Key Questions
- What is incorporation?
- When should I incorporate?
- Where should I incorporate?
- Do I need a lawyer or can I do this myself?
- What are the major decisions I need to make when incorporating?
- How expensive and time consuming is incorporating?
- What type of organization should I incorporate as? Can I change it later?
- What are the tax and governance implications of each organization type?
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Mark Windfeld-Hansen: Comparison of C Corp, S Corp and LLC Entity Types
(4 min read.) Mark compares and contrasts three popular business entity types: C Corporations, S Corporations, and Limited Liability Companies (LLCs), highlighting their key features like limited liability, taxation, and flexibility in structure. He emphasizes the importance of considering factors like business nature, financing needs, and return plans to choose the most suitable entity type for your business. While the article provides a general overview, it strongly recommends consulting with a legal professional for personalized advice regarding your specific business requirements.
Samuel Effron & Sebastian Lucier: Formation 101- Founder Stock and Vesting
(16 min video.) Lucier and Efron discuss the importance of vesting for startup founders, emphasizing its role in ensuring commitment and protecting remaining founders if someone leaves early. They explain different vesting criteria like time-based or milestone-based vesting and highlight the crucial tax implications, particularly the necessity of filing an 83(b) election to avoid severe tax consequences. Additionally, they discuss the founders’ contributions, the composition of the board, and the need for certain statutory officers, emphasizing the value of having an independent board member for industry insight.
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Carolynn Levy: Startup Legal Mechanics
(57 min video.) Levy discusses the essential steps and common mistakes in the legal formation of startups. She emphasizes the importance of incorporating early to protect personal liability, suggesting Delaware for its ease and investor preference. Using online platforms like Clerke and Stripe Atlas for incorporation and post-incorporation documents is recommended. She warns against neglecting to issue and vest founder shares, underscoring the need for a structured vesting schedule. Levy advises on the necessity of treating the startup as a separate entity, including opening a corporate bank account and filing taxes. She also stresses the importance of founders signing CIIs to protect intellectual property and maintaining proper documentation to avoid legal complications during investor due diligence.
Joey Zwillinger: So You Want to Be a B Corp…
(3 min read.) Zwillinger advocates for becoming a B Corp to adopt a governance model that prioritizes all stakeholders, including the environment, employees, supply chain partners, and communities, rather than just shareholders. Zwillinger criticizes Milton Friedman’s doctrine of shareholder primacy for causing economic inequality and environmental degradation. In contrast, he promotes benefit governance, which balances profit with positive societal impact. Under Zwillinger’s leadership, Allbirds became a Public Benefit Corporation, incorporating environmental conservation into its charter and aligning operations with B Corp principles, such as carbon neutrality and stakeholder accountability. Zwillinger emphasizes that while this governance model provides flexibility and accountability, it also ensures future leaders uphold these commitments by embedding them into the company’s legal framework.
Kati Pajak (MintzEdge): Is A Public Benefit Corporation Right for Your Mission-Driven Business?
(5 min read.) This article details the distinct features of a Public Benefit Corporation (PBC) versus a traditional corporation, emphasizing the unique focus on generating public good while balancing stakeholder interests alongside financial returns. The comparison includes aspects like ownership, management, legal obligations, and investor perspectives. The PBC’s requirement for directors to balance financial interests with public benefits and its potential for attracting like-minded investors make it an appealing option for purpose-driven enterprises.
Jeremy Glaser & Sebastian Lucier: Formation 101: Choosing an Entity Jurisdiction
(17 min listen.) Lucier and Glaser discuss essential considerations for forming a startup entity. Jeremy emphasizes the importance of forming an entity early to secure intellectual property and limit liability. They discuss different entity types, such as corporations and LLCs, concluding that a C corporation in Delaware is ideal for startups planning to raise institutional capital due to investor preference and legal protections. Jeremy also explains the limitations of B Corps for attracting venture capital. They touch on the tax benefits and the process of converting entity types if necessary. The conversation underscores the strategic choice of Delaware for ease of business operations and investor appeal.
