Startup Incorporation for Founders: A new handbook

> As the name implies, this handbook is narrowly focused on startup incorporation. A lot of people don't know this, but there's a lot more to forming a startup than just incorporation

A product suggestion for you. Something like turbotax for founding a company. Ask a series of relevant questions, then create the formation paperwork, set up the board, issue the stock, automatically sign them up with an insurance partner, payroll partner, etc.

The target audience would be a couple of people who have a really great idea and just want to get down to coding and talking to customers and building, and not dealing with all of the boring muck of legal stuff.

When I was starting companies I really wished there was something like this. Your guides are a good start, but I still have to do a lot of legwork just to get the company going!

And then once you have that, a second product -- the same thing for shutting down.

Shutting down a company is even more difficult than starting one, and there doesn't seem to be a lot of products focusing on that, even though there are almost as many shutdowns as there are startups!

Edit to add: I would gladly pay a few hundred dollars for this service, on top of the normal Clerky fees, as it would save me a ton of time. Also you could probably work out deals with the preferred partners to get some sort of referral fee.

ps. This guide is great, thank you for putting it together!

I think the following service may match what you are asking for , it is priced at $500 and from a reputable company.

https://www.angellist.com/incorporation

Included with Incorporation

Entity formation in Delaware

State filing fees

IRS Employer Identification Number (EIN tax ID)

Founder stock issuance, custom equity pool and 83(b) filings

Legal templates and founder discounts

1 free year of Delaware registered agent, $100 per year thereafter. Renews automatically

1 free year subscription to Base plan

That's very similar to what Clerky does. Clerky even goes one step further and helps set up bank accounts.

But what I'm looking for is more involved. Ask me a few questions. Do you plan to have employees? Yes? Ok we will set you up with a payroll provider and a health insurance provider and a worker's comp provider and a business insurance provider. That kind of thing.

We use Gusto for that stuff. It's been fine.

I think you're completely missing the point. I want a one stop shop that asks me questions and then signs me up for everything I need.

Sure I can go to Gusto and they can do payroll for me, but they don't do taxes. They don't do insurance. They don't do bookkeeping. And so on.

I don't want to have to look up all the things I need to do as a business owner and find all the services that do that stuff.

I want to go to one place and have a legal, compliant business.

This sounds like https://stripe.com/atlas

The shutting down part is interesting and I'm not sure how/if Atlas handles that.

Stripe only does the first part. It doesn't set me up with payroll or insurance or all the other things that I might need. That's why I said I'd like a turbotax like system that asks questions so you can get the right stuff.

Thank you for the kind words and excellent suggestion! Definitely helpful to know you'd pay for it :P

I touched on this in another comment here, but dissolution, counterintuitively, is actually a very different ballgame. There is a lot more variability in how it should be done, depending on the specific circumstances of the company being shut down. That's one of a few reasons why you don't see many products out there for this. But I completely agree it's a pain point for us to solve!

Adding onto my own experience as well. It's a huge pain in the neck that I've been working on for 4 months. Nearly all of this has been back and forths with various state government agencies on how I have not filed paperwork correctly. I too wish there was an option to pay a few hundred dollars and have this done for me.

Yikes, sorry to hear that! Things like that are frustrating to hear, because something is clearly broken with the system, but there’s no simple quick fix for it even though it feels like there ought to be one. Hopefully we’ll have a solution for it one day...

> Definitely helpful to know you'd pay for it :P

As a founder myself, I know it's easy for people to throw random ideas at you with absolutely no intention to pay for it, so I know how helpful it is to have a price anchor. :)

Haha, that's why we love having founders as customers! :)

FWIW we have at least the banking portion of what you described worked out. The idea is that you can pre-fill your applications with banks with the information that you entered for your legal paperwork. It's not quite a one-click process due to how the best banks for startups work, but it's as easy as it gets!

Quick question about Delaware; hasn't Delaware's Court of Chancery historically been on the side of the board over the shareholders in a shareholder dispute?

If so, for most startups, wouldn't the only disputes settled by the Court of Chancery largely be between the founders and the VC's, with the Court of Chancery historically siding with the VC's on the board?

Is this the biggest reason why VC's prefer Delaware before other states?

Doubtful — in general, company and investor-side counsel alike view Delaware courts as reasonable and fair. From what I've seen, the people that have a gripe with Delaware courts are usually activists of some sort.

The framing of VCs / board versus founders / shareholders doesn't make sense to me because so many startups have founders controlling the board. And VCs are shareholders too, of course.

I think what you may be referring to is that the Delaware courts generally give the company management broad discretion over business decisions. So it's difficult for a random shareholder to successfully sue the company over some bad decision they made. But as a founder, that's what you want, so you can run your startup without having to worry about backseat drivers.

> From what I've seen, the people that have a gripe with Delaware courts are usually activists of some sort.

For the record, I'm not an activist, if that's what you're saying.

I just don't see that the benefits (which seem to be very hard for anyone to quantify) of being in Delaware even come close to comparing to the opportunity or actual costs of not being in a far more business- and tax-friendly state like Wyoming, Texas, or Florida.

Oh, sorry, I didn't mean to imply you were an activist — only attempting to explain why you might see some people complain about Delaware courts.

This handbook actually contains a lengthy discussion of why startups choose to incorporate in Delaware: https://handbooks.clerky.com/startup-incorporation/where :)

My understanding is VCs prefer Delaware C Corp because it's what they understand and are familiar with. Everything else is "reinventing the wheel". It's the De facto standard.

Have you thought about adding a section on different ownership and control models, such as co-operative models?

Upvote. Even just a review of alternative models and some basic implications would be extremely helpful. It seems like worker owned software companies could be very effective.

Yea, it's a topic of interest for me personally, even if they aren't common with the types of startups we serve. Do you know of any successful worker-owned software companies? The co-ops I'm familiar with are mostly REI and grocery store types (both of which I enjoy a lot as a customer).

Not a software company, but the cheese board collective in Berkeley seems very interesting. They have survived for a very long time through the pandemic, etc. Impressive.

Not quite an answer either, but one reason for my interest in alternative models of operation is the IETF. It is, and has been a remarkably effective organization. Thanks to them I am typing on my computer at home and sending this out. They do _not_ have members. I understand that they are not a business, but they are more effective than any software company I worked for.

https://www.ietf.org/about/participate/tao/

Didn’t realize Cheese Board was a co-op! I’m not surprised though :) And I agree, we all owe a lot to IETF!

Also reccommend https://www.usworker.coop/clinic/startups/

Not the OP but a quick search reveals: https://github.com/hng/tech-coops

And here's one network of tech co-ops in the UK: https://www.coops.tech/

Thanks!

Ooh, that's a good idea. I'm a huge fan of co-ops (not for any principled reason, I just think they're cool). They aren't common for startups of the type we're writing about, but I think it does make sense to discuss that topic. Thank you for the suggestion!

> aren't common for startups of the type we're writing about

You may have a greenfield market in the trades.

Indeed! The main difficulty is that while we are experts on startup law, we're not in other things, such as co-ops. But we are working on a way to allow others to combine their expertise with our software to serve other markets :)

For those with experience with the two, how does Clerky compare with Stripe Atlas?

Oh, was hyped to read it until I realized it’s US-focused. Being a non-US citizen makes the US one of the last countries I’d incorporate in. Yes, there is a lot of services like Stripe Atlas which would be happy to incorporate you for $100-500, but usually they don’t even shed the light at all how you would do taxes. If you’re not a US citizen, that’s gonna be a huge pain in the ass. You either pay a lot of taxes or do shady funneling (like “I pay myself as another corporation in another country and leave $5 taxable in US to buy printer ink”). I’m still looking for viable options to get incorporates somewhere to be able to use Stripe, but the US is a no-go for me.

Yea, we try to make that clear with a notice at the top of every page. Sorry for the disappointment there. I sympathize — there are a lot of great startups and founders outside of the U.S. Unfortunately, the U.S. is the only place that has enough critical mass in terms of a startup ecosystem for the kind of standardization and resources you see here.

And yes, you are completely correct that taxation is a concern. Our advice to founders from outside of the U.S. is always to consult an attorney. I understand why that's not what people want to hear, but the reality is that's just what it takes to do it correctly. Anything else is just wishful thinking. Kudos to you for realizing what a lot of others don't!

