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 explain how to incorporate a startup, including the benefits of incorporation, what challenges you can expect, and the processes involved. Here's what you should know.

What's in this article?

• Benefits of incorporating a startup
  
• Challenges to be aware of before you incorporate
  
• How to incorporate a startup
  
• Where to incorporate your startup
  
• What documents do I need to incorporate?
  
• How Stripe Atlas can help
  

Benefits of incorporating a startup

Incorporating your startup can offer substantial benefits. Here are the main reasons why incorporating your startup can be a smart move:

• 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 rather than invest in an individual. Likewise, financial institutions may find it less risky to lend money to an incorporated entity.

• Easier transfer of ownership: It is easier for incorporated businesses to change ownership or add 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: In the US, incorporation may allow for business income to be treated more favourably from a tax perspective. 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 organisational 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 to be aware of before you incorporate

Though most businesses find it relatively straightforward to incorporate and solidify their existence as a legal entity, incorporating can come with challenges. Here are some common roadblocks:

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

• Paperwork: Incorporating involves a significant amount of 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 in the US. 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 US corporations, profits may be taxed at both the corporate level and 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 financial 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 a decision is made to sell or leave the business, 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 a startup

Incorporating a startup is a major milestone for any business in the US – it has a substantial impact on how the business operates, raises funds and grows. 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 their own pros and cons. Below are the most common types:

• Sole proprietorship: This business structure is the simplest. It's a one-person operation 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.
    
• Non-profit corporation: If a business is centred around social, educational or charitable work, a non-profit structure could be a viable option. It allows the business to acquire tax-exempt status, but also requires profits to be reinvested into the organisation'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 a particular startup depends on various factors, including the startup's goals, the number of owners and its financial situation.

How to incorporate a startup, step-by-step

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

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

2. 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.

3. 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.

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

5. 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.

6. Get an employer identification number (EIN): An EIN is like a Social Security number for businesses. You'll need one for filing other taxes such as corporate income tax and to open a business bank account.

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

8. 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.

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

10. 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.

11. 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.

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

13. Set up accounting and record-keeping systems: Accurate bookkeeping is important for any business. Depending on your needs, consider hiring an accountant or using special software to keep track of income, costs, and taxes.

14. 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.

15. 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 in the US involves more than just following legal protocols. Businesses should consider the following best practices for extracting maximum value and managing scalability and risk.

• Time it right: Timing can have a huge impact on a business's tax obligations and liabilities. If possible, businesses should 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 specialise in startups can help businesses to avoid costly mistakes.

• Use vesting schedules: Businesses should establish a stock option plan that uses vesting to incentivise long-term commitment from their 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. Read more about the best states to incorporate in.

• Pre-emptively manage conflicts: By drafting a founders' agreement, businesses can outline what happens in the event of disagreements or if a founder leaves. This can minimise risk and avoid messy legal battles at a later stage.

• Optimise 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 the types of stock that can be issued.

• Execute comprehensive due diligence: Before incorporating, 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: Businesses need to 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 a businesses' internal processes are, the easier it will be for them 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 using compliance software.

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

• Plan for data protection: Implement comprehensive data security measures from the start. 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 the business's investors can prevent conflicts and keep the business moving towards shared goals, especially if they are giving equity in return for funding.

• Establish an advisory board: An advisory 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.

• Have an exit strategy in mind: Even at this early stage, businesses should think about how they may eventually sell the business, go public or transition ownership. This foresight can help with making wise decisions from the beginning.

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

Where to incorporate your startup

The optimal state to incorporate your startup will depend on your business needs. Here are a few common states startups incorporate in and why:

Delaware

Delaware's body of corporate law and Court of Chancery, which specialises in business law, makes it a popular choice. It also offers flexible corporate structure options and favourable taxes (i.e. no state corporate income tax for companies that operate outside of Delaware) that are attractive for startups.

Nevada

Nevada's minimal tax requirements – no state corporate income tax, franchise tax, or personal income tax – are a major bonus. The state also has business-friendly laws and liability protection for officers and directors, which can be appealing for startups looking to minimise legal risks.

