Preparing for Funding Ep1: Incorporation – Recut
Office Hours is our podcast covering general issues related to small businesses and startups. Preparing For Funding is a series of Office Hours episodes hosted by VW Partners Kevin Vela and Rad Wood about getting your company’s legal house in order before taking on funding We are recutting this series to reflect updates in law and venture trends in the last 5 years to better help you navigate through preparing for funding.
In this episode, we discuss the basics of incorporation, including the difference between corporations v. LLCs, which state to organize in, and when we recommend online document formation tools.
- 1:20 – Corporations v. LLCs
- 3:27 – LLCs and Small Businesses
- 5:33 – Tax Advantages for LLCs
- 7:30 – Single v. Double Taxation
- 9:19 – 1202 QSBS
- 12:29 – Corporations and Startups
- 14:31 – Online Formation Documents
- 21:10 – Where Should You Incorporate/Organize?
- 24:05 – Standard Delaware Filing
- What’s The Difference Between A Small Business And A Startup?
- Choosing The Right Entity
- Why Your Startup Should (Likely) Be A C-Corp
- Do I Really Owe Delaware $75,000??? Explaining Delaware Franchise Tax Calculations
- Why Your Small Business Should (Likely) Be An LLC
- Section 1202 of the IR Code & Tax Breaks for Small Businesses
- Online Document Formation Tools: AngelList, Clerky, CapBase
An 83(b) Election is an election made under the Internal Revenue Code that allows a person receiving shares (or units) under a vesting schedule to recognize income based on the entire value of the shares as of the date of the grant – instead of as the shares vest. Basically, you accelerate the ordinary income taxes. In the context of a startup, the ordinary income liability at the time of the grant is negligible because the value of shares early on is so nominal. You want this. But if you fail to file an 83(b) election, then you will be liable for paying ordinary income taxes on the difference between fair market value and the grant price when the shares vest. If your company’s value is increasing over time, this could be a nasty consequence.Learn More
Articles of Incorporation (AOI) are what some states, including California, call the primary organization document for a corporation. In Texas, it’s called a “Certificate of Formation” and in Delaware it’s called a “Certificate of Incorporation.” Many people just refer to these docs as a corporation’s charter.Learn More
An Asset Acquisition is a transaction whereby an acquirer purchases the assets of the company, rather than the ownership interests.Learn More
Capital Gains is the profit from the sale of an asset or property. Taxes on capital gains are typically much lower than taxes on ordinary income.Learn More
A Certificate of Formation is a legal document that is filed in Texas with the secretary of state to create a corporation, limited liability company, and similar entities. Certificates of formation will contain the entity’s basic information (name, registered agent, office address, share structure, etc.). This is known as a Certificate of Incorporation in Delaware.Learn More
A Certificate of Incorporation is a state filing that creates a corporation once filed with the secretary of state. The filing informs the secretary of state about the name the company plans to operate under, whom the state can serve process on (the registered agent), where to mail important documents, and equity classification information.Learn More
Charter is a blanket term that describes a corporation’s primary governing document. In Delaware this document is the “Certificate of Incorporation,” in Texas it’s the “Certificate of Formation,” and in California it’s known as the “Articles of Incorporation.”Learn More
Par Value is the the initial value of a single share, and the lowest sales price a startup can receive for its shares. Typically, when a company first organizes, the shares have no or a nominal par value such as $0.0001.Learn More
A Pass Through Entity passes all income and losses it receives to the company’s owners or investors to be taxed at an individual level. Some examples of pass through entities are partnerships, sole proprietorships, limited liability partnerships, and limited liability companies.Learn More
Vesting is the period of time that securities (usually stock options) may be subject to forfeiture or repurchase based on meeting certain time or milestone criteria. Vesting co-founder equity helps to protect the company’s equity – so that a departing co-founder doesn’t depart with a lot of equity, but rather only the equity that has vested.Learn More