These lawyers are literally killing us with the mess they invented; making us pay for maintenance of the same.

I know this is a topic in itself. But why are we paying them?

Nobody is forcing you to form a company. You can operate a business under your own name. Here in NZ it is called a 'sole proprietorship'. I'm sure it has its own name in the United States, but the fact remains. You can form a partnership with your other founders and operate as a partnership without forming a company. That's still how most law firms are structured, I believe. Doesn't require you to file anything or form anything or pay any fees, at least here and I expect also in the US. You want to go a step further, and take advantage of special legal rules. Those rules have a cost: you have to register a company.

Companies are creatures of statute. They do not come from the common law, or from custom. They didn't evolve naturally over time. They were invented. You can choose to form a company if you want the benefits that entails. But forming a company isn't free or completely painless. Still, it's a choice you get to make. Nobody can force you to form a company.

That being said, it does sound like it is a lot more complicated in the United States than it is here in New Zealand. Here the government tells you clearly how to do it, and it's pretty cheap and easy.

https://www.business.govt.nz/getting-started/choosing-the-ri...

Same name here, re "sole proprietorship" :) I imagine it's from our shared common law background.

I don't know anything about New Zealand law, but incorporating is also not a complex process in the U.S. Hopefully our handbook didn't make it sound like it was! It's more that there are various decisions to make in doing it, and different types of businesses might make different decisions. Perhaps in other countries, there is less variability around that though.

We need another thread about law.

We, speaking about the US, are a people who have decided to be governed by laws not by people. In order for that to work there must be a mechanism for citizens to enact the laws. And there must be a mechanism for people to use the law. In my opinion neither of these is true at this time. I see a vast number of laws enacted for the benefit of corporations compared to the benefit of people. We bail out banks. We add more work requirements to people who need food. We enact laws that are not the will of the people.

As to access to the law. Many people face evictions by landlords and corporations who can afford lawyers. If you cannot afford a lawyer you lose. So landlords can file a frivolous suit and you will almost certainly be evicted. There is no downside for the landlord. There are legal services to help, but they are overwhelmed by need.

If Apple for example, decides to cripple your phone battery, what is the real downside for them? At the worst they face a class action suit which will pay a law firm enough to make it worth the law firm's while and sell some batteries at cost to users. But the question is whether the punishment will stop them from the same kind of thing again. In my opinion "nope".

These are two examples but the problem is systematic.

This asymmetry in the ability to use the law denies common citizens access to the law. I have nothing against (most) lawyers, this is a problem with our system. We need to enact laws to change this. The real problem is that we are unable to do that. In my opinion.

These engineers are literally killing us with the mess they invented; making us pay for maintenance of the same.

I know this is a topic in itself. But why are we paying them?

Except engineers put a man on the moon.

Just to clarify, are you referring to a specific situation you're in, or are you referring to lawyers / messes in general?

I mean in general. If one takes a look at the operating system of, let's say the US; what would one see? A large part of it, is the mess I'm talking about.

Or maybe I'm wrong, because at the end of the day, someone has to pay the salaries: money circulation yade-yada, but on the other hand, big lawyers are filthy rich; what do we make out of that?

Hmm, I think there are probably areas where something like what you describe is true, but I don't think something like that is going on re startups in the US. From an attorney's perspective, most of the legal aspects to startups are pretty smooth and ironed out. Startup law is probably one of the more pleasant areas of law to deal with. And some startup lawyers do pretty well, but aside from the ability to invest in your clients (or join them as a GC), it's not known for being particularly lucrative. I.e. if you were a lawyer and your sole concern was making money from your practice, startup law is not the most obvious choice. But there is inherent complexity just because the system has to be able handle all the different types of scenarios that might come up.

That said, I have no doubt that there may be other areas of law or life that are the way they are due to factors like what you describe!

Thank you for understanding what I was on about.

> From an attorney's perspective, most of the legal aspects to startups are pretty smooth and ironed out.

This is where the system is doing some balancing; it's giving something now to gain much more later so it remains relevant.

The legal system is not a single entity acting in unison and deciding not to milk something now so they can milk it later.

Have you consider making the "handbook" available as a single file, i.e. a PDF containing the site contents?