Wyoming

Similarly to Nevada, Wyoming doesn't have state corporate income tax, franchise tax, or personal income tax. It also provides liability protections for officers and directors, and offers "perpetual existence" for corporations, meaning that corporations can continue to exist even if an owner dies or leaves the business.

South Dakota

South Dakota has low ongoing filing requirements, legal protections for personal assets from corporate liabilities, and no state corporate or personal income taxes. The state has a business-friendly legal and regulatory environment that works well for many startups.

Florida

Florida has no state individual income tax and exempts S corporations from state corporate income tax unless they owe federal income tax. The state offers incentives for startups in industries such as tech and healthcare, and software-as-a-service (SaaS) sales are not subject to sales tax.

What documents do I need to incorporate?

The documents needed to incorporate can vary slightly by state, but the list below covers the core documents you usually need:

• Action by written consent of sole incorporator: This appoints the initial board of directors.

• Corporate bylaws: This internal document describes the operational procedures and governance structure of the corporation, the roles of directors and officers, stock issuance procedures, and the execution of corporate meetings.

• Certificate of secretary of bylaws: This confirms the adoption of your corporate bylaws.

• Initial action by the board of directors: This describes standard company tasks and approves the issuance of shares to the founders.

• Indemnification agreement: This outlines when and how the company will cover expenses associated with lawsuits and protects officers and directors from lawsuits. Stockholder consent is needed to approve this agreement.

• IRS Form SS-4: This requests an employer identification number (EIN) for your company.

• Common stock certificate: This shows the number of shares issued to the founders and describes the rules for selling or transferring them.

• Articles of incorporation: These are filed with the state to establish your business as a corporation.

How Stripe Atlas can help

Stripe Atlas sets up your company's legal foundations so you can fundraise, open a bank account and accept payments within two business days from anywhere in the world.

Join 75K+ companies incorporated using Atlas, including startups backed by top investors like Y Combinator, a16z and General Catalyst.

Applying to Atlas

Applying to form a company with Atlas takes less than 10 minutes. You'll choose your company structure, instantly confirm whether your company name is available and add up to four co-founders. You'll also decide how to split equity, reserve a pool of equity for future investors and employees, appoint officers and then e-sign all your documents. Any co-founders will receive emails inviting them to e-sign their documents, too.

Accepting payments and banking before your EIN arrives

After forming your company, Atlas files for your EIN. Founders with a US Social Security number, address and mobile phone number are eligible for IRS expedited processing, while others will receive standard processing, which can take a little longer. Additionally, Atlas enables pre-EIN payments and banking, so you can start accepting payments and making transactions before your EIN arrives.

Cashless founder stock purchase

Founders can purchase initial shares using their intellectual property (e.g. copyrights or patents) instead of cash, with proof of purchase stored in your Atlas Dashboard. Your IP must be valued at US$100 or less to use this feature; if you own IP above that value, consult a lawyer before proceeding.

Automatic 83(b) tax election filing

Founders can file an 83(b) tax election to reduce personal Income taxes. Atlas will file it for you – whether you are a US or non-US founder – with USPS Certified Mail and tracking. You'll receive a signed 83(b) election and proof of filing directly in your Stripe Dashboard.

World-class company legal documents

Atlas provides all the legal documents you need to start running your company. Atlas C corp documents are built in collaboration with Cooley, one of the world's leading venture capital law firms. These documents are designed to help you fundraise immediately and ensure your company is legally protected, covering aspects like ownership structure, equity distribution and tax compliance.

A free year of Stripe Payments, plus $50K in partner credits and discounts

Atlas collaborates with top-tier partners to give founders exclusive discounts and credits. These include discounts on essential tools for engineering, tax, finance, compliance and operations from industry leaders like AWS, Carta and Perplexity. We also provide you with your required Delaware registered agent for free in your first year. Plus, as an Atlas user, you'll access additional Stripe benefits, including up to a year of free payment processing for up to $100K in payments volume.

Learn more about how Atlas can help you set up your new business quickly and easily and get started today.