company is responsible for filing
taxes and other state requirements (such as anual filings). These can be
distracting early on when building a product.

- Gaurav

Jesse Silver Online Marketing & User Acquisition Expert

April 22nd, 2012

No question about it.

I was just trying to illustrate that you should allow your
lawyers/accountants to make the decision that best suits the business, both
for today, as well as what you can reasonably predict.

If things evolve in a direction such that your corporate structure becomes
an impediment to the business, one which cannot be worked around. It is
possible to change.

Chris Rill Founder | Consumer Hardware CTO

April 23rd, 2012

Hey Dan,

I\'m not a lawyer or an accountant but I\'ve seen a ton of \'Law and Order\'.

Here\'s a quick summary of what I know to be accurate about each legal
entity:

LLC:

1. Least expensive to setup and can be done via an online service.
2. Adds liability protection to protect your personal assets.
3. Establishes you as a business and can open a company bank account,
etc.
4. Taxes flow through members

S-Corp:

1. Similar to an LLC but a bit more complex (expensive) in its
incorporation. I would suggest using a lawyer to set this up.
2. Requires an accountant to manage company tax return.
1. Can carry over financial losses
2. Company files taxes independent of members.
3. Allows for different kinds of tax right offs. (healthcare, education,
etc)

C-Corp:

1. No personal experience here but I know most, if not all, large
investments will require this organizational structure.
1. This can be done at time of investment.
2. Most expensive and complex to setup
3. Allows for different share classes.

Also: Don\'t forget to fill out an 83b election:
http://www.startupcompanylawyer.com/2008/02/15/what-is-an-83b-election/

Jesse Silver Online Marketing & User Acquisition Expert

April 22nd, 2012

Also not a lawyer, having incorporated a number of companies, I\'d offer the
following advice:

Though I don\'t know the specifics, I know that there are certain limitation
to using different structures, as Jessica described. However, there are
ways to work around just about any of those limitations. Also, nothing is
set stone. To the best of my knowledge, you can change an LLC to an S-CORP
and vice versa, as is necessary, though I\'ve never had to do so, despite
using each for different ventures.

The determination on the correct structure to use should be one for your
lawyers and accountants. It\'s a question of which they are most comfortable
using. Find people or firms you like working with and let them make these
decisions for you, enabling them to do their work more effectively.

Jessica Alter Entrepreneur & Advisor

April 22nd, 2012

True, but changing from a C or S to an LLC is way more complicated and hence, expensive.
On Apr 22, 2012, at 3:10 PM, Jesse E. Silver wrote: