I open the letter from Delaware and my jaw dropped. What in the world is a franchise tax? And why do we owe Delaware so much?? So I called up the people at the Corporations office, only to find out that our decision to authorize 100,000 shares would cost us more than $500 more than it would have if we had authorized the minimum. I thought to myself, “Man am I glad I didn’t go for 1,000,000 shares!”
So now that you know you want to create a company, there are a lot of logistics to deal with. What’s funny is that while you can hear and read a great deal of advice on startup strategy, there doesn’t seem to be quite as much on startup logistics. Perhaps it’s because this is the more “boring” side of things. But doing things right can really save you some serious money — and right now, there’s not really much that’s more important. So this blog post is on logistical issues you should tackle immediately.
(1) Registering your company: LLC or Corporation?
You will hear a great deal of advice talking about the pros and cons of each. So there is no need to go into great detail here. Really quickly, an LLC (limited liability corporation) does not allow the offering of shares, while a C-Corp or S-Corp (Corporation) does. There are other differences, but let’s keep it short.
So which one is best for you? The C-Corp. Why? Because if you’re still reading this blog, you’re trying to figure out how to bootstrap the company to success. In future blogs, we will talk about different ways to raise money. But for now, know that anyone interested in giving you money in the future will want to have an equity stake in your company. So as a result, you will want to be incorporated.
(2) Where should you register your company?
Once again, there is a ton of advice for different types of companies out there. Let’s assume that you are a startup looking to be more than a “lifestyle business”. You want to be able to raise real capital. In this case, the answer is simple: Delaware.
You may ask, why Delaware? Is it cheaper? No, it’s actually more expensive. But once again, you are trying to raise funding quickly. This will be one of the hardest things you’ve had to do to date. Fortunately, you are starting your company at an exciting time where the idea of “accelerators (or incubators)” have arisen. We will talk about this more in the future, but for now- it’s important to know that typically angels and accelerators are looking for their classes to acquiesce to one standard set of state laws. As a result, you may find some that accept your state, and you may not. But you most definitely will find those who accept Delaware incorporation. So you may as well incorporate now.
(3) Ok, anything else to know?
Yes, tons! First thing’s first: As I mentioned earlier, incorporating in Delaware will be more expensive — for several reasons. (1) The tend to have pretty high fees, (2) you will need to hire a registered agent in Delaware (registered agents accept a service of process in case you get sued). I would recommend Harvard Business Services. They charge around $50/year and their rates seem to stay steady, unlike others who will charge you a low first-year rate and then jack the prices up in ensuing years. They are also really good if you want a hassle-free option for incorporating. Oh yeah, the third reason. (3) You will have to register as well in your home state as a foreign corporation. Why? Because to operate a business entity primarily in a different state, most states require you to be registered there. This also means you will have to pay a separate foreign registration fee. But remember, this is hopefully an investment that will pay off in the not-so-long term.
Second: Take care to think about the number of shares that you want to authorize for your company. Delaware charges by the number of shares you have authorized for your company. As of today’s writing, the difference between authorizing 5,000 shares and 5,000,000 shares is nearly $4000 in taxes. And the shares (at this stage in your company) have no real impact other than to say you have more shares. So start small (5,000 shares or less), and when needed, just execute a stock split.
Finally, make sure you pick a name for your company that is not already trademarked, and that you can actually protect with IP protections. At Upswing, we struggled a great deal with this. However, because our initial URL was www.upswi.ng, we registered using The Upswi.ng Group, LTD. There were several bad ideas in this endeavor. First, domain hacks (anything that uses the extension to spell the URL) are not very favorable among search engines. So rather than picking up the word upswing, Google only noticed upswi. Also the .ng domain was country specific, meaning that no one in the US would see our .ng URL. We have since changed our URL to www.upswing.io, but our official name has not changed yet in Delaware. The second issue was that we thought it would be cool to use the term LTD (“limited”) as an ending. Well, different states view LTD differently, and many see that as an ending similar to LLC rather than INC. This tended to cause us issues as well when registered with banks, etc. So think through these issues as well.