Key takeaways
You should incorporate your business for a few reasons: it gives you legal protection, it makes it easier to separate your business and personal expenses, and because investors will demand it.
There are various entity types you can use, but if you’re looking for the short answer, it’s: a Delaware C corp, with a foreign incorporation in the state you live in, done by one of Clerky, Stripe Atlas, or a corporate law firm that specializes in working with startups.
You don’t have to, but you’ll want to set up a company email address and business phone number. If you can afford it, you’ll also want to set up a virtual mailbox.
Why incorporate?
Technically, you don’t have to incorporate. You can go about your business activities as “yourself”—this is called being a “sole proprietor.” But it’s not really a good idea.
The best reason to incorporate is that it lets you separate your personal assets from those of the company. If you’ve formed a company and it owes someone money, that person can’t come after you personally for that money. They would need to come after your business. This is called the “liability shield” (or sometimes the “corporate shield” or “corporate veil”), and it’s one of the main reasons to incorporate a company.
You also need a company if you’d like to take on investors, and every investor we're aware of will insist that you be incorporated before they make an investment.
Finally, it can help with hygiene: a separate legal entity can have its own bank account, its own property, etc. in a way that will make it much easier to track the health of the business.
Now that you’re set on incorporating your business, we can talk about options for what kind of company you incorporate.
What type of company should I incorporate?
If you’re a startup that wants to raise venture capital, the answer is simple: you should form a Delaware C Corporation, which you should then also register as a “foreign entity” in whatever state you’re working in. (And you can now skip to the next section.)
But in case you’re curious, here are the basic entity types that exist:
Sole Proprietorship
One person (married couples are also eligible here) acts as the sole owner and operator of the business. You don’t need to incorporate this entity with the government, although local business permits or licenses may be required. You’re personally responsible for the company’s debts and liabilities.
Partnership
A Partnership is similar to a sole proprietorship, except that the business has two or more owners. There are two types of partnerships: general and limited. All partners manage the business and share the profits and losses in a general partnership. In a limited partnership, the general partner runs the business while the other partners have limited liability up to the amount of their investment.
Limited Liability Company (LLC)
LLCs have the legal protections of a corporation while simultaneously having the ease of a sole proprietorship or partnership. You can choose if you want your LLC taxed as a corporation or partnership. While LLCs do require registration with the state, they generally have fewer requirements and paperwork.
S Corporation (S corp)
If you want a corporate structure with the tax flexibility of a sole proprietorship or partnership, forming an S Corp is a good option. There is no corporate-level taxation or double taxation since it is a pass-through entity, and its profits and losses pass through to the owners’ tax returns. The big downside of the S corporation is that it can only have up to 100 shareholders, the shareholders have to be people, not entities (so, no VC firms), and you can’t have any foreign shareholders.
C Corporation (C corp)
This is the most popular option for venture-backed startups. This type of entity is independent and separate from the company’s owners. A board of directors, officers, or shareholders controls the corporation. C corporations can easily issue stock to people or other entities.
B Corporation (B corp)
A B corp is similar to a C Corp, in the sense that it’s a for-profit corporation that is taxed in the same way—but the company is required to balance the shareholders’ financial interests with some other benefit.
How do I incorporate my business?
If you’re a startup that wants to raise venture capital, you should form a Delaware C Corporation, which you should then also register as a “foreign entity” in whatever state you’re working in.
This process is thorny enough that I really do not recommend you DIY. You certainly could, but one of the consistent themes you’ll hear in this book is encouragement to resist innovating on your back office. This stuff is important to get right, and best practices exist for a reason. Instead, devote your creative energy towards things that will move the needle for your customers.
I’m speaking from experience, having hand-incorporated our first startup company myself in both Delaware and Massachusetts. This is an error-prone process and it’s not a good use of your time.
The easiest approach is to work with a corporate lawyer who specializes in startup companies. Your uncle’s neighbor who happens to be a lawyer is probably not the best choice here.
