Gust Guide To Incorporation

gust-guide-to-incorporation

User Manual:

Open the PDF directly: View PDF .
Page Count: 28

Download
Open PDF In Browser	View PDF

Gust’s Guide to

Startup Incorporation

Contents
01

Introduction

What Is a Company &
Why Do I Even Need One?

Which Type Should a HighGrowth Startup Choose?
The startup founder perspective

QSBS

Types of companies

The investor perspective

Reason 1: Limited liability

Why Delaware?

Reason 2: Collecting and owning assets & IP

Reason 3: Dividing and distributing ownership

When it’s time to form a company

LLCs & Common
Corporation Types
LLCs

C-Corporations

Benefit Corporations and Certified B-Corporations

S-Corporations

How Incorporation Works

How Company Formation Works

Corporate bylaws

Moving from incorporation to ownership

Issuing stock

Foreign Qualification

Gust’s Guide to Startup Incorporation / 2

1. Introduction
Welcome to Gust’s Guide to Startup Incorporation! If you’d like the easy way
through this process, close this pdf and direct your browser to gust.com/
launch, where you can apply to join our Company-as-a-Service™ platform,
Gust Launch, and take care of your incorporation the right way in just a few
minutes. For a thorough account of the possibilities and potential concerns
your startup will face as it chooses a path through the incorporation process,
read on.
Incorporation is a term that refers to starting a company. When it’s time
to engage in business activities, it can be tough to assess which sort of
company provides the most benefits to a potential business, and to find out
specifically what these costs are ahead of time.

1.
2.
3.

What is a company and why should I create one?
What type of incorporation is right for my company?
How do I go about incorporating my company?

This book was written specifically for people who plan to build high-growth
startups1, such as the Airbnbs, Ubers, and Facebooks of the world. It is the

To answer these and other questions, we’ll present everything you need to

product of research by Gust’s legal and product experts, and sets out to

know and explain how each piece of information relates to your situation: a

answer the following questions, which anyone starting their first (or second,

founder looking to create a company that is optimized for stability, growth,

or tenth) business will have about the process:

and investment.

1 Not sure if you’re starting a high-growth startup? It’s likely that your company is a high-growth startup if you are expecting to do any or all of these things: hire employees,
issue equity, seek professional investment, grow rapidly, and exit via either an initial public offering (IPO) or acquisition by a larger company.

Gust’s Guide to Startup Incorporation / 3

2. What Is a Company? Why Do You Need One?
In the simplest terms, a company is a legal designation that you can

The first two are simply ways for a person or a group of people to announce

create by telling your various governments (state, local, and federal) about

that they will be doing business under a name other than their legal name.

your intention to do business under that name. Within the category of

For example, a slushy salesman named John might do business as the sole

“companies,” there are several kinds of entity, which can be understood

proprietor of John’s Slushies. If he had a partner, Maureen, they might do

as a handful of categories (with more specific types inside each category).

business as The John & Maureen Slushy Partnership. In either case, John

Some of the most common categories are:

(and/or Maureen) have no protection as actors in situations involving the
company: they are the company and are personally responsible for any

1. Sole Proprietorship

2. Partnership
• General Partnership
• Limited Liability
Partnership

debts or obligations they enter into as the company. 2
Because companies often work on scales much larger than individual
people do, the law permits the creation of companies which exist separately
from the people who own and/or run the company from a legal standpoint.
The rest of the types of companies above have this trait, which enables the
law to consider them separately from their owners, employees, or operators

3. Limited Liability Company
(LLC)

4. Corporation

in some or all of the following ways. Each of these effects can separately be
a compelling reason to create a company.

• C-Corporation
• B-Corporation
• S-Corporation

2 This paragraph specifically concerns General Partnerships. In a Limited Liability Partnership, all limited partners will be protected by the same limited liability functions as
partners in an LLC, while any general partners will be treated as members of a General Partnership, i.e. they will not receive protections.

Gust’s Guide to Startup Incorporation / 4

REASON #1

Limited liability

LLPs, LLCs, and corporations are meaningfully

So, if a court judges against your startup for

distinct entities from the people who own them,

some reason in a suit, or if you find yourself

but can mostly do the same things (like enter into

unable to fulfill contracts—whether they’re

contracts or buy and sell products). But while a

with employees, contractors, suppliers, or

person who is doing business activities as herself

customers—the courts or the other party in the

is personally liable for them (and their effects),

contract won’t come after you and your personal

members of a corporation are not personally

assets. Instead, the corporation is responsible

liable for the activities and agreements made by

for bearing any penalty.

the corporation. This is called “limited liability”
and it is one of the most compelling reasons to
form a company.

