How to Incorporate a Startup Business

Incorporating a startup refers to the process of setting your business up as a formal legal entity, distinct from its owners and founders. The process of incorporating any business involves several steps and decisions. For clarity, we’ve compiled a succinct step-by-step process for establishing a startup incorporation.

Step by step guide to startup incorporation

Step 1: Choose a business entity

The initial step in the process of incorporating your startup is deciding which will be your preferred legal business structure. The subsequent tax designations available to you will differ depending on which structure you opt for, but we’ll go through your tax options in more detail in step 2.

For startup ventures, the possible legal structures are the following:

• Limited liability companies (LLCs)

• Corporations

• Benefit Company

• Benefit Corporations

• Nonprofit Corporations

Among these, the most common legal structures for startups are LLCs and corporations. Below is a brief description of both:

• Corporations

A corporation is a legal business entity which is created through registration, then subsequently owned by shareholders and led by a board of directors. Corporations are formal, fairly inflexible legal entities, and are obliged to abide by complex operating protocols.

• LLCs

An LLC, or a limited liability company, is a relatively simple business structure in comparison to corporations, providingliability protection for owners, thereby protecting their personal assets.

Step 2: Choose a tax structure

Linked to your choice of legal entity is your choice of tax structure. Assuming you opt for an LLC or corporation, there are four basic tax structures available to you, two of which are available only to LLCs.

The tax structures available to LLCs are:

• Disregarded entity

• Partnership

• C corp tax

• S corp tax

The tax structures available to corporations are:

• C corp tax

• S corp tax

Brief descriptions of what these different tax structures entail are outlined below:

• Disregarded Entity

Disregarded entity is the default tax structure for LLCs with a single owner. It is essentially a tax structure which allows profits to be delivered directly to the owner, who then reports his/herincome as a self-employed individual via a personal tax return.

• Partnership

LLCs with multiple members and owners will opt for a partnership tax structure. This structure involves a pass-through of profits to the owners who each individually file tax returns with their respective incomes.

• S Corp

Both LLCs and Corporations can opt to be taxed as S corps. The s-corp tax structure involves a company's income or losses being passed through its shareholders for tax purposes. This essentially means LLCs and corporations who are taxed as S corps can evade paying corporate income tax. Instead, the owners of the company will pay tax in two parts: salary and distributions.

• C Corp

Again, both LLCs and corporations can be taxed as C corps. The C corporation tax structure involves taxing corporations on their profits, minus any losses or deductions. Shareholders and owners of a C corp only pay income tax on dividends.

Step 3: Choose a location

Once you’ve decided on your legal entity and tax structure, the next step is choosing where you will incorporate your startup. This is an important decision as it will alter your ability to raise funds, how you organize tax andaccounting, and may even have legal implications for your company.

In the US, startups are typically incorporated in either the CEOs home state, the state of their investors’, or Delaware.

Delaware is a hugely popular location for incorporating a business due to its superior court system, clearly outlined and favorable corporate law system, not to mention its attractive corporate tax laws.

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