Registering a business can be a complicated step for newcomers and ensuring the right choices are made upfront can have long-lasting benefits.
Building a business is brutal. Even the most committed and talented founders will concede that it’s a tough and long road. Yet one thing I personally didn’t hear much about until I was staring down the barrel of it was how potentially expensive and daunting it can be to merely register your nascent company.
Often consolidated down to one sentence in the stories of the greats, incorporating can actually have huge long-term consequences if you do it wrong. Cautionary tales abound talk of founder disputes and investors ousting CEOs. Scared of destroying my company before it even started, my first instinct was to rely on the steady hand of a lawyer – as many would – but was quickly turned off by how expensive they were and how little they did. I figured there was a better way and there is.
While there are a lot of nuances in setting up a company, it’s something that every aspiring founder should be able to handle on their own in most cases with the help of some nifty software platforms. Even if you have the money to afford a lawyer, I highly suggest handling some of the details yourself as the experience helps clarify the rules and corporate structure you will be held to for the foreseeable future.
Hopefully, by now I’ve convinced you that spending a few hours learning about business structure and incorporation is worth it in the midst of all your other founder duties. Let’s dive into the nitty-gritty.
- Determine what type of company you should be
- Choose how you want to handle your incorporation
- Fully on your own
- Online services
- Registered Agents
- Registering in your state
Determine what type of company is right for you
The first step to setting up a new business is deciding just what kind of business you’d like to be. Thankfully this typically isn’t too difficult a decision and most companies fall into one of a few major categories.
Limited Liability Partnership
This business structure is normally geared towards smaller businesses and groups of individuals partnering on a specific venture. It provides certain tax and liability benefits and is often used for law firms and real estate investment groups. We won’t spend much time on this segment as it’s rarely used in the startup space.
Limited Liability Company (LLC)
This business structure is often used for local small businesses in retail, entertainment, services, and more. An LLC allows for multiple owners with equity percentages and provides personal liability protection for the owners. It is also cheaper to create and maintain an LLC from a taxes and fees perspective than a corporation, which we will talk about next. LLC’s are great options for those looking to build a local or lifestyle business where they are unlikely to take institutional money.
Corporation (C Corp)
This business structure is the typical choice for startups looking to eventually raise outside capital. It allows for increased liability protection by shifting actions to the entity itself and away from founders and shareholders. A C-corp also makes managing any intellectual property for the company easier by having it clearly defined as owned by the corporation itself and not any of the employees.
There are many benefits to this structure when it comes to startups, and (nearly) every investment firm will force you to be a C Corp before they invest. Something to note, though, is that registration and taxes become more expensive under this designation. A Delaware C Corp has a minimum of $300 in yearly Franchise Tax, which in actuality becomes $450 if you allocate the typical 10 million shares during incorporation.
Situations are all unique, but if you plan on spending a year or two working on a product without raising money or pulling in a ton of revenue as many do, it’s likely in your interest to stick with the simpler LLC. You can always convert into a C Corp once you get funded, and in this case, your investors will likely be able to help you with the legal aspects.
Choose how you want to handle your incorporation
Once you know what business structure you’d like to create, you have to decide how to make it happen. There are three main options that include doing it yourself, using an online service, or going to a lawyer. Each one is more expensive than the next.
Fully on your own
Registering your company completely on your own is the cheaper option, but can involve handling documents and timelines that you aren’t accustomed to. For LLCs, there are only a few forms to fill out and you will often only need to register in the state you reside in. C Corps for startups typically choose to incorporate in Delaware due to their business-minded governing and therefore involve several extra steps.
The explosion of software as a service has made day-to-day tasks like this easier than ever. Options like Stripe Atlas help you quickly register a company as a C Corp, provide you with help along the way, and even establish founder stock allocations to hit the ground running. At $500, it’s slightly more than some other online services, but the $5,000 fee credit if you use their payments more than covers it.
Though intimidating at first, I highly suggest taking this route. My first experience incorporating this way was eye-opening as I read into all the little steps I was taking. I think it’s the perfect mix of not dealing with the tiny details like you would by doing it yourself, but you also don’t just gloss over the entire experience like you would with a lawyer.
Pricing is also a big thing here. Online services often have deals that get you free AWS credits, Google credits, etc that can be very helpful when setting up your business. When you consider these plus the pretty reasonable asking prices, I think it’s a no-brainer.
This is by far the most expensive option and should really only be used in specific scenarios. The first being you’ve already been through a startup and are comfortable with business regulations and have money to spare. No need to learn things twice, so if you’re coming off a hot exit and want to start again, a lawyer is definitely the headache-saving move.
A second reason to use a lawyer is if you have a specific IP (or ownership) related concern going into incorporation. An example might be students coming out of a university technology transfer program wanting to set up the correct purchase or lifetime license needed to secure the IP.
Registered agents are basically the government’s way of always being able to contact your business. You pay somewhere on the order of $100 / year to use their business address in whatever state you register in to receive notices from the government about your company.
There are plenty of services online that will provide this service, and most of the services that help you incorporate will also include a registered agent option for a yearly fee.
Registering in your state
This last step is very important and can easily be overlooked if you aren’t careful. It’s especially annoying for startups because it adds to the initial tax and fee burden of just getting a C Corp setup. Unfortunately, even though registering in Delaware is the norm, you will also have to register your business in the state you actually operate in.
For instance, I operate my business out of Austin, TX. This meant that after I incorporated Topmarq in Delaware, I also had to register it as a Foreign Entity in Texas. The use of the word foreign is a bit confusing here but it just means foreign to the state of Delaware, not outside the United States.
Thankfully registering in your state is generally pretty easy and you can follow the steps mentioned above to do so. I was able to register in Texas on my own as it was just a couple of forms. Note that you will likely need a registered agent in your state as well.
You can see how this gets expensive as you now have fees and taxes for two separate states. I had to pay an additional $700 for my Texas registration, though thankfully they charge no Franchise Tax until you hit $1.8M in revenue. California has a set yearly fee regardless of revenue, with a 1 year grace period.
Registering a C Corp for startups gets expensive
When I was getting ready to create my company, I read a lot of online resources and they all pointed towards a C Corp for startups. I don’t disagree, but I do caution you to think about whether it is really necessary for where you are.
All told I spent $1750 in my first year as a C Corp on $0 in revenue due to the below costs.
- $500 on Stripe Atlas
- $450 Delaware Franchise Tax
- $700 Texas Registration
- $100 Texas Registered Agent
If you are trying to build a bootstrapped business with $5,000 in savings, spending 33% of that on registration fees probably isn’t a great idea. Keep in mind that what might make sense in the fictional, idealized version of a startup journey will very often not make sense for you.
Are you making real money yet? Do you have high-value IP that you need to protect? Do you have employees that you need to provide stock allocations?
If you didn’t answer yes to any of these questions, I would hazard a guess that running to register your C Corp probably isn’t necessary yet.