Startup Incorporation Guide
The incorporation process may seem complex and scary; however, it is a necessary step in founding a startup, especially a startup with high growth aspirations or that wants to take on venture capital.
In this guide, we break down the incorporation process step-by-step and help you navigate the resources and tools you may need to incorporate your startup. Here are the six steps to incorporating your startup:
Step 1: Choose a Business Entity
Step 2: Select a Tax Structure
Step 3: Choose a Location
Step 4: Create a Founders' Agreement
Step 5: Form Your Business
Step 6: Maintain Your Corporate Veil
Frequently Asked Questions
Step 1: Choose a Business Entity
One of the first and most important decisions you will need to make when incorporating your startup as a formal business structure is to decide your business structure.
This is actually a series of two distinct yet related decisions — choosing the type of legal entity you will operate under (i.e., the legal form of your startup) and selecting a tax designation. Because the type of tax structure available to you depends on the type of legal entity you choose, these decisions are closely intertwined.
Let’s begin with the legal structure of your business.
There are several types of formal legal structures for startup ventures:
- Limited liability companies (LLCs)
- Benefit Company/LLC
- Benefit Corporations
- Nonprofit Corporations
The two most common legal structures for for-profit startup ventures are LLCs and corporations. In addition to LLCs and corporations, each also has benevolent counterparts — benefit companies and benefit corporations. If your startup has a social mission rather than a purely financial one, one of these alternative legal structures may also be the right choice for your startup.
Read on to find out the right legal structure for you.
Read our full guide on How to Choose a Business Structure.
Limited Liability Company (LLC)
What is an LLC? LLC stands for limited liability company. An LLC is a simple business structure that provides liability protection for business owners and their personal assets.
LLCs are easy to start and maintain, offer management and ownership flexibility, and have several options for how they choose to be taxed, making them a popular choice for a wide variety of business types and sizes.
LLCs have one or more owners, called “members,” and can be managed by the members (member-managed) or by an appointed manager of the LLC (manager-managed). An LLC with one owner is known as a single-member LLC, and an LLC with more than one owner is a multi-member LLC.
LLCs also have several tax structures that they can choose from. By default, LLCs are either taxed as disregarded entities (single-member) or partnerships (multi-member), where the profits of the LLC pass through to the owners as self-employment income. However, LLCs can also choose to be taxed as a C corporation (C corp) or as an S corporation (S corp), which gives maximum flexibility to owners in how they distribute profits and earnings.
For more information on LLC taxation, read our LLC Tax Guide.
Conclusion: LLCs are probably the right legal structure for most small businesses — those with a small number of owners who do not plan to raise outside investment.
- Personal liability/asset protection
- Simple and easy to start
- Management/ownership flexibility
- Choice of taxation (pass-through taxation by default)
- Losses can be passed through to owners
- Difficult to raise capital
- Can only accept investments from individuals, not funds, trusts, or organizations
- Taxes must be paid on pass-through income even if there are no disbursements
- Self-employment taxes (Social Security and Medicare taxes) must also be paid on pass-through profits
Choose an LLC If:
- You plan to start a small owner-managed business
- You desire flexibility in designating ownership in the business
- You are not seeking angel or venture capital investments
Corporation (C Corporation)
A corporation is a legal business entity that is owned by shareholders, run by a board of directors, and created through registration with the state. Corporations are more formal, less flexible legal entities, and they are required to follow more complex operating procedures than LLCs.
The owners of a corporation are its shareholders, and corporations provide limited liability, protecting the assets of its owners.
Although corporations get a bad rap for double taxation, corporations can choose among several tax treatments and often provide tax benefits for its shareholders.
Corporations also make it easy to issue and transfer ownership and are the only type of organization that can go public and issue an initial public offering (IPO).
For all of these reasons, corporations are the preferred — and often only acceptable — method of organization for investors.
Conclusion: Corporations are probably the right legal structure for startups — for those that plan on high growth, it’s likely required if you plan on raising venture capital.
