Formation

Choosing Where and How to Form

One of the first decisions is where to form your company. Many businesses choose Delaware for its business-friendly laws, respected courts, and ease of administration. But incorporating in your home state may make more sense if your operations are purely local.

The next decision is what type of entity to form:

• C-Corporation – the default for venture-backed startups. Allows multiple classes of stock, stock option plans, and is expected by most institutional investors.
• S-Corporation – a tax election available to corporations that allows profits and losses to “pass through” to stockholders, avoiding double taxation. Useful for smaller businesses, but restricted in who can own stock and limited to one class of shares.
• LLC (Limited Liability Company) – a flexible, simple entity with fewer formalities. Profits and losses can pass through to members, and the operating agreement can be customized. Often the best choice for small businesses or closely held companies not planning to raise venture capital.

Rule of thumb:

• If you plan to raise outside capital, issue equity broadly, or eventually go public → C-Corporation.
• If you’re running a lifestyle business, professional practice, or family venture with no need for outside investors → LLC may be more efficient.

Steps in the Formation Process

1. Name Selection
       Your company’s name must comply with state requirements (e.g., “Inc.” or “LLC”) and be available for use.
2. Filing Formation Documents
   
    
   • For corporations: file a Certificate of Incorporation with the state.
    
   • For LLCs: file a Certificate of Formation (or Articles of Organization).
     These documents create the entity and establish basic rules like name, purpose, registered agent, and ownership structure.
 
3. Internal Governance Documents
   
    
   • Corporations adopt bylaws that serve as the operating manual.
    
   • LLCs enter into an operating agreement, which sets out member rights, voting, and economics.
 
4. Organizational Actions
       Approving bylaws/operating agreements, appointing officers or managers, issuing ownership interests, and authorizing initial actions like opening bank accounts.
5. Issuing Ownership
   
    
   • Corporations: issue stock to founders, documented through stock purchase agreements, certificates or electronic records, and stock ledgers.
    
   • LLCs: issue membership interests, documented through the operating agreement and member ledgers.

If founders receive stock that vests over time, they should also consider filing an 83(b) election with the IRS within 30 days of purchase. This election can lock in a low tax bill and start the capital gains holding period early. See below for more information.

6. Intellectual Property Assignments
       Founders and contributors transfer any pre-company IP into the entity, ensuring the company—not individuals—owns its core assets.
7. Minute Book / Records
       All governing documents, consents, and ownership records should be kept organized, either digitally or physically. Investors and buyers will expect to see a complete “clean file.”

Beyond the Basics

Smart formation also includes:

• Confidentiality & IP agreements: Proprietary Information and Invention Assignment (PIIA) agreements for employees, consulting agreements, advisor agreements, and NDAs.
• Equity incentives: For corporations, setting up a stock option plan early helps attract talent. For LLCs, profits interests can be used but are more complex.
• Securities compliance: Even private stock or membership interest issuances must comply with state and federal securities laws.
• Cap table management: From day one, track who owns what accurately. This becomes critical in fundraising and diligence.

After Formation

Once your entity is formed, there are a few immediate follow-ups:

• Obtain an EIN from the IRS.
• Open a business bank account.
• Register in other states where you’re doing business (foreign qualification).
• Obtain any required licenses and permits.
• Pay annual franchise taxes and file required state reports.
• Beginning in 2024, comply with Corporate Transparency Act reporting (beneficial ownership disclosures).

Section 83(b) Elections

If you’re receiving founder stock that vests over time, one of the most important early steps is considering an 83(b) election. This IRS filing allows you to pay tax on your stock at the time of purchase—when the value is typically minimal—rather than at each vesting date, when the stock maybe worth much more.

Benefits of filing an 83(b):

• Lock in a low tax bill from day one.
• Start the long-term capital gains clock earlier.
• Avoid surprise tax bills as shares vest.

Timing is critical: the election must be filed with the IRS within 30 days of the stock purchase, and there are no extensions. Missing this deadline can create costly and unexpected tax consequences. We strongly recommend speaking with a tax advisor to determine whether an 83(b) election is right for you.

Why It Matters

Sloppy or incomplete formation is one of the top red flags for investors and acquirers. Proper formation protects your limited liability, avoids tax mistakes, and ensures your company is “venture ready” from day one.

‍Why Delaware?
Delaware offers predictable laws, efficient filings, and strong protections for directors and investors. It’s the standard choice for venture-backed startups.

What’s the difference between a corporation and an LLC?
Corporations have more structure and are preferred for raising capital and issuing stock options. LLCs are simpler, flexible, and better suited for smaller businesses or those not seeking outside funding.

Do I need vesting for founders?
Yes. Vesting ensures founders earn their equity over time. A standard schedule is four years with a one-year cliff.

Can I just use an online filing service?
Filing services only create the entity—they don’t handle stock or membership issuance, IP assignments, or vesting. These are the details that matter most to investors and future buyers.

How long does formation take?
State filings are usually processed within a few days. Expedited options can be same-day.

What if we started building before incorporation?
That’s common. We can transfer pre-existing IP into the company and document founder ownership retroactively to keep your records clean.