Some folk find it easier to scroll through that way (it can still support header links, etc.), rather than having to click through sections of the site as required :)

That is on our list of TODO items! We were thinking more along the lines of ebook formats though, like Kindle and ePub. Would you prefer a PDF instead?

ePub. Definitely ePub (but really, why not both?). I have a million PDFs but for reading a book, ePub on either a Kindle or iPad is much more pleasant. I can read a PDF on the iPad or Kindle. But nothing beats reading something properly rendered for ePub: read, read, read, swipe left.

That said, for long ass manuals (the 5,062 page Intel® 64 and IA-32 Architectures Software Developer’s Manual comes to mind) then PDF. Also for published papers. But for books, ePub.

For example, the Pro Git book is available in ePub, PDF and mobi. It is regularly updated.

https://git-scm.com/book/en/v2

Yea, I have the same preferences as you :) We’ll try and do both!

As the parent you were asking, yes, I'd prefer a PDF - it's accessible, easy to generate and distribute, and ebook readers can handle them fine without you having to deal with typesetting for multiple formats.

Thanks, makes complete sense :) We'll work on that!

yeah I think pdf should be the priority given the audience.

Bit weird for you to answer a question that wasn't aimed at you... could've easily replied to my comment, or given me time to answer the question that was directed at me... ¯\_(ツ)_/¯

Noted!

Don't undersell that you have the perspective that comes from doing this for over a decade (YC S11?).

Excellent point! We are prone to forgetting about things like that :)

This is a great resource I wish I had before. As a bootstrapped founder, I would love to see more information on how to handle common scenarios bootstrappers face.

For example, one big issue I'm facing is how to handle the legal and tax issue of continuously depositing more and more cash into a business as it comes in from another income stream. This becomes really complicated not just from the perspective of how this affects other equity holders, but also the question of deducting the loss from my income while the company is not yet profitable.

LLCs and S-Corps are touched upon in the handbook but the issues around stock basis seems to really complicate the situation fast without providing much benefit for the deduction part.

I would think this would be a common issue since many founders aren't going to raise money beyond angel/f&f initially and will need to self-fund until they do or until they break even but I have yet to find good compliance resources for bootstrapping.

Thanks for the very useful information.

I agree with the sentiment already expressed that PDF format would be desirable (for me: to use the document in teaching entrepreneurship).

In general, could I suggest working on a flow-chart that embodies incorporation best practices regarding the typical order of things, a sort of "playbook"? Also, it would be fantastic to hear from successful startups which order to things they followed, and where they diverted from orthodoxy (e.g. Google skipped some steps in its IPO process, angering investment banks in the process but coming out of it fine). When you don't know what you are doing and you cannot buy top dollar advice, it's probably best to follow the well-trodden path, but most won't know what that looks like.

Another comment: It would be superb if someone collected similar information for other jurisdictions (London, Paris, Berlin, Talinn, Singapore).

Thanks! I'm very glad that the topic of PDFs came up here because we had thought about them and thought that most people would probably be happier with eBook formats. But given the conversation here, we will definitely be putting out PDFs as well!

And thanks for the great suggestions. You're right, the issue is completely that for someone new to all of this, it's not obvious what the well-trodden path is. We don't go up to the point of IPO, but at least for formation, we have the process covered in our first handbook (the one we posted today is our second one) here: https://handbooks.clerky.com/legal-concepts/formation#proces.... I agree a flow chart would be helpful!

Also, I completely agree about other jurisdictions. The issue, I think, is really scale. Something like this handbook, and Clerky in general, is only possible because there is this critical mass around Delaware and startups. As it is today, that critical mass is somewhat unique from what I can tell. My hope is that technology will help reduce the level of critical mass that is necessary, so that things like Clerky and this handbook can exist for more situations.

Thanks! You're right, this would be a good topic for us to cover in a subsequent handbook — in the meantime, if it's helpful, I think the way I've seen it done is pretty casual, where founders will cover expenses and then later have the company reimburse them when it has more funds. But that's more for the scenario where the bootstrapping phase is a relatively short and temporary (or at least the part of bootstrapping where you have to fund from other sources is).