- Personal liability/asset protection
- Choice on taxation (corporate taxation by default)
- Unlimited number and types of stockholders (c-corp only)
- Funds, trusts, and organizations can invest (c-corp only)
- Earnings can be retained in the corporation
- Sale of equity subject to favorable capital gains rates
- More complex and require more paperwork
- Less management/ownership flexibility
- Profits may be subject to double taxation
- No pass-through of corporate losses to owners
Choose C Corp If:
- You want to retain and reinvest profits
- You plan to build a large company with outside investors
- You are looking to raise institutional or venture capital
- You plan to take the company public
Alternative Legal Structures: Benefit Companies and Benefit Corporations
Several alternative legal structures may be available for your organization, depending on its mission.
If your startup has a social mission, the newest alternative legal structures that may be available to you are the LLC benefit company and the benefit corporation (B corp).
Benefit LLCs and benefit corporations are essentially the same as LLCs and C corps. They are still for-profit entities with members or shareholders. However, benefit LLCs and B corps have special provisions in their operating agreements or Articles of Incorporation that specify a purpose for the business outside of maximizing shareholder value.
Incorporating as a benefit LLC or B corp can be a way to officially recognize and signal to stakeholders (directors, officers, shareholders) the company’s values and social mission, and to give officers and board directors legal cover to pursue objectives that may not be consistent with maximizing shareholder value without the risk of a shareholder lawsuit.
If you plan on seeking funding, this option could make sense for a socially conscious founder with a clear social mission who is seeking investment from “impact investors,” though may not be well-received by all types of VCs and angel investors.
Step 2: Select a Tax Structure
Tied to your choice of legal entity the choice of tax structure and treatment for your company and its owners. There are four primary tax structures available to LLCs and corporations. Two of these structures are pass-through tax structures and apply only to LLCs — the disregarded entity and the partnership. The third and fourth types of tax structures can be elected by LLCs or corporations. These are the C corp tax structure and the S corp structure.
Single-member LLCs can elect to be taxed as a disregarded entity. In fact, this is the default tax structure for LLCs with only one owner. The disregarded entity tax structure is a pass-through tax structure where the profits pass directly to the owner and are reported as self-employment income on his or her personal tax return.
Multi-member LLCs default tax structure is the partnership tax structure. The partnership tax structure is a pass-through tax structure for partnerships and multi-member LLCs where the profits pass directly to the owners and are reported as self-employment income on each member's personal tax return.
There are several pros and cons to defaulting to the disregarded entity and partnership tax structures:
Both LLCs and C corps can elect to be taxed as S corps. The s-corp tax structure is a hybrid pass-through tax structure where an LLC or corporation's income or losses are passed-through to its shareholders for tax purposes. This means LLCs and corporations who elect to be taxed as S corps do not pay corporate income tax. Rather, income to an S corporation’s owners is divided and taxed in two parts — salary and distributions.
First, if any of the owners of an s-corporation also manage or are employees of the organization, S corp tax designation requires that they must pay themselves a fair salary (and the appropriate taxes be withheld) through the corporation.
However, unlike a partnership’s passthrough taxation, any profits of an S corporation over and above the owners’ salary are treated as a distribution rather than as self-employment. Thus shareholders pay tax on the capital gains that are passed through to them but do not pay self-employment tax on the distribution portion of the proceeds.
Here are the pros and cons of elected to be taxed as an s-corporation:
Both LLCs and corporations can also choose to be taxed as C corps. The C corporation tax structure taxes the corporation on their profits less any deductions, credits, or losses. The current top corporate tax rate is 21%. The owners or shareholders of the C corp then only pay income tax on any dividends issued by the corporation at the preferred capital gains tax rate.
C corporation tax designations simplify tax reporting for the company and shareholders alike. They also make it easy to retain and reinvest earnings in the company, as shareholders only pay taxes on dividends distributed by the corporation. It is clear from these reasons alone why investors prefer to invest in C corporations.
Here are the pros and cons of electing to be taxed as a C corporation:
Putting It All Together
Choosing the right type of legal entity and tax designation depends on the unique characteristics and needs of your business, and these may even change over time. Although it is possible to change your legal entity from LLC to corporation and your tax designation from partnership to S corp or S corp to C corp, these take time and come at a cost.
