I had many questions while completing the entity formation for my B2B SaaS startup. Since the next founder might have questions about the company formation process, I compiled all the information I found into one place.
The answers I found and provided here are just that: answers I found on the internet. Please use your brain and consult with the appropriate professionals. None of this is legal or tax advice. These views are my own and should not be taken as recommendations for any of the services mentioned. Disclosure is available at the end of the post.
Should I file as an LLC and convert to a Delaware C-Corp later, or bite the bullet and do it now?
If you plan have any desire to raise funds in the future, want stock to be a part of your employee incentive package, or aim to sell your company eventually, do it now. I heard it can be expensive and time consuming to do a conversion from an LLC to a C-Corp later, but it is possible.
What are the steps to set up a C-Corp?
1) Incorporation: pick a name, make sure the name is available, select a registered agent, choose how may shares to authorize, file certificate of incorporation
2) Post-Incorporation Setup: elect directors, appoint officers, adopt bylaws, issue common stock, protect IP
3) Adopt a Stock Plan: allocate an option pool and set up the rules
4) Foreign Qualification: register in other states where you transact
5) Get an EIN: be able to pay taxes or open a bank account
6) Open a Bank Account: store money
How long does company formation take?
I completed all of these steps to set up my c-corporation in 12 calendar days. I probably could have done it in 5 days if I wanted to.
What are all the fees to set up a C-Corp?
It cost me about $1,600. Here is my cost breakdown:
Clerky: $819 + tax for Company Lifetime Package
Formation (DE): incl. with Clerky CLP; usually $203
DE Registered agent: Yr 1 incl. with Clerky CLP; usually about $100
Post-formation set up: incl. with Clerky CLP; varies according to your lawyer
Form 83(b) election: $8.73 for Certified Mail & return receipt at USPS
Foreign registration (TX): $750 + credit card fees if you do it yourself; or ~$1000 if you use a registered agent. Note: Clerky includes CA or NY in their package.
As an a founder (a.k.a not a company cost): you also have to buy your shares. If you issue yourself 8,000,000 shares and they cost $0.00001, that's $80.
This is all April 2024 pricing.
Where should you keep company records?
A secure place in the cloud, your local drive, and a hard copy. Some of these items should also be stored as an individual separately from storing as a founder. For example, keep personal copies of your stock purchase documentation.
Startup Incorporation FAQs
Do I need to incorporate now or can I put it off until later?
If you are still in the idea phase and not sure if this will be a full time gig for you, you might be able to wait. This is especially a consideration if you live in a state that requires minimum wage for owner-employees and you aren't prepared to pay yourself minimum wage yet. If you expect customers soon or are taking on partners (see below), you should probably incorporate for IP and liability purposes.
Why should I incorporate now?
1) It will commit you and make it feel real
2) You need it for a company bank account or credit card
3) In case you want to take on cofounders, advisors, consultants, employees or customers, you'll want the professionalism, liability shield, and the ability to pay them (whether in cash or options)
4) It starts the clock on vesting for your founder shares
5) You are ready to take money if it is offered and worth it
Small caveat, if you don't plan to do any of these things before the end of the calendar year (like it's Dec 12 and nothing material is going to happen until next year), you may want to wait until Jan 1 to start your business so you avoid pointless (i.e. $0) annual filing requirements for the no activity year.
How long does it take to incorporate?
The actual filing took about 10 min. I spent about 30 min deciding whether it was worth it to use Clerky. My filing was accepted within 2 business days.
Where should I incorporate?
I picked Delaware. It's a common choice. But other states might be right for you.
Do I need a mailbox?
It's helpful. You're going to have to provide your company's physical address a ton of times. If you care about keeping your personal residence confidential, it's a good idea to get a company mailbox before doing all this paperwork. If you want to just get started, you can file a certificate of incorporation in Delaware with your residential address and update it later.
Does a P.O. box work?
No, a PO box won't work. Just search "mailbox service" for local mailbox services or look into virtual mailbox services like Stable if you are in a more remote location or are willing to pay to not go check a mailbox. I used PostNet for a physical address locally.
Do I need a printer?
