You’ve been working on your idea for a few months now with a cofounder, and you think you have something tangible. You want to make it ‘real’ by incorporating. You’re thinking LLC because you hear that it’s ideal for taxes and protecting you from liability.
You also believe online services like LegalZoom, Rocketlawyer, and Stripe Atlas can do this for you with minimum work. They’ll even draft basic bylaws for you, and issue “stock certificates” on some thick cut paper. You’ve got it all figured out and you’re good to go, right?
Before you jump into action and get all of this done with a few clicks of your trackpad, take a moment to make sure you’re doing the right things the right way.
The last thing you want is to choose a name, register a domain, spend time and money making logos and marketing only to get a cease and desist letter from another startup located across the country claiming they own the trademark to your name.
Don’t let it get there. Do a comprehensive search on your name and logo, register the trademarks, and then start the rest.
Type of Entity
You’ve got two main choices when choosing a type of entity for your startup – a Limited Liability Company (LLC) or a Corporation. LLC’s protect you from liability, and allow you to file your company taxes in your personal tax return. Corporations are taxed separately, and you will be paying taxes on your income as well as on dividends earned. Good thing is – you like won’t have any dividends as a startup.
But this decision really just boils down to one key point – raising money. If you’re planning to raise venture capital in exchange for stock in your company, a C Corporation is essentially your only way to go. LLC’s quite simply cannot issue stock, so there is no point in bothering.
If you’re wondering what state to form your entity in – the answer is usually Delaware for a variety of reasons you can read about here.
Agreements In Place
Doing this the right way means having several key agreements in place right from the beginning. These include:
- Certificate of Incorporation,
- Corporate Bylaws,
- Certificate of Secretary,
- Initial Action by Board of Directors,
- Restricted Stock Purchase Agreement,
- Technology Assignment Agreement,
- Confidential Information and Invention Assignment Agreement,
Having these agreements properly written specifically for your company will save you the headache of coming up on a big funding round, or even worse, an exit – only to find out you don’t own any stock, the IP belongs to a cofounder that left the company, and you have no set way for the board to vote – leaving you with some big problems to figure out.
Let us Help
Services like Legalzoom and Rocketlawyer are great options for simple entity to formation – like a solo law practice for example. However, forming a startup is an important and comprehensive undertaking when done right.
Kader Law can help you research and trademark your brand, choose the ideal entity, and draft all necessary agreements.
This post is not legal advice, and does not establish any attorney client privilege between Law Office of K.S. Kader, PLLC and you, the reader.