Take the time to assess your current and future needs and which business structure suits your company best. To learn more, read our full guide on How to Choose a Business Structure or consult with an attorney to help find the right business structure for your startup.
Step 3: Choose a Location
Once you have chosen your legal entity and tax structure, you will need to decide where to incorporate your startup. Where you incorporate your startup is a very important decision with implications on raising funds, tax and accounting, and legal ramifications for your startup.
Entrepreneurs nearly always incorporate their startup in one of three states: their home state, their investors’ or venture capitalists’ state, or Delaware.
Yes, Delaware. In fact, Delaware has long been one of the most popular states for incorporation. To date, Delaware has more corporations (≅1.5 million) than people (≅1 million). Additionally, Delaware corporations make up a majority of successful companies young and old, including startups that reach an IPO (75% of companies that reach IPO) and Fortune 500 companies (67.8% of Fortune 500 companies).
There are several reasons many entrepreneurs (and investors) prefer to incorporate in Delaware. Primary among these are Delaware’s exceptional court system and well-defined corporate law, flexible corporate structure, and tax laws.
One of the principal reasons entrepreneurs and investors prefer to incorporate in Delaware is its exceptional court system and well-defined corporate law.
Corporate law cases in Delaware are decided by a special court for corporations known as the Court of Chancery. The Court of Chancery handles only corporate cases, and cases are decided by a judge who is an expert on corporate law, not a jury.
The special Court of Chancery and the judges’ expertise on corporate law has led to well-defined corporate law with a long history of decisions and legal precedence.
Another reason that entrepreneurs and investors prefer to incorporate in Delaware is the flexibility in corporate structure. Corporations in Delaware can include just one person who serves as officer, director, and shareholder.
Directors, officers, and shareholders also do not have to be residents of Delaware and do not have to be reported to the state, meaning that they can remain anonymous if they wish.
Entrepreneurs and investors also often prefer to incorporate in Delaware because of its tax laws. There is no corporate income tax in Delaware (although there is a franchise tax on the value of shares), and shareholders who do not live in Delaware do not have to pay tax on shares in the state.
Despite all of the above advantages, there are a number of drawbacks to incorporating in Delaware. First, filing fees to incorporate in Delaware are higher than many states and you will have to find a registered agent in Delaware.
Also, although Delaware has no corporate income tax you will have to pay a franchise tax in Delaware and may have to file and pay income taxes and franchise taxes in the states you do operate in. This means that many businesses will see no real tax benefit and may even end up paying more in taxes.
You will also need to comply with several sets of corporate laws — Delaware corporate laws as well as the corporate laws of the states you operate in. And, if legal issues do arise, you may have to travel to Delaware to settle any legal disputes.
Step 4: Create your Founders’ Agreement
Next, you will need to draft the appropriate agreements between the founders of your startup. This should be initiated in the earliest stages of forming your startup by drafting a founders’ agreement, and defined in depth in the formation documents for your LLC or corporation.
If your startup has multiple founders, a founders’ agreement should be drafted in the earliest days of your startup. The founders’ agreement lays out the roles, responsibilities, liabilities, ownership, and vesting schedules among the co-founders of a venture.
Founders’ agreements should address any possible issues that may arise concerning ownership, contribution, and decision-making power of the founders. The ideal founders’ agreement should lay out:
- IP Ownership
- Founders’ Roles
- Decision Making
- Issuance of Shares
- Founders’ Exits
Consider hiring a startup lawyer to help draft or review your founders’ agreement. Read our guide on how to find a startup lawyer for information on finding the right attorney for your startup.
When going through the formal steps to incorporate your startup, the framework laid out in your founders’ agreement is further defined and expanded upon in your LLC or corporation formation documents.
Provided the key points have been discussed and agreed in advance in a founders’ agreement, there should hopefully be little room for disagreement at the formation stage.
The formation documents you need to incorporate your startup depend on whether you are launching an LLC or a corporation and vary by state, but typically include an operating agreement (LLC) or Articles of Incorporation (corporation), bylaws (corporation), and shareholders agreements (corporation).