Gust’s Guide to Startup Incorporation / 5

REASON #2:

Collecting and owning assets & IP
Like liability, many of the benefits of incorporation are tied to the company’s
status as an independent entity. This entity can own assets like capital,
equipment, and intellectual property (IP). All of these assets increase your
company’s value, especially from the perspective of future investors and
existing shareholders.
The last kind, intellectual property, is especially crucial for high-growth
startups, which tend to focus on developing disruptive new technologies or
techniques (rather than reusing established business models, as many other
small businesses do).
Just like with debt, you want ownership of these intellectual property assets
to be the property of the startup, not the individual founders. In this arrangement, each founder’s contributions will remain with the company even if
they leave, which has two big benefits: first, it means that nobody can hold
the company’s future hostage purely on the basis of their past contributions,
and second, it provides a sensible justification for each contributor’s equity

If you do not protect your IP early then you’ll introduce downstream risks on

stake. There’s also a financial benefit, which is that the value created by the

future financings and/or in the market through competition. Keeping that IP

intellectual property can be considered part of the value of the company,

within the walls of an incorporated entity reduces risks if done properly, and

which is the main mechanism investors use to decide how much money to

they can benefit from corporate laws that have already been built around

put into a startup.

scenarios like this.

Gust’s Guide to Startup Incorporation / 6

REASON #3

Dividing and distributing ownership

The assets and revenue created and owned by a

In all of these ways, the relevant parties

Investors usually put money into companies in

company as well as any investment it takes in all

understand the value as being divided up

exchange for some amount of equity. Employees

contribute to the company’s overall value. This

according to shares. A business entity, unlike a

often receive equity as an incentive to work hard

value manifests itself in a few forms—corpora-

person doing business without forming a new

on behalf of the company. Company founders

tions may distribute some profits to sharehold-

legal entity, can have multiple owners, whose

retain large portions of equity in exchange for

ers as dividends; the assets may help justify a

ownership (also known as equity) is divided

their hard (and usually free) work before the

valuation in the minds of investors; capital con-

into an arbitrary number of pieces. This concept

company had any real value. The existence of

tributed by investors might be added on top of

is legally complicated, because equity can be

a legal entity that can have many owners makes

a valuation as a representation of the company’s

distributed in many forms depending on the

it possible to articulate all these relationships

overall worth.

company’s type, structure, and bylaws, but in

and make sense of how they deliver value to

all cases the point of the division is to explain

each party.

who owns the company and how much of the
company each shareholder owns.

Gust’s Guide to Startup Incorporation / 7

When it’s time to form a company
Incorporation can be both expensive and confusing, which is why many founders delay the process. So
when exactly should you incorporate your startup? The short answer is: as early as possible.
Specifically, you’ll want to be incorporated as soon as (or before) you have any of the following:

Any intellectual property

A partner

A customer

An employee

A grant

Any potential liability

An investor

A need for a bank account

Any assets

(including trademarks or
computer code)

For reasons that vary case-by-case, every event on this list separately amounts to a need for an entity
separate from yourself that can be held liable in case of debt or penalty, can own an asset, or can
distribute shares of itself to investors.

Gust’s Guide to Startup Incorporation / 8

3. LLCs and Common Corporations

As we mentioned in the previous chapter, companies come in many types.

The four most popular of these are an LLC or three slightly different types of

For high-growth startups in the United States, there is really only one ideal

corporation: C-Corporation, B-Corporation, and S-Corporation.

choice (a Delaware C-Corporation3), but there are technically many options.

3 It’s important to note that most types of companies are registered with state governments, not the federal government, so there may be slight differences in the ways these
entities behave on a state-by-state basis. We’ll discuss this a little in chapter 4, under the heading “Why Delaware?”