If you think you might be funding from other sources for quite a while (sounds like that might be your situation), then yea, the tax considerations become more relevant and important. Another common approach is to put the money in on a safe or convertible note, though that doesn't help with pass-through taxation.

I'll be honest these all sound like very situation-specific tax questions for an accountant (or even tax attorney), and not something any founder should be wasting their time learning.

What makes you feel this example is a very situation-specific question rather than a common issue a bootstrapped founder might face?

The "right move" if there even is one will likely depending on 1) where that other income stream comes from - W2 wages, investments, wholly-owned business profits, partnership profits, etc; 2) separately from 1, whether you have other forms of income coming in; 3) are you married and are they part owners? explicitly or via marital property? 4) is anything securing the bootstrapped business that might be affected by paper losses? And I'm sure half a dozen things I'm not thinking of because I'm not an attorney or accountant.

Even if you can generalize a lot of these, this seems like exactly the sort of thing that should be outsourced to professionals who do it every day rather than wasting cycles becoming an expert in the minutia of state and federal tax laws.

I agree that there's many factors that could affect the "right move" and those should likely be handled by someone qualified.

That said, I think the situation of someone bootstrapping from a job or from another business income (freelancing, agency, etc) would be common and similar enough for some general options and traps to avoid.

I myself have had to learn some very hard lessons on what to do and what not to do. Not because I didn't consult attorneys, tax attorneys, and tax advisors (I did), but the cost of their services have far exceeded the value I could have learned from some online resources. There's also a level of trust you have to put into the specialists to give you the right advice, and that too has been an expensive minefield at times.

Perhaps I'll be the one to write about my experiences here once I'm done going through them ;)

Such an excellent resource. Makes me wish there was an equivalent geared toward small business as opposed to startup operation

Thank you! Yes, I've always felt it would be great if all types of businesses had the same resources that startups have. We get into this a bit in the handbook, but the lack of that is primarily because regular small businesses are a lot more varied in how they operate. My hope is that all types of businesses will trend toward the type of standardization that's in the startup world, because it really does reduce a lot of friction!

Nothing to add, other than that Darby and the team have been wonderful for the past decade or so and I really appreciate them and the product! If you're thinking of incorporating, I haven't had a single issue with Clerky yet. It's incredibly boring, in the best way possible.

Thanks so much for the kind words Greg!

It's me or it misses the SHA (Shareholder's Agreement) topic? [1]

[1] https://en.wikipedia.org/wiki/Shareholders%27_agreement

It’s not you — this handbook is purely about incorporation, and doesn’t go into what happens after incorporation. We go into that a bit in a handbook we wrote previously, here: handbooks.clerky.com/legal-concepts/formation#shareholder-agreements

Thank you. Another question: do you have some recommendations about Delaware vs. Wyoming?

Yup! For startups of the type we’re talking about, definitely Delaware :) We go into the reasons behind that here: https://handbooks.clerky.com/startup-incorporation/where

If you’re building more of a small business, I could see more of a rationale for Wyoming, but that’s getting outside of my area of expertise.

Would love to see some info on minority protections.

E.g. establishing a business with two other founders, who were previously in another business relationship and have a greater bond.

Good idea — this sounds like a good topic for us to cover in a future handbook, perhaps about the post-incorporation setup process, where you're setting up the board, issuing stock, etc.

"establishing a business with two other founders, who were previously in another business relationship and have a greater bond."

Especially if this is your first startup and you actually care about the business, just don't...

No handbook needed...

There's a question about whether one would be the third wheel or marginalized, and near-term you wouldn't be able to answer that with 100% confidence, but you might get sufficient confidence.

Early good signs include (if pre-seed) all three of you getting the same equity deal.

Then I'd consider things like how candid, honest, and thoughtful they are.

But if the startup's premise or initial execution looks ethically questionable, run away.

(For example, I wouldn't trust a situation where the other two might as well say "We're exploiting users or gig workers to their disadvantage, ignoring regulations, self-dealing, doing pretty much anything in cryptocurrency/blockchain, and/or building an investment scam house of cards that we'll cash out of before anyone realizes... but the two of us totally wouldn't collude to screw you, even though we'd have similar incentive to also do that.")