Step 5: Form Your Business
Once you have chosen a legal entity, tax structure, and location, you are now ready to form your business. Many of these steps are the same whether you are forming an LLC or a corporation. For example, no matter your legal entity type, you will need to name your business, appoint a registered agent, file formation documents, and get an EIN.
Here are the five steps to form an LLC:
1. Name Your LLC
Choosing a business name is the first step in starting an LLC. You will need to choose a unique name that complies with your state’s corporate name requirements. In order to form an LLC successfully, you have to be sure no one else in your state is using your name and that it meets state guidelines.
Most states also require you to include “Limited Liability Company” or one of its abbreviations (e.g., LLC or L.L.C.) in an LLC’s legal name. Check with our state LLC naming guides for information about your LLC naming rules in your state.
Learn how to search if an LLC name is available and if it meets naming guidelines in our LLC name search guide.
2. Choose a Registered Agent
When you form an LLC in most states you will be required to choose a registered agent within that state. A registered agent is responsible for receiving important legal documents on behalf of an LLC. The registered agent’s most important job is to accept service of process (legal summons) within the state the LLC is registered.
Many entrepreneurs choose to hire a registered agent service to help with this part of their business. You can also appoint a friend, colleague, or yourself.
3. File LLC Formation Documents
To form an LLC, you will need to file LLC formation documents with your state. These formation documents are called the Articles of Organization (also known as the Certificate of Formation or Certificate of Organization in some states).
LLC formation document requirements and process for filing vary by state. Most states offer online filing. Each state charges a fee to process LLC applications.
To learn exactly how to complete this step for your LLC, read our state-by-state guide on how to form an LLC.
Or, for help preparing your formation documents, consider hiring an LLC formation service.
Articles of Organization
The Articles of Organization is a document that specifies a business as an LLC and provides the LLC’s name, address, members and/or managers, and its primary purpose or nature of business.
Most states provide a standard form that you can download for free or file online from the agency that is responsible for regulating business in your state (often the Secretary of State’s office). Try our state-by-state guides on how to form an LLC to find the required forms, instructions, and filing procedures in your state.
4. Create an LLC Operating Agreement
You will also need to create an operating agreement for your LLC. An operating agreement is a legal document that outlines the rules and procedures related to the operation of an LLC. Operating agreements define how your organization will be operated.
Operating agreements detail members and managers roles and responsibilities, how decisions will be made, how ownership may be sold or transferred, and how profits will be assigned and distributed.
From there, you can add as many provisions as you want, provided they are not in conflict with your state’s or the incorporating state’s business law.
5. Get an EIN
An Employer Identification Number (EIN) is basically a Social Security number (SSN) for your LLC. Your EIN allows the IRS to identify your business and keep track of your business’s tax reporting.
Here are the 10 steps to form a corporation:
1. Name Your Corporation
Choosing a business name is the first step in starting a corporation. You will need to choose a unique name that complies with your state’s corporate name requirements. In order to form a corporation successfully, you have to be sure no one else in your state is using your name and that it meets state guidelines.
Your corporation’s name should be unique and distinguishable from other business names. It also must contain the word “corporation,” “company,” “incorporated,” “limited,” or an abbreviation of one of these terms. Visit our How to Start a Corporation state-specific guides for your state’s business name search portal.
2. Appoint a Registered Agent
When you form a corporation in most states, you will be required to choose a registered agent within that state. A registered agent is responsible for receiving important legal documents on behalf of the corporation. The registered agent’s most important job is to accept service of process (legal summons) within the state the corporation is registered.
Many entrepreneurs choose to hire a registered agent service to help with this part of their business. You can also appoint a friend, colleague, or yourself.
3. Complete and File Formation Documents
To form a corporation, you will need to file formation documents with your state. The formation documents will cover the basics of your corporation, including your corporation's name and principal address, information on your directors, officers, and shareholders, your registered agent’s information, and the number of authorized shares the corporation is permitted to issue.
Corporation formation document requirements and process for filing vary by state. Most states offer online fillable forms and online filing.
