Wise Startup Blog

Incorporating your startup is an important step in your long process of starting your business, forming a business plan, and generating revenue. The key point of this article is the urgency. Incorporating your business early is a big motivator to get going on your business. First, you’re going to be spending money to do this, so you want to make sure you don’t waste your money, and secondly, setting up the company will get you excited and drive you to see things through to fruition.

Incorporating your company is the natural first step, as it dictates how you should be approaching new partners, investors, and giving framework to your overall mission and business plan. There are a number of different corporation types ranging from a sole proprietor all the way up to C corps. Since the business is so young, I don’t suggest you waste your time (and money) in creating a C corps, plus the fact that you most likely have NO experience creating this means you’re going to be spending a lot of time reading about incorporation strategies instead of doing the core work early on for your business plan.

Form an LLC and Call it a Day

The LLC is the easiest and safest initial corporate structure for any entrepreneur, as well as a lot of major private equity holdings are using an LLC due to their simplicity and limited tax liability. When creating an LLC, all you need to get started are the “articles of organization” and an “operating agreement“.

The articles of organization are really nothing more than your name, your state, and your address that needs to be sent to your state secretary so that you’re recognized officially as an LLC. The operating agreement is the tricky part, that’s where you stipulate what role partners, investors, etc. play in the organization. The good thing is, you don’t need that document until the time comes, so you can take care of the LLC incorporation immediately and deal with the operating agreement once you get to that point.

When registering, I would suggest using the cheapest, easiest platform possible. I used LegalZoom and recommend them as they’re real simple, real cheap ($150), and online. In the past I’ve made the mistake of hiring an accountant, a local lawyer and ended up spending $800 to incorporate my business!

To make sure you’re aware of what advantages and disadvantages carries, let’s go over a couple of those:

LLC Advantages

• Much less administrative paperwork and record keeping than a corporation.
• Pass-through taxation, i.e., no double taxation (unless a C corp)
• Owners or “members,” are protected from some liability for acts and debts of the LLC
• Can elect to be taxed as a sole proprietor, partnership, S corporation or C corporation
• Membership interests of LLCs can be assigned
• LLCs in most states are treated as entities separate from their members

LLC Disadvantages

• Many states, including Alabama, California, Kentucky, New York, Pennsylvania, Tennessee, and Texas, levy a franchise tax or capital values tax on LLC (in most states the fee is nominal, and factored as a % of revenues)
• Investors may be more comfortable investing in corporate form
• Taxing jurisdictions outside the US are likely to treat a US LLC as a corporation
• Some creditors will require owners of up-and-starting LLCs to cosign for the LLC’s loans

Now don’t think that just because I listed more advantages than disadvantages, the LLC is the best choice for you, you should still do your research to the point until you have a general grasp on what structure is best for you and definitely read Wikipedia, as they’re a great source for LLC information.

Ditch Your LLC and Upgrade to a C Corp

When the time comes, you will upgrade to a C corporation, but that won’t be for another 1-2 years after initially filing your LLC incorporation papers. At that time, you should have more capital, and can spend more time, and have more partners to help you with the process of incorporating to a C-corp. Also, since you will be moving onto a C corp, you most likely will be doing so for capital reasons, as larger Angel and Venture Capital investors insist on investing in C corps over LLCs.

And while it makes sense that you take care of the dirty work in the beginning (since you plan to raise Venture Capital, anyway) it’s actually more counter-productive, as your time is better spent writing business plans, finding CTOs, and raising money.

So for all of you out there, incorporate your business early & often, and start building your business.