Gust’s Guide to Startup Incorporation / 9

(LLCS)

Limited liability companies
simple

income (without being taxed at the LLC level) to

arrangements in which every

its owners, who then treat it as taxable personal

owner is a partner. An LLC

income. Whether or not any money actually

basically provides the limited

passes from the LLC to the individual, the

liability protection for which

individual owner must pay income tax on their

people form companies, but does not do much

share of the profits (or losses) generated by the

else. Each company which chooses to incorpo-

LLC. Every year at tax time, every LLC must send

rate as an LLC drafts an “operating agreement”

every one of its members (and the IRS) a Form

among the owners, which contains all the rules

K-1, showing that member’s personal share of

by which the company operates. This operating

the company’s profit or loss.

LLCs

are

extremely

agreement is similar in function to the bylaws of
a corporation, but due to the bespoke nature

The features which tend to make LLCs popular—

of each LLC’s structure, there are no standard

namely, their pass-through taxation structure

components for this document (although there

and their liability limitation without the need for a

are common features).

full corporate structure—make them well-suited
for people who simply want a business entity

LLCs are also not independently subject to

through which to do business. For high-growth

corporate tax: an LLC is effectively invisible (for

startups, they are generally not well-suited, for

tax purposes), and “passes through” any net

reasons we will address in subsequent sections.

Gust’s Guide to Startup Incorporation / 10

C-Corporations

C-Corporations are the most popular type of American cor-

its shareholders (known as “distributions”), the shareholders themselves are

poration. They are different from LLCs in a few ways. The

required to pay personal income taxes on the amount they receive.

first is that, rather than an operating agreement, corporations
abide by bylaws written into their articles of incorporation, for

The third defining feature of a C-Corporation is that it comes with an out-of-

which there are many regularized and standard structures.

the-box mechanism for distributing equity. This is called stock. At incorpora-

Due in large part to their popularity, C-Corporations enjoy the benefit of

tion, corporations authorize a certain number of shares of themselves (which

having both state and national courts which are familiar with their features

can be increased at any time) and can subsequently issue these shares to

and behaviors, so the operating a corporation as it scales is somewhat

their owners (such as founders and investors). Because this instrument is

easier and less lawyer-intensive than other types of companies.

well-understood, this is easy to accomplish without involving lawyers.

The second key difference between a C-Corporation and an LLC is the way

C-Corporations are by far the best-suited corporate entity for high-

in which it is taxed. C-Corporations are subject to a separate set of taxes

growth startups. We’ll specifically address the reasons why this is so in

than their owners or operators are. A C-Corporation pays annual corporate

subsequent chapters.

taxes based on its taxable net income, and then if it distributes any money to

Gust’s Guide to Startup Incorporation / 11

(B CORPS)

Benefit Corporations and Certified B-Corporations

Most corporations are generally assumed to have the

with a B-Corporation). This entity is not available to companies in all states,

primary goal of maximizing their value for shareholders. In

and generally differs primarily in ways that are related to its public benefit

the past few decades, many companies (especially startups)

goals, such as accountability to shareholders and transparency—for most

have shown interest in expanding their range of aims to

other structural and tax-related concerns, it is similar or identical to a

include various kinds of altruistic and socially positive

C-Corporation.

goals—traditionally solely the concern of nonprofit organizations—to which
the law refers generally as “public benefit.”

These companies can also (optionally) choose to become Certified B Corporations, which is a third-party certification offered by the group responsible

Corporations who seek to include some public benefit in their purpose

for the creation of the Benefit Corporation legal entity and is not a type of

have a legal entity option called a Benefit Corporation (sometimes confused

corporate legal structure in its own right.

Gust’s Guide to Startup Incorporation / 12

S-Corporations

Some C-Corporations can optionally file Form 2553 with the

The rules that determine which businesses can elect to be treated as S-Cor-

IRS, which changes the C-Corporation into a “Small Business

porations are somewhat restrictive and a little confusing, but in practice end

Corporation,” popularly known as an S-Corporation. S-Cor-

up working for most high-growth startups. To be eligible, a company can’t

porations are essentially just an election for pass-through

operate within certain industries, and must have fewer than 100 sharehold-

taxation status, and are perhaps best considered a subcat-

ers (although a married couple or an estate can count as a single sharehold-

egory of C-Corporation designed to compromise between the corporate

er), all of whom are individuals (or “certain trusts” and estates) rather than

rigidity and standardization of a C-Corporation and the tax-invisible nature

corporations or partnerships, and all of whom are residents of the United

of an LLC.

