Forming a legal entity (part 5): Filing incorporation papers

CAVEAT: I am not a lawyer, and I got legal advice before making any of the choices described in this post. If you are making similar choices, you should definitely should do the same.

Filing incorporation papers was a big moment.  It was when all the dreaming, planning, and preparations became for real.  It also involved a lot of reading, learning, and making decisions which would be with me for a while, and could be expensive to unravel if done badly.  However, before it could happen, there were a few questions I had to answer.

The most immediate was what kind of legal entity to create.  While there are a ton of options, the ones which were on the table for me were: a C-corp (a traditional corporation), an S-Corp (essentially, a C-corp which jointly files taxes with the owner/s), an LLC (a roll-your-own legal entity for small business), or a Sole Proprietorship (a formality with little or no legal protection for your assets).

In my case, I knew that I didn’t plan to hire employees soon, nor did I expect to raise money soon.  Therefore, the tax benefits of an S-Corp made it more attractive than a C-Corp.  There was also the fact that I could “upgrade” from an S-Corp to a C-Corp by filing a simple, single form in case something changed with made a C-Corp more desirable.

I didn’t choose an LLC because, according to my lawyer, their open-ended nature makes them more complicated for investors/acquirers, and there weren’t any substantial benefits for me over an S-Corp.  I also didn’t choose a Sole Proprietorship because I wanted more legal separation between my assets and the company’s assets than that offers.

I also needed to decide which state to incorporate in.  Surprisingly, there’s really nothing preventing you from incorporating in whatever state you want.  The reasons to choose one or the other basically come down to how expensive it is, and, most importantly, what laws that state has regulating businesses.  The most popular state for tech-startups, because of its business-friendly laws, is Delaware.  However, incorporating out of state has a number of extra costs associated with it, and it’s always possible to re-incorporate in another state should be it become necessary (e.g., if an acquirer doesn’t like something about how your company is set up).

So, I decided to just stick with California (where I lived at the time) to avoid the extra expenses.  Since I’d be primarily operating in CA, I’d have to file for a business license there anyway, and, for what I expected from my business, it didn’t make enough difference to warrant the extra expense of officially incorporating out of state.

There were a bunch of other little things, and perhaps I’ll write about them in the future, but they were all incidental and easily resolved once those two big questions were settled.

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