The advantage of working with a skilled corporate lawyer from the get-go is that you’re definitely going to have other questions you’ll want their help with in the future, and so it's nice to already have that relationship in place. The disadvantage is, of course, cost. Corporate lawyers are expensive. Some startup law firms might be open to deferring their fees until you’ve raised money.
If you’re not going to work with a corporate lawyer, we’ve had very good experiences with both Clerky and Stripe Atlas, which will help you incorporate and issue stock to the company’s founders.
So that you have a sense of what this process looks like, here’s a breakdown of the steps needed to get your company up and running:
Registering in Delaware
To register in Delaware, you need to know your entity type (per above, we recommend a C corp), you need to have a name for the company, and the name needs to be available—it can’t already be in use by a different company. You can search the full list of existing Delaware corporations on their website.
Essentially, what happens is: the incorporator files a certificate of incorporation in Delaware. The certificate of incorporation generally specifies things like:
- The corporation’s name, generally ending in “Inc.” or similar
- Who the registered agent is (more on this below)
- The company’s purpose, usually something like “any lawful act or activity for which a corporation may be organized” in Delaware. (Yes, it’s actually that general.)
- The number of shares that the company is authorized to issue, and “par value” of those shares, usually 10 million shares with par value $0.00001 per share
- The contact information of the incorporator
A “registered agent” is a specific person that Delaware can reach if they need to send you official government notifications, notifications of lawsuits, etc. Technically, this can be anyone who is over 18 and resides in Delaware. In practice, you (or your lawyer) will hire a company to do this for you, and they’ll forward you notifications when they receive them. (Hopefully you have very little of this.) If you’re incorporating via Clerky or Stripe Atlas, either of these services will take care of providing you a registered agent for your first year, as part of their initial charge.
Once that’s done, you technically have a corporation. Next, the incorporator takes what’s called the “Initial Action by Sole Incorporator,” where they adopt a bunch of the rules that make the company do what you want the company to do. Generally speaking, this:
- Adopts the company’s bylaws—basically, the rulebook that describes how the company is going to operate
- Names an initial board of directors
The board of directors will generally then do many of the following items:
- Elect the officers of the company
- Set the company’s fiscal year
- Authorize the company’s officers to open bank accounts, etc.
- Issue stock to the founders (and early employees, if any)
- etc.
Generally speaking, the board will do these things by “written consent,” rather than actually holding an initial meeting. But once that’s done, you’re off to the races. Congratulations, you have a company.
Of course, this raises a bunch of other questions:
Do I need a board of directors?
Yes, but probably not in the way that you think. Your initial board will probably just be you—or you and your cofounders. Delaware requires that you have at least one board director (aka board member).
At some point in the future, when you raise money, your investors may request a board seat, probably around the time of your Series A. You may also have independent board members at some point. Neither of these are required or needed (or honestly, even appropriate) at this stage of the company.
You may also have advisors or an “advisory board.” That’s a distinct concept (and not a formal, legal concept) which is also independent of this discussion.
Since the board rules by majority, it can be slightly advantageous to have an odd number of board members, to prevent ties. In practice, if your board is resolving contentious matters of governance by this sort of voting (vs. by discussion), your company probably has larger issues.
In any case, I’d encourage you to keep your initial board as small as possible.
What are corporate officers? Do I need them?
Corporate officers are appointed by the board, and are responsible for the day-to-day management of the company. Typical corporate officers are the president (or CEO), secretary, and treasurer (or CFO). The secretary’s specific job is to keep minutes of board meetings, keep stock records, etc., and the treasurer’s job is to maintain the financial records and bank accounts of the company.
In Delaware, there’s no requirement that these officer roles be distinct, so if you’d like to, you can be both president and secretary. Other states may have other specific requirements about what titles they require.
Important: giving someone a “Chief” title does not automatically make them an officer of the company. You might hire a CTO or a CIO or a Chief Accounting Officer—those are their titles, but these people are not technically officers of the company. It’s important not to confuse these two concepts (someone’s title, and whether someone is an officer of the company.).