Yes. You have to physically mail in some forms (that Form 83(b) is really important), so you can buy a printer or go to a print shop. Thanks to Clerky's built-in electronic signature management, I think I only *had* to print one time, so it's up to you.
How much is incorporation going to cost me?
It's going to cost $1-2k if you do it with a service like Clerky and not through a lawyer. If you do it with a lawyer, I've heard packages usually run $2-5k. I'm not sure if this includes third party fees. Sometimes the lawyer's fees are lower if your lawyer works with a software like Clerky (since it also saves the lawyer time).
Why did you use Clerky?
First, my situation is was very straightforward. My company is in its infancy and I have no one else to negotiate or influence what needs to go into this process. Basic was good for me.
Second, doing the math above, the price for Clerky's Company Lifetime Package was only $500 more than I'd have to pay to file in DE and pay a registered agent. I figured a lawyer would cost me way more than $500 for all the paperwork.
Third, I didn't want hurdles like finding a lawyer to prevent me from getting started. I just wanted to knock it out.
I was really happy with the service. Clerky guides you with best practices a typical Silicon Valley VC or lawyer usually recommends and is pretty clear when you should talk to a lawyer along the way.
How many shares do I authorize?
10,000,000 seems to be a standard if nothing has happened with your business yet. You want the number to be big enough to do math with the share price (i.e. 10,000,000 x $0.00001 is $100). You can always authorize more shares later if needed, but it will dilute your original shares.
Startup Post-Incorporation FAQs
How long does it take to do post-incorporation set up?
The process to generate the documents was fast with Clerky, but it took me several hours because I thoroughly researched these answers. I also read all the documents before I signed them, which you should also do. Your set up is done as soon as the documents are signed and the 83(b) is mailed.
Mailing the 83(b) letter took 1-2 hours at the post office. I did that on another day.
Does anyone else have to be on my board of directors?
No, you can elect yourself to all of the roles. It's like that Spiderman meme.
Do I issue myself all of the shares?
No, not usually. You'll issues some to cofounders (if you have them), a stock option pool, and even likely leave some unissued for a future use, like a future cofounder or very early investor. That way if you have enough unissued shares, you don't have to authorize more shares before performing these actions.
How much should I issue myself?
It will depend on your situation. Clerky provides pretty good guidance in this help article on share allocation. They say the standard is something like 80% split between the cofounders, 10% for Employee Stock Option Pool and 10% unissued. If you plan to find a cofounder, but don't have one yet, consider issuing yourself 40% and leaving 50% unissued (40% presumably for a not-too-future cofounder).
Do founder shares need to vest?
Yes. YCombinator (search "vesting") talks about this a lot. If you have a cofounder, it's a way to keep things fair between you, especially if someone leaves. If you don't have a cofounder, VCs like to see it.
If you don't plan to have a cofounder or investors, there's no harm in setting up vesting anyway. Think of it like your very own incentive structure and commitment to stick with this for at least 4 years.
Why does my spouse have to sign stuff?
When you purchase shares as a founder, your spouse might have a community property interest in them depending on where you live. They have to sign stuff saying they agree to the same rules. They also have to sign the 83(b) election since your taxes are intertwined.
How do I buy my shares?
You do the math (shares x price) and write a check for that amount dated on the day you sign the purchase agreement. If you used the examples above, it will be something like $80. You don't have to cash the check until you have a company bank account, but you do need to write the check. Take a picture of it, too.
What is Section 83(b) election and why is it so important for founders?
If you set your shares to be subject to vesting, you have 30 days to get this letter to the IRS. Stop reading and go do it now.
The section 83(b) election says you are opting to pay ordinary taxes on your shares at issuance vs when they vest. Remember that check you wrote for ~$80? That's what you're paying taxes on. Hopefully those shares are worth a lot more when they vests over the next 4 years, which you don't want to pay taxes on. It also starts the clock for long-term cap gains at time of issuance vs at time of vesting.
Thanks, Cooley Go.
How to I make sure the IRS gets my 83(b) election?