States. In addition, an S-Corporation can only have one class of stock.

Gust’s Guide to Startup Incorporation / 13

Business structure comparison
SOLE PROP.

GEN.
PRTNRSHP

✓

Moderate

Difficult

Moderate

Extensive

Moderate

Few

✓

C-CORP

B-CORP

LLC

Offers liability protection

✓

Can own assets & IP

✓

Can grant stock

✓

Owners can split profits/losses w/
business

✓

Owners can report profits/losses on
personal tax returns

✓

Created by state-level registration

✓

Easy

Moderate

Extensive

✓

Ease of raising funds

Ongoing record keeping reqs.
May have an unlimited number of
owners

LTD.
PRTNRSHP

✓

Gust’s Guide to Startup Incorporation / 14

4. Which Type of Company Should
a High-Growth Startup Choose?
Now that we’ve looked at the myriad types of

basis of their benefits and drawbacks. There are

There’s a right answer—spoilers: it’s a Delaware

companies available to an entrepreneur seeking

two main categories of stakeholder a startup

C-Corporation—but to understand exactly why,

to become the founder of a high-growth startup,

founder should consider: themselves (and their

we’ll walk through all the potential ramifications

we can compare them to each other on the

cofounders) and the investment community.

of each choice.

The startup founder’s perspective
As Daniel DeWolf at Mintz Levin puts it, “Incorpo-

While it’s possible to develop workarounds for

rating as a C-Corporation in Delaware is the gold

an LLC to divide its ownership structure, notably

standard for high growth startups. It provides

profits interest (which signals an intent to divide

limited liability, ease of use, ease of setup, the

profits at a later date, counting from when the

ability to issue stock options, and tax benefits

interest was granted) and capital interest (which

upon sale for many qualified small businesses.”

represent portions of the value of the company
if it were to be liquidated), these don’t exactly

The two key differences between an LLC and a

translate to stock or ownership in the obvious,

C-Corporation are the ability to divide ownership

comparatively intuitive ways that shares of a

and the way in which their income is taxed.

C-Corp do.

Gust’s Guide to Startup Incorporation / 15

On top of these differences, LLCs entirely lack a way to grant options, which

However, LLCs operating at a loss do offer their owners the ability to pass

are a common equity incentive format that startups give to employees and

through some of that loss directly to their personal tax returns, thus reducing

advisors that more or less represent the ability to purchase shares of the

their net taxable income. This is genuinely attractive to many startup entre-

company at a discount when it’s advantageous to do so. Since almost any

preneurs, who are likely to be bootstrapping their businesses and forgoing

successful high-growth startup will seek professional investment, these

a salary, and are therefore very grateful to reduce their tax burden.

structures will need to be converted into analogous C-Corp ownership units
(i.e. shares). In short, that’s a lot of expensive lawyer time.

Startup founders who are interested in taking advantage of pass-through
taxation while still choosing the standard and well-suited C-Corporation

Despite the comparative difficulty an LLC introduces as a result of its inability

structure for their startup can choose to elect S-Corporation status. There

to directly issue stock, many startup founders are still hesitant to choose a

are two distinct disadvantages to this approach, one of which can be

C-Corp structure. The number-one reason is because they’ve heard about

handled easily and one of which cannot be mitigated at all.

the “tax advantages” of LLCs: many first-time founders hear that a C-Corporation’s profits are “taxed twice,” compared to an LLC’s profits, which are

The first disadvantage is that S-Corporations are effectively investor-proof.

only taxed once, and should therefore be avoided.

S-corporations, as noted above, are limited to one class of stock and 100
individual shareholders (who cannot be businesses or partnerships). Still,

This belief is based on a misunderstanding of the pass-through taxation

an S-Corp is perfect for an initially founder-funded startup, and then when

structure. Since few high-growth startups turn profits in their first few years,

the startup’s first investors arrive, the company can simply drop its S-Corpo-

there is effectively nothing to “double-tax.” Startups tend to reinvest any

ration election and turn into an investor-friendly C-Corp with the ability to

revenue they generate in growth, and no profits to tax means no tax on

issue the Preferred stock that they will insist on purchasing.

profits. No profits also means no dividends paid to shareholders, so there
will be no personal tax on those nonexistent profits either. In other words,

The second disadvantage is that an S-Corporation (as well as an LLC or any

“double taxation” in a high-growth startup usually amounts to 2 x $0 = $0, or

other non-C-Corporation entity type) is not eligible to take advantage of the

double taxation on nothing.

