Incorporating a startup means setting up a business as its own legal entity, separate from its owners. This process often involves filing documents with the government—in the United States, usually the secretary of state’s office in your state—and paying a fee. Once your startup is incorporated, it’s subject to specific laws and regulations but gains certain advantages, such as limited liability and easier access to capital. Incorporating your startup can make it simpler to manage taxes, ownership, and liability.

Below, we’ll look at the key steps involved in incorporating a startup. These include the benefits of incorporation, what challenges you can expect, and the processes involved. Here’s what you need to know.

What’s in this article?

• Benefits of incorporating your startup
  
• Challenges of incorporating your startup
  
• How to incorporate your startup
  
• How Stripe can help
  

Benefits of incorporating your startup

Though incorporating a startup isn’t the simplest process, it offers substantial benefits. Here are the main reasons why incorporating your startup can be smart:

• Limited liability: One of the major advantages of incorporation is the separation of personal and business assets. If the business incurs debts or faces legal issues, personal assets, such as your home and savings, are typically protected. This consideration is particularly important for startups because about 80% of US startups don’t survive past the first year.

• Access to capital: Incorporation can make it easier for your business to raise money. Investors are more likely to put money into a corporation than an individual. Likewise, financial institutions may find it less risky to lend money to an incorporated entity.

• Easier transfer of ownership: Incorporated businesses have an easier time changing ownership or adding co-owners because the business structure allows for the issuance of shares, which offers a streamlined and flexible way to transfer ownership stakes, raise capital by selling shares to investors, and reward employees through stock-based compensation.

• Tax benefits: Incorporation may allow for more favorable tax treatment of business income. Businesses may also be able to write off a greater number of expenses as deductions.

• Credibility: Using Inc. or LLC in your business name—something only corporations can do—can lend an air of legitimacy to your business. This may help in gaining the trust of potential customers and partners.

• Longevity: A corporation continues to exist even if the owner leaves or dies, which makes it easier for the business to survive.

• Formal structure: A corporation has a set organizational structure, which often includes a board of directors. This can simplify decision-making and governance.

• Ownership versatility: Corporations can have multiple classes of stock, which allows for different types of ownership with varying levels of control.

• Employee benefits: It’s easier for incorporated businesses to set up retirement funds, stock options, and other perks for employees. These measures can attract higher-quality talent.

• Strategic growth: Incorporation can open doors for partnerships and joint ventures that may be out of reach for sole proprietorships or partnerships.

Challenges of incorporating your startup

Though most businesses find it relatively straightforward to incorporate and solidify their existence as a legal entity, incorporating can come with challenges. As with most business-related obstacles, the best first step is knowing what to expect. Here are some common roadblocks:

• Initial costs: Incorporating a startup requires filing fees and, potentially, seeking legal consultation, which can be a financial burden for a new business.

• Paperwork: Incorporating involves significant paperwork and administrative duties, including filing the initial articles of incorporation and dealing with ongoing compliance reports.

• Tax complexity: Though incorporating has many tax benefits, the process also introduces more complicated tax filing requirements. This often requires hiring an accountant, which adds to operating costs.

• Regulation: Corporations are subject to a variety of local, state, and federal regulations. Compliance can be time-consuming and, if mishandled, can lead to fines or legal trouble.

• Ownership dilution: Raising capital often involves issuing shares, which can dilute the ownership stake of the original owners. This can lead to less control over the business in the long term.

• Decision-making: A corporation’s decision-making process can become complicated and slow because of its board of directors and other stakeholders—in contrast to the agility of unincorporated businesses.

• Double taxation: In certain types of corporations, profits may be taxed at the corporate level and again when profits are distributed to shareholders. This can lead to double taxation.

• Public scrutiny: Depending on the type of incorporation, a business may need to disclose financials and other sensitive information. These disclosures subject the business to increased public scrutiny.

• Employee burden: Providing employee benefits such as retirement plans and stock options can be a complex undertaking that requires additional administrative efforts.

• Exit strategy: If you decide to sell the business or leave, the formal structure and obligations of a corporation can make this process more complicated than it would be for a sole proprietorship or partnership.

How to incorporate your startup

Incorporating a startup is a major milestone for any business—it has a substantial impact on how you operate, raise funds, and grow. Here’s a quick guide to the process:

Types of corporate structures

One of the first decisions you’ll have to make is choosing the type of corporate structure that best suits your startup’s needs. In the US, startups can choose from several types of corporate structures, each with pros and cons. Below are the most common types:

• Sole proprietorship: This business structure is the simplest. It’s a one-person show in which the business and owner are the same entity for tax and liability purposes. It’s easy to set up but doesn’t provide personal liability protection.