Christian Hollweg: Choice of Business Entity: Pros and Cons of Corporations and LLCs
(10 min read.) Hollweg discusses the critical decision of selecting the appropriate business entity for success. He outlines the features of C-Corporations, S-Corporations, and Limited Liability Companies (LLCs), highlighting their taxation implications, investor appeal, and operational simplicity. Hollweg talks about how C-Corporations are favored by large investors and suitable for venture capital, while S-Corporations and LLCs offer tax advantages beneficial for smaller or family-owned businesses. He also advises entrepreneurs to align their business structure with long-term strategic and funding objectives.
Matthew Bartus: How Many Authorized Shares Should I Use in My Certificate of Incorporation
(3 min read.) In this article Mathhew discussed the considerations of share issuance. When incorporating a business, it is important to determine the number of authorized shares, which is the maximum number of shares a corporation can issue. He shares that while it’s common to believe authorized shares should equal the total shares issued initially, it’s generally recommended to authorize a significantly larger number. This provides flexibility for future growth, easier share issuance, and avoids complex and costly procedures. The use of large numbers is prevalent in the technology industry where companies often grant shares to employees and investors through stock option plans. This allows for easy option grants without needing to amend the certificate of incorporation, which involves board and stockholder votes and additional filing fees. Larger share grants also make recipients feel more valued and lead to a lower per-share price, which is beneficial for fundraising and future stock valuation. Although the number of authorized shares can impact Delaware state taxes, it’s not a major concern in the early stages of a company’s life. Therefore, it’s advisable to authorize a large number of shares when incorporating a business.
Josh Seidenfeld: Corporations: The Basics
(8 min read.) In this article Josh covers the basic understanding of corporations. Corporations are separate legal entities owned by stockholders and are governed by a board of directors elected by them. Day-to-day operations are managed by officers appointed by the board. While incorporation can be done without legal assistance, it is advisable to consult an attorney to navigate tax and fundraising issues, optimize capital structure, and avoid potential pitfalls. To maintain limited liability, corporations must follow specific procedures such as obtaining authorization for actions, separating corporate and personal funds, maintaining complete records, and ensuring an arms-length relationship with stockholders. Delaware is a popular state for incorporation due to its established corporate laws, but choosing a state other than the principal place of business can result in higher taxes and costs.
Josh Seidenfeld: S Corporations: The Basics
(5 min read.) In this article Josh discusses S Corporations which is a type of corporation that avoids paying federal corporate income tax. Instead, profits and losses are passed through to the stockholders for tax purposes, meaning profits are only taxed once and losses can be deducted by stockholders on their individual tax returns. However, there are several limitations to S Corporation status, including a maximum of 100 stockholders who must be individuals or certain qualifying entities, and the requirement of only one class of stock. To elect S Corporation status, a qualified corporation must file Form 2553 with the IRS and obtain the consent of all stockholders. Failure to meet these requirements can result in termination of the S election and create tax issues.
Josh Seidenfeld: Limited Liability Companies (LLC): The Basics
(4 min read.) Here, Josh talks about a Limited Liability Company (LLC) which offers business owners the advantages of a partnership’s pass-through tax benefits and the personal liability protection of a corporation. LLCs are similar to S corporations in their limited liability and tax benefits but offer more flexibility. LLCs are suitable for businesses financed by corporate investors and wealthy individuals, particularly start-ups. Because of their flexibility, LLCs can be incorporated tax-free at any time, allowing them to adapt to changing financing needs.
Carta: Qualified Small Business Stock (QSBS)
(7 min read / 5 min video.) Qualified Small Business Stock (QSBS) is a U.S. tax benefit for eligible shareholders of qualified small businesses. It offers up to 100% exclusion on capital gains tax when selling or exchanging qualified stock. To qualify, companies must meet specific criteria, including being a U.S. C-corporation with less than $50 million in gross assets. Shareholders must hold the stock for at least five years to benefit from QSBS tax treatment.