Qualified Small Business Stock tax write-off, which can amount to millions
and millions of dollars in savings.

Gust’s Guide to Startup Incorporation / 16

QUALIFIED SMALL BUSINESS STOCK (QSBS):

A key consideration for everyone

Under certain circumstances, stock issued by C-Corporations counts as Qualified Small Business Stock
(QSBS). After five years of ownership, the gains made on the value of this stock can be written off the
personal taxes of the stockholder up to $10,000,000 or 10x the stockholder’s adjusted basis in the
stock, whichever is greater. In other words, the $10M in non-taxable gains is the minimum, provided you
have $10M in gains in the first place.
The requirements for equity to qualify for the QSBS exemption are relatively straightforward: stock
issued by an active, domestic, C-Corporation that has less than $50,000,000 in assets right after
issuing the stock. Virtually all newly-incorporated, high-growth, US C-Corp startups would meet
these requirements.
For both startup founders, who are expecting (or hoping for) a massively successful exit, as well as
investors in such a startup, this $10M+ in tax exemptions should be an extremely compelling reason to
choose C-Corporation status. After all, is the possibility of saving a small amount in taxes deducted from
your personal income this year worth potentially paying taxes on up to ten million dollars in personal
gains when you make it big?

Gust’s Guide to Startup Incorporation / 17

The investor’s perspective
Like founders, investors’ primary cause of

It’s also important to note that the efficiency

aversion to LLCs is the difficulty created by their

isn’t just a one-time benefit at the moment of

non-standard equity mechanisms. Remember

investment. It remains a concern for the duration

that since LLCs are technically always partner-

of the relationship as it impacts everything from

ships, any equity-like features need to be cus-

additional equity issuances to investor protective

tom-written into the operating agreement each

provisions. The crux of this issue is the LLC’s

time they are issued in order to approximate the

mandatory IRS form filing, known as a K-1.

equity functions of corporations.
Recall that the LLC is invisible for tax purposes.
Sophisticated professional investors often have

In tax season, the partners (i.e. all equity-hold-

cidentally expose their investors to tax penalties

portfolios with dozens—or even hundreds—of

ers, including each of the investors) have to

for late filing, which is unlikely to have a positive

companies. If an LLC is among them, investors

file a document with the IRS that explains the

effect on what should be a mutually beneficial,

are required to deal with these ad-hoc equity

attributed income they received (whether or not

satisfying relationship.

agreements on an individual basis. Even though

they actually received any of it in cash) from the

these may look and behave similarly to stock

partnership. These forms are called K-1s, and

Between the sheer annoyance of K-1s, the

in a C-Corporation, the reality is that each one

they are not popular with investors.

legal and accounting difficulties created by

must be treated separately because there are

LLCs’ ad-hoc approaches to equity, S-Corpora-

no standards. Compare this to the known and

If an investor held a stake in an LLC (i.e. was a

tions’ inability to issue preferred stock or take

understood

C-Corporation

partner) in any given year, the IRS requires that

investment from business or partnerships, and

shares, and it’s easy to understand why investors

the file a K-1 in order to complete their taxes, so

the $10M+ in potential tax exemptions available

prefer the known commodity: it’s less work for

the investor’s tax filing can easily be blocked by

only to C-Corporations, professional startup

the investors and their lawyers, making these

a single company’s tardiness in distributing the

investors almost exclusively choose to invest in

types of investments significantly more efficient.

forms. In other words, a startup founder can ac-

C-Corporations..

mechanisms

Gust’s Guide to Startup Incorporation / 18

Why Delaware?

Benefits of incorporating in Delaware:

Delaware’s filing offices and court
systems are prompt and offer good
customer service.
The state has predictable, welldeveloped corporate laws that
experienced businesspeople and
lawyers worldwide understand.

Corporations (and most types of companies) are chartered by state governments rather than the federal
government. Because Delaware is a small state, it developed a series of tax and regulatory laws (notably
the Delaware General Corporation Law) and court systems that are more advantageous to the corpora-

The laws are the most businessfriendly and protective of a company
and its management and board of
directors.

tion than almost anywhere else in the country, leading it to be the most favorable place to incorporate
for both companies and investors. It’s a revenue win for them; a tax and regulatory win for companies.