• Partnership: A partnership involves two or more people who agree to share in the profits and losses of a business. Different forms of this arrangement include general partnerships and limited partnerships. General partnerships divide control and profits among all members, while limited partnerships allow for members to have a smaller role, limiting their liability but also their control over the business.

• Limited liability company (LLC): This structure, like a corporation, provides some protection from personal liability but allows for more flexibility regarding taxes. It’s a popular choice for its adaptability and more flexible governance requirements.

• Corporation: This is a more complex structure that involves issuing stock, creating a board of directors, and adhering to a host of regulations. Two of the major types of corporations are C corporations and S corporations.

  • C corporation: This is the standard corporation. It provides the most liability protection but is subject to double taxation.
    
  • S corporation: Similar to a C corporation, an S corporation allows profits and losses to pass through to shareholders for tax purposes, thus avoiding double taxation.
    

• Nonprofit corporation: If your business is centered around social, educational, or charitable work, a nonprofit structure could be a viable option. It allows you to acquire tax-exempt status but requires that profits be reinvested into the organization’s mission rather than distributed to shareholders.

Each of these structures has its own set of legal requirements, benefits, and drawbacks. The right choice for your startup depends on different factors, including the startup’s goals, number of owners, and financial situation.

How to incorporate a startup, step by step

Incorporation involves steps that help you establish your startup as a legal entity separate from yourself. Below is a step-by-step guide to incorporating your startup.

• Research and decide on the best type of business structure: Based on your business needs, goals, and financial considerations, decide what business structure—such as a sole proprietorship, partnership, LLC, or corporation—works best for you.

• Choose a business name: Make sure the name you pick is available in your state and does not infringe on another business. You may also want to check for domain availability if you plan to have a website.

• Register the name and trademark: Once you’ve chosen a name, you should register it with the necessary governmental bodies. You may also want to file for a trademark to protect the name.

• Appoint a registered agent: Your registered agent will be responsible for receiving legal documents on behalf of your corporation.

• Draft and file articles of incorporation: These are the official documents that establish your business as a corporation in your state. They must be filed with the secretary of state’s office or another appropriate state agency.

• Get an employer identification number (EIN): An EIN is like a Social Security number for businesses. You’ll need one for tax filing and to open a business bank account.

• Open a business bank account: Separate your personal finances from your business operations by opening a bank account solely for business transactions.

• Create corporate bylaws: These are internal rules that manage the operation of your corporation. Though not all corporations are legally required to have bylaws, they are highly recommended for clarity and structure.

• Issue stock and establish ownership: For corporations, you’ll need to issue shares to signify ownership. Maintain accurate records of this.

• Hold an initial meeting of the board of directors: In this meeting, you’ll appoint officers, approve bylaws (if applicable), and set the fiscal year, among other tasks.

• Register for state and local taxes: Make sure to register for any state and local taxes that apply to your business, such as sales tax and employee withholding tax.

• Get necessary permits and licenses: Research what federal, state, and local permits and licenses you need to operate, and obtain them before doing business.

• Set up accounting and record-keeping systems: Accurate bookkeeping is key. You can hire an accountant or use software to keep track of income, costs, and taxes.

• File regular reports and taxes: Depending on your business structure and location, you may be required to file quarterly or annual reports and tax returns.

• Maintain corporate compliance: To stay in good legal standing, keep accurate records, hold annual meetings, and make sure you meet all deadlines for filings and fees.

Best practices for incorporating a startup

Incorporating a startup involves more than just following legal protocols. Consider these best practices for extracting maximum value and managing scalability and risk.

• Time it right: Timing can have a huge impact on your tax obligations and liabilities. If possible, incorporate at the end of a calendar year to avoid unnecessary complications.

• Consult seasoned advisers: Even with the most careful planning and diligent research, problems can arise. Working with legal and financial advisers who specialize in startups can help you avoid costly mistakes.

• Use vesting schedules: Establish a stock option plan that uses vesting to incentivize long-term commitment from your team.

• Choose the right state: Incorporating in a state such as Delaware can provide advantages in terms of investor familiarity, legal precedent, and flexibility. These can apply even if your business doesn’t operate there. More than 66% of Fortune 500 companies are incorporated in Delaware, according to the state’s Division of Corporations. However, this can involve extra fees and paperwork.

• Preemptively manage conflicts: Draft a founders’ agreement that outlines what happens in case of disagreements or if a founder exits. This can minimize risk and avoid messy legal battles later.

• Optimize for tax benefits: Different corporate structures have different tax implications. For instance, S corporations allow income to flow directly to individual tax returns, potentially lowering tax burdens. However, they come with restrictions on the number of shareholders and types of stock that can be issued.