All the guides I’ve ever found are for American companies. Does anybody know of a good resource for Canadian startups?

Submitted on Show HN 8h ago https://www.getsiva.co/

just saw after reading your comment, pretty funny

I learned the hard way: Incorporation seems easy but man can it be a huge pain when done poorly. Before I do it again, I'm reading this guide.

One recommendation: Add a section on winding down a corporation. This is difficult and easy to get wrong and can be quite costly when things do go wrong :)

Thanks for bookmarking :) It sounds like the last section in particular, the one about the types of information that go into a certificate of incorporation, may be particularly of interest in that case.

And yes, you're exactly right about dissolution — it is easy to get wrong! Incorporation lends itself much more to standardization because everyone is starting off from the same place, which is nothing. By contrast, dissolution depends heavily on the current state of the corporation, which of course differs widely. Hopefully we'll be able to add some content to cover the simplest scenarios at some point though.

Any anecdotes on how wrong incorporation can go and why?

This looks incredibly useful. Is there a version for models outside of the US coming, perhaps UK? Or any recommendations for an equivalent service folks have used?

Probably not from us, unfortunately. I hope more resources like this can be put out there by others for other jurisdictions though!

Why is Delaware the go to for startups, and most big companies?

Ask and ye shall receive: https://handbooks.clerky.com/startup-incorporation/where

:)

Hello from your old Burlingame neighbor :) (Tesorio)

Wow, good to hear from you! We were sad to leave — are you all still there, or did you move?

How does this compare to capbse?

I can’t speak to Capbase in particular, but in general, Clerky is pretty unique in that we’re run by startup attorneys. Partially as a result of that, we have a much stronger focus on helping people get paperwork done in a way that will survive legal due diligence (basically, review by investor and acquirer counsel). Also, our software in general is more focused on helping people get legal paperwork done, as opposed to any of the many other aspects of running a startup.

Very much US focused. Things are different elsewhere.

Here in Germany there are a few things to be aware of:

- not incorporating doesn't mean you are not a company. The second you shake hands with someone you have effectively incorporated and this can get you into a lot of legal trouble if you are not aware. Things like taxes, ownership, etc. all become applicable. Fine as long as there are no conflicts or liabilities but it's a good reason to incorporate sooner rather than later.

- German bureaucracy is a PITA. It's neither free nor fast and absolutely everything is complicated. There are low cost options (like an UG) but what nobody tells you is that there are all these little costs that add up. Plan on spending around 3000 euro in your first six month on just getting set up with a legal entity. There are notaries, accountants, tax offices, registries, and none of that is for free. And you need a bank account with funding to pay for all this and some reserves for future bills. And that bank account is also not free. Plan for the process to take up to four months end to end. Faster is not impossible but you really need to be on top of everything for that. I've done it twice. Four months is what it took between all the gotchas, chicken egg problems, people not being responsive, etc.

- If you are going to do business, you need to have completed this process. Things like invoices, investments, etc. all require this. Also paying for stuff is a lot easier if you have a company bank account. And you don't want to mix business and private financials and liabilities.

- If there are multiple people involved, take care of things like intellectual property, NDAs, share distribution, etc. These are all potential points of conflict if things go south. Make sure you have signed agreements. If you don't, the law simply assumes some defaults. And you probably won't like those. And let's be honest, your startup will likely fail and that usually involves a level of founder drama. Write it down ASAP.

- Limited liability in Germany is very limited. You are personally liable for a lot of things. Like making sure your company is run properly. Germany has lots of lawyers and they'll go after you if they smell money. Things like imprints on websites are important or GDPR or privacy.

- The only thing that's harder than incorporating in Germany is getting rid of your legal entity in case it fails. Nobody talks about this but of course most start ups fail and this is as much as a PITA as starting your company.

- The tax office assumes you are profitable even when you are not. So, you are potentially on the spot for a lot of stuff unless you get very pro-active on this. Things like tax pre-payments, salaries, social security, etc. This really sucks if you have no funding yet.

It is completely U.S. focused — we tried to be very clear about that :)

Thanks for sharing this information about how it works in Germany! There definitely needs to be more content out there about how things work in other countries. I have to say I feel bad for startup founders forming a German entity. It sounds kind of painful...