As it grows with more board
members and investors, a Delaware

The net result is that most investors will prefer to invest in startups incorporated in Delaware, since its
laws and regulations are both familiar and preferable to professional investment groups and startup

corporation offers flexibility for Board
actions and shareholder rights.

lawyers. In some circumstances, there are compelling reasons to incorporate elsewhere, but most
startups stick with Delaware as “The First State” and file a foreign qualification form to operate in their
own home state.

Gust’s Guide to Startup Incorporation / 19

5. How Incorporation Works
Incorporation refers to a charter granted by a governmental jurisdiction, in
this case the State of Delaware, for a group of people to do business as a
legal entity rather than as individuals. This involves filing a Certificate of Incorporation, which means picking a name, signing a document, and sending
it to the office of Delaware’s Secretary of State.
To actually draft and file the Certificate, a founder will need to engage a
lawyer or legal filing service. Gust Launch’s incorporation process is the
latter—it is a quick and easy software experience that fills out and files the
Certificate of Incorporation, using a set of documents which have been
custom-tailored for use by high-growth startup companies by experienced
startup lawyers.
As part of the incorporation process, companies authorize themselves to

use vesting, which (in extremely simplified language) makes the shares

issue shares of stock. Most high-growth startup companies, including all

available incrementally over time4. Startup grants often vest over 48 months,

those who use Gust Launch, authorize themselves to issue 10,000,000

meaning that 1/48 of the shares vest every month. If a startup has 10,000,000

shares, each at a par value of at least $0.00001.

authorized shares and grants 0.1% to a new advisor, the grantee would have
10,000 shares, which is easily and meaningfully divisible by 48 (to ~208

Setting a company up with millions of shares lets the company give relatively

shares per month). By contrast, if you authorized only 5,000 shares, an 0.1%

small grants to advisors and employees. To understand why millions of

grant would be 5 shares. This math doesn’t work nearly as well, because a

shares are necessary, it’s important to mention that most shareholder grants

grantee cannot easily vest 5 shares over 48 months.

To learn more about vesting, read “How Vesting Protects Companies and Founders” on the Gust Launch Blog.

Gust’s Guide to Startup Incorporation /20

The per-share price (or par value) of $0.00001 is possible because the startup has no assets, so the
taxes each grantee must pay on their stock grants can be kept extremely minimal by declaring an
overall value of the company at $100.
Gust Launch’s incorporation process also includes an SS-4, which is the application for an Employer
Identification Number (EIN). This IRS-assigned ID number is used when paying taxes and otherwise
identifying the company to the US government. It’s necessary for opening a company bank account, as
well as for paying employees when the company is ready to hire.
The Gust Launch incorporation process is quick and easy—to get started, visit gust.com/launch or
watch a video demo at http://gust.ly/incdemo.

Watch a video demo of the Gust
Launch incorporation process

Gust’s Guide to Startup Incorporation / 21

6. How Company Formation Works
The term “company formation” refers to a series of decisions to make

retail store would have very different formation documents than a ven-

and documents and actions to adopt reflecting those decisions that

ture-funded startup. Often, a startup will bring in an experienced lawyer at

ensure that the brand-new C-Corporation has the structure and traits that

this point if they are using one of the more general-purpose online legal

investors expect.

filing services.

Some online incorporation services either skip the formation step or simply

We’ll describe the Gust Launch approach, which takes the process step by

send the founder general-purpose documents that aren’t appropriately

step, using online documents specifically intended for startups.

customized for specific types of companies—for example, a family-run

STEP ONE:

Establish corporate bylaws
Immediately after filing for incorporation, a
company needs to draft and adopt its bylaws.
These are operating rules to specify the organization, structure, and governance functions of
the corporation.

Gust’s Guide to Startup Incorporation /22

BASIC CATEGORIES OF BYLAWS
There are a few other pieces to the bylaws.
Stockholders:

Many will be different for startups than for other

people who own shares of the company have meetings and vote to elect Board

kinds of companies. For example, startups can

members, among other things.

save countless time and money by including
provisions in their bylaws to take advantage of

Board of Directors:
this section specifies the number of people on the Board, what their powers are,
and the rules that apply to them.

new Delaware laws that allow for paperless stock
records and online votes and notices. This is one
of many reasons to hire a startup lawyer or use
startup-oriented legal automation software, such

Officers:
the organization’s top management, what they do for the organization, and how

as Gust Launch, that use documents appropriate
to startups.

they will be appointed. In the beginning, this might mean co-founders as well as
any advisors or investors the company has.