• Execute comprehensive due diligence: Before incorporating, thoroughly research your market, liabilities, intellectual property rights, and other elements that may affect your business. This will give you the knowledge to choose the best corporate structure and strategies.

• Document everything: Keep meticulous records of everything from employee contracts to board minutes. This makes due diligence easier for potential investors and is often a legal requirement.

• Establish strong internal controls: The more structured and controlled your internal processes, the easier it will be for you to manage growth and satisfy legal requirements. This is especially true when it comes to financial practices.

• Be mindful of compliance deadlines: Missing a filing deadline can result in penalties and, in extreme cases, the dissolution of your business. Use reminders and consider employing compliance software.

• Secure intellectual property rights early: File for patents, copyrights, or trademarks as soon as possible to protect your assets. This can also make your business more attractive to potential investors.

• Plan for data protection: Implement comprehensive data security measures from the first day. This protects you and your customers and can be a selling point for potential investors.

• Vet potential investors thoroughly: Understanding the background and intentions of your investors can prevent conflicts and keep your business moving toward shared goals, especially if you are giving equity in return for funding.

• Establish an advisory board: This board is made up of industry veterans who can provide expert advice without committing to the day-to-day involvement of a director. They can also be influential factors in networking and opening doors for your startup.

• Keep an exit strategy in mind: Even at this early stage, think about how you may eventually sell the business, go public, or transition ownership. This foresight can help you make wise decisions from the beginning.

Following these best practices regarding incorporation will help you create a business that’s legally sound and well-positioned for challenges and opportunities.

How Stripe can help

Stripe Atlas makes it simple to incorporate and set up your company so you’re ready to charge customers, hire your team, and fundraise as quickly as possible.

Fill out your company details in the Stripe Atlas form in less than 10 minutes. Then, we’ll incorporate your company in Delaware, get your IRS tax ID (EIN) for you, help you purchase your shares in the new company with one click, and automatically file your 83(b) tax election. Atlas offers multiple legal templates for contracts and hiring and can also help you open a bank account and start accepting payments even before the IRS assigns your tax ID.

Atlas founders also gain access to exclusive discounts at leading software partners, one-click onboarding with select partners, and free Stripe payments processing credits. Start your company today.

The Stripe Atlas application

It takes less than 10 minutes to fill out the details of your new company. You’ll choose your company structure (C corporation, limited liability company, or subsidiary) and pick a company name. Our instant company name checker will let you know if it’s available before you submit your application. You can add up to four additional cofounders, decide how you split equity between them, and reserve an equity pool for future teammates if you choose. You’ll appoint officers, add an address and phone number (founders are eligible for one year of a free virtual address if you need one), and review and sign your legal documents in one click.

Forming the company in Delaware

Atlas will review your application and file your formation documents in Delaware within one business day. All Atlas applications include expedited 24-hour processing service at the state, for no extra fee. Atlas charges $500 for your formation and your first year of registered agent services (a state compliance requirement), and $100 each year thereafter to maintain your registered agent.

Getting your IRS tax ID (EIN)

After your formation in Delaware is complete, Atlas will file for your company’s IRS tax ID. Founders who provide a US Social Security number, US address, and US phone are eligible for expedited processing; all other users will receive standard processing. For standard orders, Atlas calls the IRS to retrieve the EIN for you, using real-time IRS data to determine when your filing is likely to be available. You can read more about how Atlas retrieves your EIN and view current tax ID ETAs.

Purchasing your shares in the company

After Atlas forms the company, we’ll automatically issue shares to the founders and help you purchase them so you formally own your share in the company. Atlas allows founders to purchase their shares with intellectual property in one click and reflect this in your company documents, so you don’t need to mail and track cash or check payments.

Filing your 83(b) tax election

Many startup founders choose to file an 83(b) tax election to potentially save on future personal taxes. Atlas can file and mail your 83(b) tax election in one click for both US and non-US founders—no trip to the post office required. We’ll file it using USPS Certified Mail with tracking, and you’ll get a copy of your signed 83(b) election and proof of filing in your Dashboard.

Partner perks and discounts

Atlas partners with a range of third-party tools to offer special pricing or access to Atlas founders. We offer discounts on engineering, tax and finance, compliance, and operations tools, including OpenAI and Amazon Web Services. Atlas also partners with Mercury, Carta, and AngelList to provide faster, automatic onboarding using your Atlas company information, so you can get ready to bank and fundraise even faster. Atlas founders may also access discounts on other Stripe products, including up to one year of free credits toward payments processing.

Read our Atlas guides for startup founders, or learn more about Stripe Atlas and how it can help you set up your new business quickly and easily. Start your company now.