What incorporation options are available to startups?
C Corps, S Corps, and LLCs are the most commonly used options. These options differ with regard to tax consequences and investment restrictions, but most venture and institutional investors favor the C Corp, which allows for an unlimited number of shareholders and provides for separate classes of stock (allowing for various levels of investor preferences, protections, and share valuations). The C Corp is also the easiest type of entity to take public in an initial public offering.
There are additional considerations, and it is advisable that you discuss these options with your attorney, who will inform you of the consequences and restrictions in force at that time, and for your particular situation. One must also consider in which state it would be best to incorporate. Delaware is by far the most common, but again, discuss this with your attorney.
Your attorney will also familiarize and assist you in the development of two incorporation documents that will be required by state and federal laws.
Incorporation documents that detail the rules under which the entity must operate:
- Articles of Incorporation
The primary rules governing the management of a corporation in the United States and Canada, and are filed with a state or other regulatory agency.
- Corporate Bylaws
Drafted by a corporation’s founders or directors under the authority of its Articles of Incorporation. Bylaws vary widely from organization to organization, but generally cover topics such as how directors are elected, how meetings of directors and shareholders are conducted, and describe the structure of the organization’s officers and their duties.
Prior to your engagement of a local attorney, you may want to visit Startup Lawyer, a well-known blog site that provides insight and commentary on a wide range of legal and financial-related issues, including the selection of an incorporation option. A search function on the site allows you to locate subject matter content from its archives.