Indemnification:
the corporation accepts the responsibility to cover legal actions brought against
certain people who act on its behalf. In other words, if a founder or officer is sued,
the corporation will pay the attorney fees and any damages assessed, rather than
leaving the founder on their own.

Stock:
how the company’s stock ownership is tracked, including how the company records
ownership, rights to receive dividends from the stock, and other specifications.

Gust’s Guide to Startup Incorporation / 23

STEP TWO:

Move from incorporation to ownership

There are several ways to go about the next formation steps. Gust’s process

The new Board is empowered by the bylaws to appoint officers of the

is optimized for simplicity and speed of execution.

company. The next step is for the Board’s newly appointed initial member
to appoint the company’s first CEO (usually themselves), secretary, and

In the incorporation process, the person signing and filing the Certificate

treasurer (the three “statutory” officer positions required by Delaware

with the state of Delaware is known as the “Incorporator,” and has certain

and the bylaws), as well as any other initial officer positions they wish to

initial duties specified by the Certificate and by Delaware law. For conve-

set up initially. The co-founding team are now the officers and Board of the

nience, Gust asks the primary founder to sign as Incorporator, and in that

company, but they do not yet actually own the company. In fact, nobody does.

role to adopt the initial bylaws by signing an “Action of the Incorporator.” By

That’s what shares of stock are for. The next step is to solve this problem.

that document, the Incorporator also appoints the first Board members—in
this case, appointing themself to be the first member of the Board, and then
resigns as Incorporator (because the position has no further duties).

Gust’s Guide to Startup Incorporation / 24

STEP THREE:

Issue stock
Per Delaware law, the Board directs the issuance
of shares of company ownership. The Gust Launch
Certificate of Incorporation provides for 10,000,000

Incorporation & company
formation, step by step:

authorized shares of the new company, which just
means that the company can theoretically be divided
in up to 10,000,000 equal pieces. To create actual
ownership, stock will have to be “issued,” meaning that
the company pushes out shares from being merely
authorized to being actually outstanding, and then

Obtain a charter by filing its Certificate

Apply for and receive an EIN from the

grants will likely make up a significant but not complete portion of the 10,000,000 authorized shares,

split among the co-founding team and any other initial participants .

of stock to each recipient, who will need to sign a package of stock grant documents and purchase the
stock (at the nominal “par value” of $0.00001 per share specified in the Certificate of Incorporation) for
the grant to be complete. Most companies with multiple founders and team members opt to make stock
ownership subject to vesting. There is also a stockholder agreement to handle a myriad of terms that
apply to stock ownership, like transferability of shares. This is the point at which the co-founders would

Adopt bylaws containing the rules and
structure that investors expect, and set
out its operations and powers

Once the Board approves the initial stock grants, the CEO oversees and signs the issuance and grant

IRS so that it can open a bank account,
hire employees, and pay taxes

“granted,” meaning that the shares are sold to one
or more people or business entities. The initial stock

with Delaware

4.
5.
6.

Elect a Board of Directors
Appoint the founder and others to
be officers
Issue and sell stock to founders, giving
them ownership of the company

file their 83(b) elections, which relate to taxation of future gains in value of vested stock.

For more background on how this all works, check out Gust’s guide to startup equity terms and principles.

Gust’s Guide to Startup Incorporation /25

7. Foreign Qualification
The last step of incorporating and setting up a company is only relevant to
companies which incorporate in states other than the state in which they
are physically located or active. In this case, a company will need to file
for foreign qualification, which means submitting a document to the state
in which they are actually based asking for permission to do business in
that state.
In other words, if a company is based in Delaware but has its headquarters
in Alabama, it will need to file a foreign qualification with Alabama in order
to operate. This will inform Alabama of the company’s existence, and gives
that state the power to regulate and tax the company.
The actual document that must be filed varies from state to state (as does

10,000,000 shares. Nevada, on the other hand, calculates its fee according

the fee which the company must pay to file it), but most states refer to this

to the value of the startup’s equity using a minimum par value of $0.001

document as a “Certificate of Authority.” The requirements of the applica-

per share, which ends up putting the fee for new startups with 10,000,000

tion may differ but usually include a mix of information about your business

shares at around $75.

