Ever wonder what’s required or recommended to set up a new company? Yes, incorporation is an obvious first step, but there is much more to delineating a company as a separate legal entity than just filing registration papers with a state. Depending on the type of entity you want to set up and the industry you’re in, some aspects may change, but the checklist below should be fairly universal and standard. Check it out:
1. Choose Entity Type. Are you a sole proprietor or partnership? Either way, you’ll then need to decide whether to choose an LLC or a C Corporation, the two most common types of entities. An LLC is a hybrid between a partnership and a corporation, with limited liability, and is easier to maintain. A corporation can issue shares/stock and may be a better fit if you are in the tech space, but it does have many compliance features.
2. Choose State of Incorporation. Where do you live or work? Will your company have offices? Will it look to seek outside funding (angel/venture capital)? Or will it be a small brick-and-mortar business? While Delaware is the top destination for incorporation, it should not be considered the de facto state of incorporation without a thorough review of your goals.
3. Designate a Company Name. Irrespective of what name you choose, you need counsel to conduct due diligence on any existing trademarks and domain names. Failing to do so may result in serious adverse legal consequences. The last thing you want is to be dragged down in court when what you really should be focused on is your company’s growth.
4. Identity Founders, Ownership Percentages. If you have partners or “co-founders,” you will need to memorialize this. You’ll also need to designate ownership percentages, with corresponding founders shares if the entity is a C Corp. If you are issuing shares, are there vesting proscriptions applicable to those shares? Many founder teams seek to incentivize their performance over a specific duration of time with a vesting schedule so not all stock is transferred at once.
5. Founders Roles, Responsibilities and Expectations. The number of instances partnerships have gone to court over these issues (often under breach of fiduciary duties) is astounding. What are the founders’ roles and expectations of each other? What titles and work commitments are in place? Is there a hierarchy (there should be)? Are any founders financing the new company? How does this impact expectations?
6. Articles of Incorporation/Formation and Bylaws. You will be filing with the state of your choice, articles or certificate of incorporation/formation, designating the name of the new company and the number of shares authorized to issue with a par value per share (if C Corp). Often, you’ll need a registered agent to serve as a local designee in that state. You will need bylaws, in addition to organizational consents. All of these documents serve two purposes: (1) provide for clarity in terms of management and operations of the new company; and (2) comply with state law to show the world the new company is a separate legal entity and not a mere extension of your personal conduct and activities. On this note, you should create an annual budget for entity registration/registered agent and annual report expenses that will come up once a year in the state of incorporation. This also includes franchise taxes payable to the state.
7. Founder’s Stock Purchase Agreement (SPA) and Option Pool. If C Corp., presumably you will be issuing shares to yourself and your co-founders. This is subject to an SPA, which should comply with or be exempt from, state and federal securities laws. You would be purchasing the shares from the company, either through a monetary payment or the assignment of technology. If you want to issue shares to early employees or key individuals to incentivize their work, you are required to have an option pool that designates a portion of the authorized shares for this purpose; the same goes for investors. Don’t forget that 83(b) election under IRS rules which allows for taxation at par value of shares issued as restricted stock. A strict 30-day rule applies for mailing an 83(b) election notice after the date of restricted stock issuance.
8. Operating or Shareholder Agreement. If an LLC, you need an operating agreement. If C-Corp, a shareholder agreement.
9. Intellectual Property. You will very likely need to file a trademark for your name and any tagline, and patents for any differentiated technology, software or methods. The U.S. is essential, and depending on your goals, Europe and other regions as well. You may need a Proprietary Inventions Agreement to protect your inventions from yourself and your co-founders, and to assign them to the Company.
10. Employment or Independent Contractor Agreements. If you’re hiring employees or seeking services from independent contractors (ICs), you need contracts. For employees: role/title, compensation structure, expectations, termination (New York is an “at-will” state), and any unemployment benefits/workers compensation compliance. For ICs, you would outline the services to be rendered and expectant results, compensation, disclaimer of any tax or unemployment liability, among other critical provisions. Non-disclosure and non-competition covenants should be standard and included. ICs will often include consultants and advisors.
12. Accounting and Tax Requirements. You do plan on making money, right? Then you need an accountant and likely a bookkeeper. All those federal, state and local tax requirements will creep up on your soon enough. You may need to make quarterly payments.
13. Conducting Business. Plan on operating in one state or multiple states? You may need to separately register your company in different states to conduct business.
14. Insurance and Risk. This is highly dependent on the industry your company operates in. If you’re a boutique hedge fund or law firm, you should absolutely make sure any insurance requirements are met, in addition to any risk mitigation procedures and protocols. If you’re a retail or restaurant establishment, other insurance procurements may be necessary.
15. Secure a Federal EIN and a bank account. For tax purposes, the federal government requires an EIN. The EIN will also enable you to open a bank account.
While your new company may have other legal matters and requirements to address, this checklist should serve as the basic architecture to get started. Starting a new company can be one of the most exhilarating and rewarding experiences of your life, but knowing the practical nuts and bolts of setting it up and protecting yourself will be a key feature of your new enterprise’s success.
Sheheryar T. Sardar, Esq.
Sardar Law Firm LLC
New York, New York
Core Practice Areas: Technology, Corporate & General Counsel, Startup Law, Project Finance, VC/PE, Arbitration/Mediation, Entertainment, and Human Capital
Disclaimer: The contents of this article shall not to be considered legal advice or to create any lawyer-client relationship. The article may contain attorney advertising.