To learn exactly how to complete this step for your corporation, read our state-by-state guide on how to form a corporation.
Typical formation documents for a corporation include:
Articles of Incorporation
The Articles of Incorporation, or Certificate of Incorporation, is a document that specifies a business as a corporation and provides the corporation's name, address, corporate structure, registered agent, officers, number of shares authorized, and value of the shares.
Corporate bylaws are the procedures and rules that determine how your organization will be operated and how decisions will be made. Corporate bylaws are kind of like a constitution for your corporation. They describe how your company will be run.
Action of Incorporator
An action of incorporator document officially announces the appointment of the corporation’s directors and the adoption of the corporation's bylaws. Action of incorporator documents are used in several states, including Delaware and California.
Founder Stock Purchase Agreement
A founder stock purchase agreement is a document that defines founders’ ownership in the company and sets the terms of the founders’ initial purchase of stock from the company. A Founder’s Stock purchase agreement typically includes any vesting, transfer, or sale provisions agreed to by the founders.
4. Get an EIN
The Employer Identification Number (EIN) is basically a Social Security number (SSN) for your corporation. Your EIN allows the IRS to identify your business and keep track of your business’s tax reporting.
5. Adopt Bylaws
The first act of a corporation’s board of directors is to write and adopt the bylaws of the organization. The bylaws of an organization are the procedures and rules that determine the management structure, decision-making process, and how your organization will be operated.
Several states also require that your organization file an Action of the Incorporator when your directors adopt your company’s bylaws. The Action of the Incorporator is a document that officially announces the appointment of your directors and the adoption of your bylaws.
Recommend: Most startups work with an attorney to write their company’s bylaws. Read our guide on how to find a lawyer for your startup.
6. Draft Shareholders’ Agreement
Your corporation will also need to draft and approve a shareholders’ agreement. A shareholders’ agreement is an agreement between the majority of shareholders that defines the rights and responsibilities of shareholders in the company and describes how the organization should be operated.
A shareholder’s agreement establishes the relationship between shareholders, directors, and management of the company and includes provisions directing voting rights, the composition of the board of directors, and vesting, transfer, and sale of shares.
7. Issue Stock
When forming your corporation, you will need to choose a share structure and strategy and issue shares to your founders as agreed upon in the Founders’ Stockholder Agreement. You will also need to issue stock to anyone else who has invested capital, goods, or services in your business in exchange for ownership interest. This may include shares promised to advisors, employees, suppliers, or vendors.
8. Follow and Maintain Your Corporation’s Bylaws
You must follow your corporation’s bylaws and keep them up-to-date bylaws to keep your corporation protected and maintain your corporate veil.
Your corporation's bylaws should require holding periodic board meetings, documenting corporate decision-making, keeping detailed financial records, and filing corporate tax returns — all of which are required to maintain your corporate veil.
While it is important to get your corporation's bylaws correct when you are incorporating, you will also need to amend your bylaws as needed and keep the bylaws up to date. To amend a section or article of your corporation’s bylaws, you must call a special meeting with the board of directors, who must first vote on the proposed changes. Depending on your bylaw structure, either a majority vote or minimum vote will be required to pass the amendment.
After the first meeting, notices must be sent to the corporation’s shareholders and a second meeting must be held for all shareholders to either approve or disapprove your proposed amendments.
9. Set Up a Corporate Records Book
You will need to set up and maintain your corporation's record book. A corporation’s record book is a hard-copy record book where you keep all critical corporate documents, like your formation documents, bylaws, meeting minutes, stock certificate ledger, stock transfer documents, and any other crucial corporate records.
10. Hold Periodic Board Meetings
Finally, to maintain compliance with state laws and regulations, you are required in most states to hold an annual shareholder meeting once a year. During this meeting, the shareholders elect the board of directors. The date for this meeting should be set forth in your corporate bylaws. Other board of director meetings should be held regularly, and minutes should be recorded.
