Preparing for Funding Ep1: Incorporation
Office Hours is our podcast covering general issues related to small businesses and startups. Preparing For Funding is a series of Office Hours episodes about getting your company’s legal house in order before taking on funding.
In this episode, we discuss why your company’s legal matters, lifestyle businesses v. venture-backed businesses, whether you should form your entity as a corporation or LLC, implications of the new tax code, and the filing requirements for entity formation.
- Make an Investment in Legal
- What’s The Difference Between A Small Business And A Startup?
- Choosing The Right Entity
- Why Your Startup Should (Likely) Be A C-Corp
- Why Your Small Business Should (Likely) Be An LLC
- Do I Really Owe Delaware $75,000? Explaining Delaware Franchise Tax Calculations.
- The Company Agreement Explained
A Capital Account is a ledger in an LLC which tracks the contributions and distributions to members. Each member’s capital account is oftentimes adjusted by allocations and distributions of the company’s profits and losses.Learn More
A Company Agreement is an internal document for an LLC that provides the framework for how a limited liability company operates. According to the TBOC, “It governs the relations among members, managers, and officers of the company, assignees of membership interests in the company, and the company itself; and other internal affairs of the company.”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
Customer Acquisition Cost (CAC) is the cost to acquire a new customer. CAC can be calculated by dividing the total costs associated with acquisition by the total new customers, within a specific time period.Learn More
An Employer Identification Number (EIN) is the number issued by the IRS to a company that identifies the company as a taxpayer in the US. An EIN is required for a company to open up a bank account and file taxes.Learn More
Gamification occurs when real-world activities are made game-like in order to motivate people to achieve goals. Gamification leverages people’s natural tendencies for competition and achievement. Examples include rewarding users for achievements and earning badges.Learn More
An Institutional Investor is an entity with large amounts of resources that invests significant amounts of money on behalf of individuals and companies. Institutional investors are typically investment companies, mutual funds, brokerages, and insurance companies.Learn More
A Lifestyle Company is a startup who is no longer seeking rapid growth and an exit (through a sale or IPO), but rather plans to operate as a going concern into the indefinite future. Not a bad thing, but generally not what venture capital investors are looking for.Learn More
An Limited Liability Company (LLC) is the best of both worlds when it comes to entities. An LLC offers the benefits of limited liability, taxations as a partnership, and management flexibility. An LLC can elect to be “manager-managed” or “member-managed.”Learn More
A Limited Partnership (LP) has two classes of partners: General Partners and Limited Partners. General Partners in an LP are like General Partners in a conventional partnership (i.e., have personal liability for the debts of the business). Limited Partners are not liable for debts of the business.Learn More
Milestones are company goals used as incentives for employees or company contracts. If a company reaches certain objectives, it may receive greater funding from an investor or an employee may receive a larger bonus.Learn More
A Partnership is created, without filing anything with the state, when two or more individuals go into business for profit. Partners are personally liable for all of the partnership’s debts and liabilities, but the partners receive the benefit of pass through taxation. Partnerships are rarely intentionally created now because of other limited liability options that exist.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
A Profit Interest Plan (Incentive Unit Plan) is used by an LLC to incentivize and compensate service providers to the company, similar to a Stock Option Plan in a corporation. An incentive unit gives the recipient a right to the future profits of the company after the date of the grant (hence, incentive units are also known as “profits interest”).Learn More
A Registered Agent is the official “contact person” for a business. A business must officially designate a registered agent to receive and accept any lawsuits, notices, or other legal documents on behalf of the entity. Texas requires every entity to assign a registered agent before it is authorized to conduct business within the state.Learn More
An S-Corporation is a form of corporation that meets the IRS requirements to elect pass through taxation. The corporation can pass income directly to shareholders. S-corporations can be very valuable in limited instances. They are not typically recommended for startups, but may make sense for some small businesses (particularly services businesses). Please consult with an attorney and/or CPA.Learn More
A Shareholders’ Agreement (SHA) is an agreement among a company’s shareholders that sometimes exists in startups. While most of the shareholders’ rights are laid out in the formation documents, the shareholder agreement may supplement these documents and further provide how the shareholders will vote, solve disputes, and other rights.Learn More
Short for Action by Unanimous Written Consent, a UWC is a legal document that memorializes the unanimous consent of the board of directors and/or members of a corporate entity on a specific issue or action.Learn More
Venture Capital is capital provided by investors to startups. Startups are inherently risky due to their likelihood of early failure. Because of the high risk, investors may achieve greater returns.Learn More