Send via Certified Mail with return receipt (see below). Send the letter and 2 copies, asking for one copy back with a date stamp. Include a stamped return envelope. They don't always return it, but ask for it anyways.
Why does the 83(b) need to be sent with Certified Mail?
You can use USPS Certified Mail with a Return Receipt or Priority Mail with similar features, but you want evidence of the post mark date, tracking, and a return receipt to prove you sent the form within 30 days. You can't just put the letter in your outgoing mailbox and get these things.
Why do I need to track the 83(b) election?
Send it early and track the letter to make sure it arrived. If it didn't, send another on.
Why doesn't the IRS have a normal street address?
They have dedicated zipcodes. I thought this was interesting.
Why is it so intimidating to go to the Post Office?
Because it's not a very friendly UX. Reflect on how you can learn from that and apply it to your offering while you wait in line for an hour.
My lessons? 1) Fit and finish is important for user confidence, 2) don't change for the sake of change; people like some comfort of knowing what to expect, 3) nice customer support can go a long way in covering the inadequacies of a product.
Filing for Federal EIN as a Startup FAQs
Do I need an EIN yet?
Probably, it's free, easy, and fast. And you can put it on your foreign registration and bank application.
How long does it take to apply for an EIN?
It took me about 5 min and I got it immediately.
Where do I apply for an EIN?
Apply for an EIN at irs.gov.
The EIN asks if I plan to have W2 employees in the next 12 months. What do I put?
The box you check on the EIN application isn't binding, so mark what you think will happen. If you plan to hire people (including yourself), put yes. If not, put no.
Do I have to pay myself?
If you plan to pay yourself, you should put "yes" as you would be a W2 worker.
IRS
With a C-Corp, the IRS seems more worried about you paying yourself too much (i.e. they cap what you can deduct from the company's federal taxes). The IRS gives guidance for CEO of a C-corp to be paid a "reasonable salary." But doesn't define what reasonable is. Here is some more info on reasonable salaries for employee-owners on Forbes.
Federal Law (FLSA)
An employee who owns at least 20% of the equity of the business is exempt from minimum wage laws as bona fide executives. See Fact Sheet # 17B: Exemption for Executive Employees Under the Fair Labor Standards Act (FLSA), section Exemption for Business Owners.
State Law
Texas Labor Code also exempts bona fide executives from minimum wage. California Law does not exempt owners/executives from minimum wage.
Norms
Regardless of your local laws, YCombinator recommends that you should pay all cofounders at least minimum wage. See "Do I have to pay my cofounders" below.
I'm a Texas-based solo founder with more than 20% ownership of a c-corp with no meaningful assets, investment, income or distributions, so I think it's reasonable compensation to pay myself $0 for now. I plan to confirm this with a tax accountant before I get too far in, but for the sake of this form, I said no.
Do I have to pay my cofounders?
If they own less than 20% of the company, they do not qualify as bona fide executives, so they are not subject to exemption from the federal minimum wage laws. State minimum wage laws might also dictate your answer.
YC says you should pay all cofounders minimum wage. The mere threat of a lawsuit following a cofounder leaving could be enough to ruin your company and they've seen lots of cofounders negotiate for accelerated vesting to settle claims, warranted or not.
Foreign Qualification FAQs
Why is it a "foreign" qualification?
I already knew this one, but throwing it in for fun. Any state registration outside of the state where you incorporated is a "foreign" registration or qualification.
Where and when do I need to complete foreign qualification?
Each state has different laws on when you need to register "to transact" within their borders. Usually it's when you have an employee or property in the state, use a warehouse to ship goods within the state, or sell enough in the state.
If you are a DE C-corp and you live somewhere else, you should usually register in that state. In Texas, the deadline is within 90 days from "transacting" in the state. Since I live here and am working on this full time, I made my deadline 90 days from the date of my incorporation in DE.
Thanks, FindLaw.
You'll need to complete foreign qualification as you start to transact in them, but not right away.
Can I be my own registered agent?
At least in Texas, you can be your own registered agent as an individual, but not as a member of your company. You also have to physically reside in the state and provide your consent for the company to list you as its agent. For example, the CEO who lives in Austin can be the registered agent.