Step 6: Maintain Your Corporate Veil
You will need to establish and maintain a corporate veil. What is the corporate veil? A corporate veil is a legal concept that the corporation is a legal entity separate from its members or shareholders. This is the aspect of a corporation that provides personal liability protection for the members or shareholders of the corporation.
In order to establish and retain liability protection, the business and its owners must maintain a corporate veil. This means registering your business correctly and filing the right documents, maintaining separation between the corporation and its owners, keeping your corporate records updated, and filing required documents and quarterly, biennial, and annual reports on time.
Importantly, this begins with maintaining separate business and personal assets. When your personal and business accounts are mixed, your personal assets (including your home, your car, and other valuables) are at risk in the event someone sues your business. In business law, this is referred to as piercing the corporate veil.
Separate Business and Personal Assets
The first thing you need to do to establish and maintain a corporate veil is to separate business and personal assets. This includes opening separate business bank accounts, business credit cards, and building business credit.
Business Bank Accounts
A business bank account helps you separate your business and personal finances, adds professionalism and legitimacy to your new venture, and helps prevent piercing the corporate veil.
The first accounts you will need to open are a business checking account and a business savings account. This is the first step in separating your business and personal finances.
We highly recommend reading our review of the best bank accounts for startups and entrepreneurs to help you choose the right bank account for your business.
Business Credit Cards
If you find yourself relying on credit cards as a source of funding or to provide that extra financial flexibility, you will need to open a business credit card rather than relying on your personal cards in order to keep your business and personal accounts separated.
Business credit cards are an important source of funding for startups and small businesses and can provide some financial flexibility in between funding cycles, during slow periods, or for unexpected expenses.
There are many different types of small business credit cards, each with its own mix of interest rates, fees, benefits, and rewards.
Read our guide to the best business credit cards to find the right business credit card for your business.
Building Business Credit
Another way to separate personal and business assets is to begin building business credit. Building business credit involves establishing your business’s fundability, getting listed with business credit bureaus like Dun & Bradstreet, and establishing credit lines while keeping them in good standing.
Read our guide on how to set up business credit for the first time to learn more about getting started with business credit, which mistakes to avoid, how to use net-30 vendors to build credit, and how to build business credit.
Maintaining Corporate Records and Filing Reports
In order to establish and retain your corporate veil, you will also need to maintain accurate corporate records. This involves setting up and managing your accounting and producing and submitting accurate financial statements and reports.
There are a number of options for managing your accounting, such as hiring a bookkeeper or accountant or using small business accounting software.
Maintaining the legal status and corporate veil of your LLC or corporation will also require you to file the required financial documents and reports.
In some states, you will be required to file an annual report or reports with your state. You may also be required to file quarterly, biennial, or annual reports with taxing agencies or with your owners or shareholders.
Again, these will vary by state and whether you are forming an LLC or a corporation. To learn more about your state’s requirements, see our guides on how to form an LLC or how to form a corporation for your state.
Ready to begin incorporating your business? There are several options available depending on your needs.
If you are starting an LLC or a small corporation, you may want to consider a DIY approach or using an incorporation service. You can form an LLC or corporation yourself, and there are services available to help you get everything in order.
On the other hand, if you are starting a corporation that is geared for growth and you hope to take on investors, you should strongly consider hiring a lawyer to incorporate your startup.
Keep reading to find out more about each option and which is right for you.
Many startup founders form their LLC or corporation on their own. Incorporating yourself saves money, which is always a concern for cash-strapped startups.
While LLCs are relatively easy to form yourself online, corporations are a little more complex but can still be accomplished by resourceful startup founders.
The formation requirements for LLCs and corporations vary by state, so you will need to check with your state’s Secretary of State (or other appropriate agency) for the correct formation documents, procedures, and filing fees for incorporating your startup.
Use an Incorporation Service
Instead of incorporating your startup completely on your own, you can also hire an incorporation service to do some or most of the work for you.
Third-party, online incorporation services can help you complete your formation documents or can handle the entire business formation process, saving you time and money and allowing you to focus on starting and running your business.
Each incorporation service has its own sets of affordable features (e.g., EIN and registered agent services) and pricing for your business structure (e.g., corporation, single-member LLC, multi-member LLC, etc.).
