Startup 101 - Should You Incorporate?

If you are a new startup founder and completely new to the startup scene, you may very well be stuck on this question. I was in a similar position 2 years ago, and from many hours of research it seemed logical to incorporate in Delaware to get those annoying paper works taken care of.

This may be the very first mistake in your startup journey! Unless you have a huge team with various level of trust issues or if you are ready to begin doing sales/business. You should avoid incorporating.

Reason:

  1. Resources in the beginning stages are extremely scarce. Correct incorporation may run you $1,000-$3,000.
  2. You will most likely screw up your cap table after incorporation, which will cost you an arm and leg to fix it later on. $5,000–$10,000+
  3. Annual cost for filing, taxes, franchise, accountant, lawyers, bookkeeper, and the time you waste dealing with each. $1,000+

If the team is small and the idea is still premature, bootstrap and write up some simple agreements to split that equity pie!

Read this post too late? Already incorporated? Double check the following asap!

Checklist:

  1. Are you incorporated in Delaware? It always help speed through investor discussions when your incorporation is done in Delaware, saving you cost.
  • If you are not in Delaware, consider closing that company down and reincorporating. This is often cheaper then moving the company to Delaware.

2. Did you issue any shares to founders/co-founders/employee/advisors? How were they issued, did you setup a reverse vesting agreement on restricted stock? Did you file 83B?

  • All shares should be issued as a reverse vesting agreement on restricted stock with a 4 year buy back and 1 year cliff. This way you can file a 83B to save your piggy bank on immediate taxes.

3. If you are registered in Delaware, but doing business in another state. Did you register in that other state to do business!?

  • Every state that you do business in has its own rules! Consult with your accountant or lawyer to make sure you are registered in that state. It is considered doing business in that state if you have the following: are selling goods/service there, have an office, have employees, and have contracts & agreements.

4. Are you booking all your expense/cost correctly?

  • Your local accountant that does your personal taxes might be great at their job. But often they are not experienced with the startup game. Get yourself a decent accountant at a reputable firm and pay the extra cost. Many firms get stuck in this pot hole because their initial accountants screw up the books. Just take a look at WeWork trying to go IPO!

5. Did you file tax return for the company?

  • Even when you don’t do any business/sales, you must file! Otherwise be prepared for penalties.

6. Did you file for trademark and copyrights?

  • This should be avoided until angel/seed funding where you are absolutely sure on the company name. Many companies end up changing their name.

Hope this short post give you some guidance on your new journey.