Forming an Entity (LLC v. C-Corp)
March 13, 2018 | By Kevin Vela
Okay – it’s time to actually form the business. You’ve built your pitch deck, received feedback from naysayers, visited with your attorney, and worked out the structure with your co-founders. The next step is to incorporate your company so that it can stand on its own. Filing your organization docs and opening a bank account signals a move from “idea” to “company.”
As I mentioned before, some of these posts will discuss the divergent paths of a small business versus a startup. This is one of those posts. Organizing a small business – say a restaurant, construction company, retail store, or services business, is very different than organizing a startup. I will caveat this by saying that every business has its own considerations, so please visit with an attorney and accountant to figure out what would be best for you. But here are some guidelines:
Starting a Small Business
1. Organize an LLC in your home state (listen to why VW thinks small businesses should be LLCs and startups should be c-corps here)
2. Visit with an accountant to see if it is better to be taxed as a partnership, or S-Corp
3. If there are co-founders, consider vesting over 1 year with a 3-month cliff
4. Have all founders sign a Founders IP Assignment to make it clear that the company owns all of the intellectual property
5. Draft a Company Agreement – include buy/sell language if the ownership is 50/50, and a call right (visit with your attorney about this)
6. Get an EIN
7. Open a Bank Account
8. Make Money
On the other hand, forming a startup is pretty formulaic. Not every startup attorney agrees on the nuances (here’s a similar post from a few years ago from my colleague Ryan Roberts – you should read his stuff, it’s great; here’s another old post by Scott Walker – a well respected startup attorney), but do some research and you’ll see the fundamental similarities.
My next startup would follow these steps:
1. Form a Delaware C-Corp with 10,000,000 authorized shares of common stock, with a par value of $.00001
2. Issue 9,000,000 shares to the founders via a Restricted Stock Purchase Agreement and keep 1,000,000 in reserve for advisors and an employee pool (you’ll have to authorize more shares in the future when you go through a capital raise, but that’s common)
3. Have everyone vest their equity over 4 years with a 1-year cliff with double trigger acceleration
4. Have all founders sign a Founders IP Assignment to make it clear that the company owns all of the intellectual property
5. Execute Bylaws
6. Qualify the business in your home state (usually known as a Foreign Entity Qualification)
7. Get an EIN
8. Open a Bank Account
9. Build the Company
Please understand that your business will require nurture and care. You’ll get out of it what you put into it. This rings true for corporate matters. So once you organize, make sure that you meet with your attorney and accountant regularly to ensure proper filing of all required paperwork.
About the Author(s)
Kevin Vela
Kevin is the managing partner at Vela Wood. He focuses his practice in the areas of venture financing, M&A, fund representation, and gaming law.
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