(such as how many shares you’ve authorized) and sometimes a certification
from your state of incorporation called a “Certificate of Good Standing” that

Actually filing for foreign qualification is as simple as looking up the forms

attests that your business conforms to local laws.

for the state in which you wish to qualify, filling them out, and sending them
in. However, due to the variant nature of the fees (and forms), consulting

The fee is generally a flat rate, and for the most part, this fee is not especially

a lawyer about this process is often advised. A Gust Launch subscription

substantial: it’s on the order of a few hundred dollars. However, in a few

includes the process of foreign qualification and files the appropriate

states, the burden can vary greatly, especially for high-growth startups. For

documents on its startup’s behalf, leaving founders responsible only for the

example, in Virginia, the fee is calculated on the basis of the number of

fees charged by the state as well as a small filing fee charged by our filing

authorized shares, which results in a fee of over $2,500 for startups with

partner, which depends on the state in which you wish to qualify.

Gust’s Guide to Startup Incorporation /26

Credits
CONTRIBUTORS:

EDITOR:

Alan McGee

Ryan Kutter, Esq.

Gil Silberman

David S. Rose

Andrew Crimer

Head of Product

Relationship Manager

Startup Lawyer

Founder & CEO

Marketing Manager

ABOUT GUST
Gust is the global SaaS platform for founding, operating, and investing in

is the official platform of the world’s leading angel investor federations and

scalable, high growth companies. Gust’s online tools support corporate legal

venture accelerators. More than 500,000 startups have already used Gust to

and financial formation and operation for entrepreneurs, as well as deal flow

connect with over 70,000 investment professionals. Gust powers the official

and relationship management for investors, from startup through exit. As the

online hubs of the world’s largest innovation ecosystems including New

world’s largest community of entrepreneurs and early-stage investors from

York City (Digital.NYC), Boston (StartHub.org) and London (Tech. London).

191 countries, Gust pioneered the equity funding collaboration industry and

For more information about Gust, please visit gust.com.

Gust’s Guide to Startup Incorporation / 27

Is your startup growing to include customers, partners,
employees, intellectual property or investors?
Gust Launch is the quick and easy way to incorporation,
created by experienced startup lawyers.

Learn more at
gust.com/launch.

Source Exif Data:

File Type                       : PDF
File Type Extension             : pdf
MIME Type                       : application/pdf
PDF Version                     : 1.7
Linearized                      : Yes
Language                        : en-US
XMP Toolkit                     : Adobe XMP Core 5.6-c138 79.159824, 2016/09/14-01:09:01
Create Date                     : 2017:10:11 12:17:32-04:00
Metadata Date                   : 2017:10:11 12:17:44-04:00
Modify Date                     : 2017:10:11 12:17:44-04:00
Creator Tool                    : Adobe InDesign CC 2017 (Macintosh)
Instance ID                     : uuid:a5820ec7-9473-7d4f-b769-b11e8fde3dda
Original Document ID            : xmp.did:40264e65-92fd-4ca8-b5f3-1a3e5e86f550
Document ID                     : xmp.id:d2f5000a-1028-4558-9337-7d623323f7ca
Rendition Class                 : proof:pdf
History Action                  : converted
History Parameters              : from application/x-indesign to application/pdf
History Software Agent          : Adobe InDesign CC 2017 (Macintosh)
History Changed                 : /
History When                    : 2017:10:11 12:17:32-04:00
Derived From Instance ID        : xmp.iid:d6161909-cb7a-4495-8d8a-858256947b11
Derived From Document ID        : xmp.did:40264e65-92fd-4ca8-b5f3-1a3e5e86f550
Derived From Original Document ID: xmp.did:40264e65-92fd-4ca8-b5f3-1a3e5e86f550
Derived From Rendition Class    : default
Format                          : application/pdf
Producer                        : Adobe PDF Library 15.0
Trapped                         : False
Page Count                      : 28
Creator                         : Adobe InDesign CC 2017 (Macintosh)

EXIF Metadata provided by EXIF.tools

Gust Guide To Incorporation

gust-guide-to-incorporation

Navigation menu

Versions of this User Manual:

Views

Navigation