Corporate officer positions are created either in the bylaws or by board resolution, and they’re typically appointed by the board of directors. You probably want as few of these as possible.
What is an EIN? Do I need one? How do I get one?
EIN stands for Employer Identification Number, and it’s a number that identifies your business to the US government. Think of it as your company’s equivalent of your social security number. You’ll need it to pay the company’s taxes, and you’ll need it to open a company bank account.
If you already have a social security number (or an ITIN), getting an EIN for your business is very easy: you complete a form on the IRS website, and you’re generally issued one instantly. If you’ve incorporated using Stripe Atlas, they’ll handle this for you. As of this writing (February 2023), Clerky will not.
If you don’t already have an SSN, you have to complete IRS form SS-4 and mail or fax it in.
Do I need to register in other states?
Almost certainly. The rules for where you need to register are a bit tricky (this is a great “talk to your lawyer” question), but the short version is: if you have an office in the state or employees in the state, you need to register in the state.
This process is called registering (or “qualifying”) as a foreign corporation. As an example, our first startup was based in Boston, so we incorporated in Delaware and then registered as a foreign corporation in Massachusetts. Our current startup—Pilot.com—started in San Francisco, so when we first incorporated, we incorporated in Delaware and registered as a foreign corporation in California. (We’re now registered in many different states, because we employ people all over the US.)
Your corporate lawyer or Clerky can help you with these foreign incorporations, but broadly the process looks like:
- Order a copy of a Certificate of Good Standing from Delaware
- Hire a registered agent in the state you’d like to “foreign qualify” in
- Register your foreign entity with that state’s Secretary of State/Division of Corporations
Do I need to register in my city?
It depends on the city, but, probably eventually.
In San Francisco, there are nine considerations, and if any one of them applies to your business, you must register in the city. One trigger is basically “Do you have an office in San Francisco?” Once you’re registered in San Francisco, you’re also on the hook for something called “Gross Receipts Tax” and some other filings.
New York City, Seattle, LA, Boston, and many other cities have requirements like this.
Things to be especially careful about
There are a number of compliance pitfalls you need to pay special attention to:
Issuing founder stock correctly, and in a timely way: You generally want to issue founder stock immediately, with a four-year vesting period and a one-year cliff, and you want to do it alongside a signed employment agreement and an actual stock purchase from the founders.
83(b) elections: Technically, this is a subset of the item above, but it’s so important that I want to call it out separately. When you issue stock to yourself or your cofounders, please make sure that you file an 83b election on time. This is critical, and it’s an obligation of the stockholder, not of the company.
Tax and compliance obligations: it’s not enough to incorporate the company—you also need to keep it in good standing. You brought the puppy home—now you have to take care of it.
This generally requires paying various fees and submitting various reports every year. If you’re a Delaware C corp operating in California, some examples of this include your federal tax return, Delaware franchise tax & annual report, California Statement of Information, California state tax return, etc.
Employing people: If you want to employ people, it’s not enough to just incorporate the company and then start writing them checks. It’s critical that anyone you employ is paid via a payroll system, that you register with various federal and state agencies, and that you pay payroll taxes. Yes, it’s annoying—but the alternative is far more annoying.
Considerations for foreign founders
You don’t need to be a US citizen to start a company in the US. In fact, you don’t even need to reside in the US at all, and you can start a company in the exact same way that a US citizen or resident can.
However, actually working for the company (and being paid by the company in the US) is where things get trickier. Simply having started a business in the US doesn’t automatically authorize you to work or live in the US, and you’ll need a visa in the same way that you would if you were working for another company.
Separately, some things are going to be more tedious or more complicated than you’d like. In particular, your application for an EIN for the business will likely be much slower, because you have to complete it by mail or by fax.
Things you’ll want to set up next
Ok! You now have a company that’s properly formed and ready to do business. In this next section, we’ll talk through the practical things we’d recommend you get set up right away.