Hiring an incorporation service only requires you to submit some basic information about yourself and your business. The incorporation service will then help you complete your formation documents and any other services you choose.
We reviewed and ranked the top seven incorporation services. To find out which is right for your business, read our guide on the best incorporation services.
Hire a Lawyer
Alternatively, you may want to hire a lawyer to incorporate your startup. Incorporation can be complex and confusing, and it takes time and energy away from running your business.
While it is possible to incorporate without a lawyer (especially if you choose to form an LLC), it is recommended to at least consult a lawyer when incorporating your startup. Startup lawyers can help you understand the complexity surrounding incorporating, choosing a business structure, choosing your tax treatment, choosing where to incorporate, and making sure all of the legal documents are in order.
Hiring a lawyer is strongly suggested if you are planning on seeking angel funding or venture capital. Investment documents, operating documents, and term sheets are complex and highly technical. You will need someone who specializes in startup funding to help you understand the terms and watch out for your best interests.
Lawyers who are familiar with startup funding can help you navigate finance structures, terms of the deal, tax and compliance-related issues, and the legal implications of funding. A seasoned startup lawyer has also had the experience of participating in several funding deals and may even be able to help you negotiate the terms, conditions, and valuation of investments in your startup.
Also recommended: Read our guide on what to do after incorporating your startup.
What is meant by incorporation of a company?
Incorporation of an organization is the designation of the company (and recognition by the state) as a unique legal entity separate from its founders or owners. As a general term, incorporation is the act or process of organizing a company as a separate legal entity and can apply to forming an LLC, incorporating a business as a corporation, or designating a nonprofit, school, or even a borough, town, or city as its own legal entity.
Why should I incorporate my startup?
There are a number of good reasons you should incorporate your startup. What business structure you choose and when highly depends on your individual business’s factors and needs.
Advantages of Incorporating:
- Liability protection
- Intellectual property protection
- A more formal business structure
- Establish trust and credibility
- Potential tax advantages
- More appealing to investors
When should a startup incorporate?
When you should incorporate your startup is a decision that depends on your business’s characteristics, where you are in the startup process, and the nature of your business. There are several circumstances in which you should or need to incorporate your startup, and in many of these cases, the sooner you incorporate, the better.
It is time to strongly consider incorporating when any of these situations apply to you:
- Your startup has multiple founders
- You want liability protection to protect your personal assets
- Your startup has created or is centered around intellectual property
- You want to establish trust and credibility with stakeholders
- You plan to seek investments
- You want to issue stock
- You want to build business credit
- You are seeking to limit tax consequences
Should I form an LLC or a corporation?
Deciding whether to form a corporation or an LLC depends on your business’s specific situation. Your company’s size, structure, goals, and more will determine if it is better to form a corporation or form an LLC.
To learn more about what business structure is best for you, read our guide on how to choose a business structure.
What forms do I need to incorporate my startup?
The forms you need to incorporate your startup depend on whether you are forming an LLC or starting a corporation and the state where you are incorporating. At the minimum, you will at least include a formation document. The name of this document varies from state to state and between LLCs and corporations (e.g., Articles of Formation, Articles of Incorporation, Certificate of Formation, Certificate of Incorporation, etc.).
Do I need a lawyer to incorporate my startup?
While it is possible to incorporate without a lawyer (especially if you choose to form an LLC), it is recommended to at least consult a lawyer when forming an LLC or a corporation. Startup lawyers can help you understand the complexity surrounding incorporating, choose a business structure, choose where to incorporate, and make sure everything is in order when you are ready to incorporate your startup.
Why do so many companies incorporate in Delaware?
There are several reasons that so many companies choose to incorporate in Delaware. Delaware has well-defined corporate law and a special court system — the Court of Chancery — for corporations. Delaware also has flexible management and ownership requirements as well as a business and investor-friendly tax system. All of this makes the state the top choice for incorporation for most entrepreneurs.
What is the corporate tax rate?
The US federal corporate tax rate is 21%. Corporations might also have to pay additional state corporate taxes depending on the states they do business in.