You’re an entrepreneur and want to start your US company. You found this online platform that handles everything for $500 or so. Should you go for it?
That’s what we are going to look into today.
Why should you do it?
When is the right time?
An overview of the process
Alright, most companies are incorporated as C-Corporations. The second, rather common alternative is LLCs or limited liability corporations.
An LLC is a type of company organized under an Operating Agreement, which is a contract between the owners specifying how it will be run and how the economic burdens and returns will be split.
We’ll focus on C-Corps, today. In our experience with investors and accelerators, most of them will want to invest on Delaware C-Corps: so if your plan is to raise venture capital, that’s probably the way you want to go.
A C-corporation is an entity designed to act as an abstraction layer between the operators of the business and the owners of the business. The power of a C-Corp is that it generally separates liability from the business owners.
Ownership is tracked by shares, with each share corresponding to a defined portion of control of the business and entitlement to the economic upside of it.
The state of Delaware has a highly developed body of law governing corporations.
So why doing it?
Clarity with Co-Founders.
While those agreements can be put in paper first, as your product and company increase in value you’ll need to have them in full, legal writing, and a legal corporation is the best way to do it.
Allows Equity Ownership and Compensation
Not only for founder shares but for early team members. You’ll want to define an option pool for them to compensate them for taking a risk with your company.
If you are developing code, that code belongs to you unless you have a contract with the company. By creating a C-Corporation you can ensure that all code generated is owned by the company.
Personal Liability Protection
If the corporation is sued, the assets of its founders are more likely to be protected.
You will probably not be able to raise money to your name. It needs to be put into a corporation.
While incorporating normally costs around $500, you need to pay around $500-$800 per year in state fees.
Furthermore, you need to be compliant with accounting and tax filings.
The process is rather straightforward and we laid it out in our platform FounderHub. We built that specifically to help founders navigate this process.
1. Filing takes about a day.
2. You’ll want an EIN number.
3. You’ll need to define a Board of Directors and company Bylaws.
4. You’ll need to define share ownership and vesting.
5. Very important, if you are vesting stock, you’ll need to file an 83B election form.
6. You’ll want to sign a Restricted Covenants Agreement between the founders.
We have details on each one of these steps as well as document templates available on our free FounderHub platform.
If you are from outside of the US, this last part is for you.
Do you need a US company vs a local company? It depends.
a- If your product is global, and you want to bill customers around the world, it is expected for those credit card charges to come from the US.
b- Charging credit cards as a US company is very easy. Stripe and Square are two companies that have perfected that model.
c- If you are looking for US investors, or even plan to raise from investors from multiple countries, they can probably all agree to invest on a Delaware C-Corp.
d- Startup mechanisms such as vesting, stock option pools, and convertible notes: not all countries have legislation or mechanism in place to handle these agreements, it’s all quite standardized in the US.
#startups #incorporate #smallbusiness
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