Incorporation Checklist: Why, When, and How

Disha Bheda is our coordinator for the San Francisco breakfast, she has pulled together a checklist of questions for entrepreneurs to think about as a part of planning to formalize their business structure.

First let’s look at why form a corporate business structure? Incorporation is the forming of a new legal entity that is effectively recognized as a person under the law. A couple benefit of having a new legal entity are:

• protect personal assets
• provide container for intellectual property your team is creating
• enables you to do business with larger firms
• formalizes agreements between business associates and certain stakeholders
• you want to compensate third parties/employees by stock initially when cash flow is scarce
• raising funds is easier

When (how long can you put it off)

• When you are not the sole founder
• once your core team is formed
• when there are many stakeholders-intention of hiring people
• the idea/product begins to sell or launching a service

A bootstrapper’s start-up can be either sole proprietorship, a Corporation, Sub-S, or a Limited Liability Company (LLC). What kind of corporate business structure makes sense for you? Definitely include your accountant in these discussions, it is important to understand the current tax implications of one structure over another. Tax treatment is often the biggest reason for one over another.

• While deciding a business structure, you should keep in mind:
  • The tax implications for each structure.
  • The kind of liability provisions offered by each structure.
  • How much regulatory paperwork you want to file.
• Both a S-Corporation and LLC eliminate the double taxation incurred by owners of corporations and sole proprietor.
  • The main differentiating factor though, is the employment tax paid on earnings, which is significantly more in the case of LLC.
  • A LLC does have less recordkeeping rules so you may have to tradeoff that off against the tax liabilities.

How

• Either do it yourself or hire a lawyer.
  • Good lawyers are typically from small law forms with a handful of employees.
  • They tend understand the mindset of start-ups better.
• Business name check to ascertain if the business name is available with the state of incorporation
• File papers for formation of the business entity – Certificate of Incorporation – which is filed with the secretary of state
• Create the initial bylaws – procedures affecting the governance of the business entity-the structure of capital such as common stock, preferred stock, etc-whether the corporation is forever or renewable
• Put in place appropriate Non Disclosure Agreements
• IP assignment
• Software License Agreement