One of the early tasks that we took care of it, during the first couple of weeks we started, was the registration of our company as a C-Corporation. To my surprise I ended up putting a lot of hours into research and making the choices that comes with the legal process of registering a company. At first glance, it seemed to be an extremely simple task but then as we went through it there were number of questions that we needed to answer and it took much longer than what I expected to come to a conclusion that made sense. In this post I will summarize what we learned, decisions we made and our logic to make those decisions. I summarized them in the form of Question and Answer so that it is easier to glance through and find the specific questions you are interested in. Intuitively you would think registering a business is all about choosing the name. It is of course required and is a hugely sentimental step. However there are three other more serious questions that you need to answer when you are registering your business legally. Here they are in the order we did research and answered:
1. Do we need to register our start-up legally?
When it comes to registering the company, the first question that we needed to answer was whether we actually need to register it as a legal entity. Many start-ups go through the product development phase without any legal status. As a matter of fact, many early/idea stage investors, VCs, and incubators prefer the start-ups not to be registered. Mostly because when it comes to bringing on an early investor they would rather to have control over the type of shares being issued and so on. In their application Q&A section they ask the applicants not to register the company prior to applying for their program. You can read about their reasoning on the Q&A section of their website under the "sustainability" section. Despite the investor community and incubators' reasoning there are benefits to thinking about this question. Fore one, it forces you and your co-founders to discuss roles and responsibilities. Also, as you will see later in this post, to register your business you need to identify number of shares to authorize and issue and to whom they are assigned and that is a great conversation to have with your co-founders.
What we did: After reading the descriptions of the options available and comparing them based on the business structure comparison table provided by San Francisco Business Portal we disregard Single Proprietorship, General Partnership, Limited Partnership, and Limited Liability Partnership (LLC). Then we had to choose between S-Corporation and C-Corporation and we chose to register the company as a C-Corporation for the following reasons:
2. Do we register the company on our own or use an expert help and/or advice?
You can certainly register your business yourself. You need to choose a name, check whether it is available, fill the forms required, get the permits you need (depending on your industry, city, country, ...), and file all the required documents. You can also hire a lawyer to take care of the process for you. Third alternative is to use companies like https://www.legalzoom.com or https://www.priorilegal.com. These are legal services on-demand platforms supported by lawyers and accountants if needed.
What we did: We chose to use Legal Zoom for two reasons:
3. How many shares, at what value and which class of shares to authorize and issue?
In my point of view, this is the best and most valuable section of this post if you are about to go through the registration process of your company (yeah, your welcome!). As you go through the Legal Zoom process (I'd expect it is the same if you choose to go through the process in any other ways), you ,must answer four questions:
What we did:
Before I wrap-up, I have to say that registering your legal structure will cost you. We paid around ~$350 to Legal Zoom for the initial services (including checking the availability of our name, filing with state and federal governments, obtaining our EIN number that is needed for hiring employees). We also paid an additional ~$150 for an add-on service to make Legal Zoom our authorized agent. This means they give us a calendar and an alert system to remind us of the frequent actions we need to take to stay compliant with the legal requirements of being a Corporation (e.g., annual reports, taxes, etc.). One last expense we incurred was an additional ~$350 for Legal Zoom partners to file our company's annual taxes. You can choose not to do the last two options and either work with another company or take care of it on your own. We chose to pay for it to make sure we do not need to worry about any legal and compliance issues and focus on what matters the most which is developing our product. Also be aware that you will receive bunch of letters form the government and some commercial calls form accounting firms and Dun and Bradstreet to sell you more stuff. We chose to rejects them all and stay focused on our product development priority and minimize noise.
Hope this post saves you some time as you go through the registration process of your start-up. If you are at that stage, let me just congratulate you. When the registration was done and we received our official documents in a nice package from Legal Zoom, it actually made us really happy and felt great. We knew that we are serious now and to me that was the most important reason we registered our company.
6/13/2016 11:16:53 pm
Registering the business and choosing what kind of entity to establish are just the tip of the iceberg of having a legal business entity to operate.
6/16/2016 11:58:07 pm
Yes, that is true. The maintenance and growth of the business is a lot of work but it will be totally worth it once you see and experience the fruits of your hard work.
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