How do I get consent for a registered agent?
Use a form provided by your SOS. For Texas the registered agent consent form is Form 401. This form needs to submitted with your foreign registration and/or kept on file with your company.
What are the responsibilities of a registered agent?
Make sure they can receive legal correspondence get it to you. This means they have to always have updated contact info for the company and have to always provide an updated address to the SOS.
What's my legal address?
Your registered agent's address on your certificate of incorporation.
What is the purpose of my business?
It's on your certificate of incorporation, but you also have to be subject to the laws within the state you are doing foreign registration. Guidance for Texas is right on the instructions for Form 301:
"The application must state each business or activity that the entity proposes to pursue in Texas, which may be stated to be “any lawful business or activity under the law of this state.” In addition, as required by chapter 9, the application must contain a statement that the entity is authorized to pursue the same business or activity under the laws of the entity’s jurisdiction of formation."
How long did foreign qualification take in Texas?
It took about 10 minutes to complete the form and one day to get the certificate.
FAQs when Opening a Bank Account for your Startup
How do I put more money into my company?
You have some options:
Use your personal card, submit expense reports to the company, and reimburse yourself. Hold as accounts payable until the company has money to pay you out. Co-mingling personal and business transactions has risks, but this is the most straightforward option. >>Likely best option for not dealing with this question right now.
Make a loan to the company. Make sure to fully document it. Pay the loan back when the company has money to pay you out. Plan to pay it out before taking on investment or expect investors to ask you to write off the loan or tie repayment to future performance milestones. >>Likely best option if bootstrapping forever.
Issue a SAFE with a MFN clause. >>Likely best option if fundraising eventually.
Thanks, Capbase.
If I just plan to reimburse expenses, do I need a bank account yet?
If you issued yourself stock and wrote a check for it (which you should have done on the day you issued it), you need somewhere to cash that check before it expires, typically 180 days after the date. But hopefully you'll be taking money from someone (early customers or investors) before then.
How much money do I need to put in a bank account to avoid annoying fees?
Mercury & Brex don't have account minimums, but you might miss out on some new account incentives if you don't plan to put a larger balance in yet.
How can these banks provide FDIC insurance about the normal limit?
Providers like Mercury and Brex are not actually banks themselves. They work with several banks to spread you deposits out to collectively achieve higher insurance limits. It's called a sweep network.
What are providers like Mercury and Brex then?
Fintechs that works with banks to provide banking services.
How long does it take to open a bank account with these providers?
It took about 10 min to apply and I was approved same-day.
Why is the bank/fintech asking for an ID, picture and other stuff about me?
I also didn't really have this question thanks to my experience working with banks, but I thought you might wonder. They have to KYC (Know Your Customer) you. Read more in this article on KYC at Plaid.
Remember when Silicon Valley Bank went under and all the startups freaked out? All the companies that were already KYC'd with other banks were easily able to move their money. It's an important step in establishing a banking relationship.
What does the bank/fintech need to approve my account without issues?
Standard stuff covered in this FAQ is required (certificate of incorporation, director info, EIN, your SSN, etc). It's also helpful to have stuff showing you're a real person with a real business (website, professional social profiles, etc.).
Note: Banks who don't normally deal with startups might require more or different items than these fintech services require.
DISCLOSURE: This information is provided by Tabata HQ, Inc. ("we," "us," or "our") on www.tabatahq.com (the "Site") is for general informational purposes only. Tabata HQ does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. All information on the Site is provided in good faith, however we make no representation or warranty of any kind, express or implied regarding the accuracy, adequacy, validity, reliability, availability, or completeness of any information on the Site. UNDER NO CIRCUMSTANCE SHALL WE HAVE ANY LIABILITY TO YOU FOR ANY LOSS OR DAMAGE OF ANY KIND INCURRED AS A RESULT OF THE USE OF THE SITE OR RELIANCE ON ANY INFORMATION PROVIDED ON THE SITE. YOUR USE OF THE SITE AND YOUR RELIANCE ON ANY INFORMATION ON THE SITE IS SOLELY AT YOUR OWN RISK.