Domain name
One of the first things you’ll want to do is to set up email and a website. To do that, you’ll first need a domain name: something that will represent your brand on the Internet.
Some people (including, clearly, us) feel strongly that you need a “.com” for your company’s name. I’ve chronicled the full “How we got pilot.com” story here, but here’s the brief version of the advice:
Regardless of what domain you get, optimize for a name that’s short, spellable and pronounceable. You want your customer to have some hope of typing in the right thing when they hear about it from their friend on the street or in a noisy bar.
If you’ve found a domain name you love, you should also register the name (or a variant) on any social media services you think you might use to reach your customers. (It’s only going to be harder to get your name in the future.)
You can register your domain name at a place like Namecheap, or really any registrar—it doesn’t particularly matter, so if there’s one you especially like or already use, it's good enough.
Once you have a domain name, you can set up your email.
Set up your company email as soon as possible. It’ll make your business look more professional, but it also means that all of your records will be in one place.
Your email inbox will be the source of truth for everything that’s happening in the business, and you’ll want to keep that separate from your personal email.
As far as the service to use: I strongly recommend Google Workspace for this. I’ve now done this for three startups, using Google every time, and haven’t regretted it.
Business phone number
Get a business phone number set up sooner rather than later, for two reasons:
The obvious reason is: you may want your customers to call you—but you might not want those customers reaching you at 2am on Sunday when you’re asleep, or when you’re out to dinner with your partner.
The less obvious reason is that your company’s phone number appears on a bunch of filings you have to make, some of which become public records. At my first startup, my cofounder took care of many of these filings, and “helpfully” included my cellphone number as the official company number. Even though the company was dissolved in 2011 (after Oracle acquired it), I still get calls on that number asking about it.
The good news: there’s a solution that’s easy and free. Register for a free Google Voice number (associated with your work email address). You can then forward it to your cell phone, or you can just use it for voicemail and texting, which can forward to your email.
Virtual mailbox
This one is a great decision but it’s less of a no-brainer because it costs money. But if you’re looking to minimize hassle, I strongly recommend it, with similar reasoning as the business phone number.
You need an address that can receive mail, for various forms and filings.
If you have an office, your natural inclination will be to use your office address. But if your startup is successful, you’ll outgrow that office, and you’ll move to a bigger office. Tracking down and changing all the places you’ve listed the old address is a huge hassle, and you really don’t want to miss the important notification from the government or from your law firm that inevitably gets sent to the old address.
You might be tempted to use your home address, but if you ever move, you’ll face the same problem—and you may not want your home address as part of the company’s public records.
The old-school solution would be: “a PO Box at your local post office,” and that’s not a terrible plan if you’re going to check it regularly. The much better alternative is to get a virtual mailbox through a service like Earth Class Mail.
You’ll get a virtual address, and any mail that goes there is scanned and sent to you via email, where you can have it forwarded to your current address if you need the physical document (or shredded, if you don’t.)
Things you can safely skip
Here’s a short list of things I wouldn’t bother with in the early days of the company:
- Patents. This is an easy place to waste a ton of time, money, and energy, in a way that won’t realistically matter until much much later, if at all. Don’t even begin to think about this until you’ve raised a few million dollars, and even then, don’t pursue it unless it’s really key to your business model (e.g. you’re a biotech startup).
- Trademarks. If you’ve already raised money and are actively providing your product or service, you should trademark its name. Until that’s the case, you can safely wait.
- An expensive logo or website design. Unless this happens to be particularly key to how you acquire your initial customers, I’d rather you use the time and money elsewhere—especially because you may end up changing the idea!.
- Business cards. I would have answered this question differently in 2010, but unless you’re planning on very regularly attending trade shows, this is an easy one to skip.
Conclusion
Congratulations: your company is incorporated, and you’ve got your basic back-office infrastructure up and running.
In the next chapter, we’ll cover everything you need to know about founder dynamics, dealing with equity splits, and more.