INCORPORATING YOUR STARTUP
By Ryan Allis, CEO of Hive
Now that you have a plan, it’s time to become official. It’s time to incorporate. There are many benefits to incorporating, including much lower taxes, liability protection, being taken seriously, being able to get an employer identification number (EIN) and a bank account, and being able to hire employees, raise investment, and gain corporate credit.
Here’s why it will lower your tax bill: Companies pay taxes on their net income (in other words, the difference between their revenues and expenses). Individuals generally pay taxes on their total income, minus a few deductions that are available from the IRS.
If you’re an individual who make $50,000 in annual salary, you’re going to pay taxes on that full $50,000, whereas if you’re a company that earns $50,000 in revenue and you have $48,000 in expenses, then in this simplified example, you’d only pay taxes on that $2,000 of net profit. You pay significantly lower taxes by working through an incorporated entity.
In the United States, to incorporate, you only need to know a few things:
If you know that you want to incorporate, for example, Hive Inc. as a Delaware C-Corporation, you want to create ten million shares at the beginning, and you know which initial cofounders and employees will get what percentage, you’re good to go.
The major places to incorporate are online sites like Legal Zoom or Incorporate.com, or any corporate law firm. I would encourage you to use a corporate law firm. It will usually cost between $2,000-$4,000, compared to the online services which are $300-$400, but you’ll often get a lot of other services as well, such as template documents you can use for employment contracts and confidentiality agreements. And the law firm will make sure you do it right.
In the United States, there are four major types of companies you can start. You can start an S-corp, a C-corp, an LLC, or a benefit corp. There are a number of states now (California included) in which a benefit corp is a separate type of legally recognized corporate entity in which you have to amend your charter to recognize the perspectives and desires of all stakeholders, not just those who are shareholders. It’s an interesting way of balancing the impact on the community, the customer, the employees, and your shareholders as you create long-term shareholder value.
In the U.S., a C-corp is the most common for companies that are trying to raise outside venture capital. If you plan on raising outside venture capital, being a Delaware C-corp is probably what your attorney will end up advising.
In choosing a law firm, you want to look up their reputation and references, their startup experience, their ability to introduce you to potential investors, and any experience they have with taking companies all the way from a startup into an initial public offering on the New York stock exchange or NASDAQ. Most important is your ability to communicate and connect with the partner who is going to be handling your account, as well as the associate partner who might do a lot of the heavy lifting.
Once you’re incorporated, you’ll receive your Articles of Incorporation, your set of bylaws, and your set of stock certificates. Then, you’re official. Once you get your Articles of Incorporation, you can apply for an EIN from the IRS. Then you can open a bank account and start legally operating your incorporated business.