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?
Disclaimer. I am not a lawyer. I am sharing this from the entrepreneur's perspective. Consult your lawyer for any details.
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 between the partners. They don't function with shares.
We'll focus on C-Corps. Most of them will want to invest on Delaware C-Corps: so if your plan is to raise venture capital, that's 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, who may or may not be involved in day-to-day business activity. The power of a C-Corp is that it 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 which can lead to a high degree of predictability in the event of a legal dispute.
If you are developing code, that code belongs to you.
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.
When is the right time?
While incorporating normally costs around $500, you need to pay around $500-$800 per year in state fees.
These fees are going to be at least $1,000 a year for a rather inactive corporation, and as you ramp up revenue and expenses, that can go up. That is expensive, of course, If you are not generating revenue and funding the business yourself, this could be a lot of money that you could be using elsewhere.
The process is 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. You'll need to file an 83B election form.
6. 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. Check it out at founderhub.io.
If you are from outside of the US, this last part is for you.
- Do you need a US company vs a local company?
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, very easy. Stripe and Square are two companies that have perfected that model and they only allow accounts from certain, specific countries, including of course the US.
c- Investment. 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, versus an entity belonging to one specific country. It's all about being familiar with the legislation.
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, while it's all quite standardized in the US.
You can incorporate a US company without setting foot in the US. Companies like Stripe Atlas let you do that remotely and even set up a bank account for you.
Your US Corporation can easily be the parent company of a foreign entity. If you have staff or operations in a certain country, you'll probably want to use this model to centralize everything in the top company, and still be compliant with other legislation.
Slidebean: https://slidebean.com/
FounderHub: https://founderhub.io/
Demo Day: how to deliver a startup pitch deck https://youtu.be/IO11PLB2UV8
Seed Funding for Startups https://youtu.be/4RAs9Y5wwDo
Convertible Notes, Equity, and Startup Funding Explained https://youtu.be/njx09wXb9o0
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