Gust Guide To Incorporation
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Gust’s Guide to
Startup Incorporation
Contents
01 04
05
06
07
02
03
Introduction
What Is a Company &
Why Do I Even Need One?
Types of companies
Reason 1: Limited liability
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
Which Type Should a High-
Growth Startup Choose?
The startup founder perspective
QSBS
The investor perspective
Why Delaware?
How Incorporation Works
How Company Formation Works
Corporate bylaws
Moving from incorporation to ownership
Issuing stock
Foreign Qualification
4
15
17
18
19
22
24
25
10
11
12
13
5
6
7
8
Gust’s Guide to Startup Incorporation / 2
Gust’s Guide to Startup Incorporation / 3
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.
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
product of research by Gust’s legal and product experts, and sets out to
answer the following questions, which anyone starting their first (or second,
or tenth) business will have about the process:
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 oering (IPO) or acquisition by a larger company.
To answer these and other questions, we’ll present everything you need to
know and explain how each piece of information relates to your situation: a
founder looking to create a company that is optimized for stability, growth,
and investment.
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?
1.
2.
3.
Gust’s Guide to Startup Incorporation / 4
2. What Is a Company? Why Do You Need One?
In the simplest terms, a company is a legal designation that you can
create by telling your various governments (state, local, and federal) about
your intention to do business under that name. Within the category of
“companies,” there are several kinds of entity, which can be understood
as a handful of categories (with more specific types inside each category).
Some of the most common categories are:
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.
The first two are simply ways for a person or a group of people to announce
that they will be doing business under a name other than their legal name.
For example, a slushy salesman named John might do business as the sole
proprietor of John’s Slushies. If he had a partner, Maureen, they might do
business as The John & Maureen Slushy Partnership. In either case, John
(and/or Maureen) have no protection as actors in situations involving the
company: they are the company and are personally responsible for any
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
in some or all of the following ways. Each of these eects can separately be
a compelling reason to create a company.
1. Sole Proprietorship
3. Limited Liability Company
(LLC)
2. Partnership
• C-Corporation
• B-Corporation
• S-Corporation
• General Partnership
• Limited Liability
Partnership
4. Corporation
Gust’s Guide to Startup Incorporation / 5
Limited liability
LLPs, LLCs, and corporations are meaningfully
distinct entities from the people who own them,
but can mostly do the same things (like enter into
contracts or buy and sell products). But while a
person who is doing business activities as herself
is personally liable for them (and their eects),
members of a corporation are not personally
liable for the activities and agreements made by
the corporation. This is called “limited liability”
and it is one of the most compelling reasons to
form a company.
So, if a court judges against your startup for
some reason in a suit, or if you find yourself
unable to fulfill contracts—whether they’re
with employees, contractors, suppliers, or
customers—the courts or the other party in the
contract won’t come after you and your personal
assets. Instead, the corporation is responsible
for bearing any penalty.
REASON #1
Gust’s Guide to Startup Incorporation / 6
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 arrange-
ment, 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
stake. There’s also a financial benefit, which is that the value created by the
intellectual property can be considered part of the value of the company,
which is the main mechanism investors use to decide how much money to
put into a startup.
If you do not protect your IP early then you’ll introduce downstream risks on
future financings and/or in the market through competition. Keeping that IP
within the walls of an incorporated entity reduces risks if done properly, and
they can benefit from corporate laws that have already been built around
scenarios like this.
REASON #2:
Gust’s Guide to Startup Incorporation / 7
The assets and revenue created and owned by a
company as well as any investment it takes in all
contribute to the company’s overall value. This
value manifests itself in a few forms—corpora-
tions may distribute some profits to sharehold-
ers as dividends; the assets may help justify a
valuation in the minds of investors; capital con-
tributed by investors might be added on top of
a valuation as a representation of the company’s
overall worth.
In all of these ways, the relevant parties
understand the value as being divided up
according to shares. A business entity, unlike a
person doing business without forming a new
legal entity, can have multiple owners, whose
ownership (also known as equity) is divided
into an arbitrary number of pieces. This concept
is legally complicated, because equity can be
distributed in many forms depending on the
company’s type, structure, and bylaws, but in
all cases the point of the division is to explain
who owns the company and how much of the
company each shareholder owns.
Investors usually put money into companies in
exchange for some amount of equity. Employees
often receive equity as an incentive to work hard
on behalf of the company. Company founders
retain large portions of equity in exchange for
their hard (and usually free) work before the
company had any real value. The existence of
a legal entity that can have many owners makes
it possible to articulate all these relationships
and make sense of how they deliver value to
each party.
Dividing and distributing ownership
REASON #3
A partner A customer
An investor
An employee A grant
A need for a bank account
Any intellectual property
(including trademarks or
computer code)
Any potential liability
Any assets
Gust’s Guide to Startup Incorporation / 8
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:
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.
3. LLCs and Common Corporations
Gust’s Guide to Startup Incorporation / 9
As we mentioned in the previous chapter, companies come in many types.
For high-growth startups in the United States, there is really only one ideal
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 dierences 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?”
The four most popular of these are an LLC or three slightly dierent types of
corporation: C-Corporation, B-Corporation, and S-Corporation.
Gust’s Guide to Startup Incorporation / 10
Limited liability companies
LLCs are extremely simple
arrangements in which every
owner is a partner. An LLC
basically provides the limited
liability protection for which
people form companies, but does not do much
else. Each company which chooses to incorpo-
rate as an LLC drafts an “operating agreement”
among the owners, which contains all the rules
by which the company operates. This operating
agreement is similar in function to the bylaws of
a corporation, but due to the bespoke nature
of each LLC’s structure, there are no standard
components for this document (although there
are common features).
LLCs are also not independently subject to
corporate tax: an LLC is eectively invisible (for
tax purposes), and “passes through” any net
income (without being taxed at the LLC level) to
its owners, who then treat it as taxable personal
income. Whether or not any money actually
passes from the LLC to the individual, the
individual owner must pay income tax on their
share of the profits (or losses) generated by the
LLC. Every year at tax time, every LLC must send
every one of its members (and the IRS) a Form
K-1, showing that member’s personal share of
the company’s profit or loss.
The features which tend to make LLCs popular—
namely, their pass-through taxation structure
and their liability limitation without the need for a
full corporate structure—make them well-suited
for people who simply want a business entity
through which to do business. For high-growth
startups, they are generally not well-suited, for
reasons we will address in subsequent sections.
LLCS
Gust’s Guide to Startup Incorporation / 11
C-Corporations
C-Corporations are the most popular type of American cor-
poration. They are dierent from LLCs in a few ways. The
first is that, rather than an operating agreement, corporations
abide by bylaws written into their articles of incorporation, for
which there are many regularized and standard structures.
Due in large part to their popularity, C-Corporations enjoy the benefit of
having both state and national courts which are familiar with their features
and behaviors, so the operating a corporation as it scales is somewhat
easier and less lawyer-intensive than other types of companies.
The second key dierence between a C-Corporation and an LLC is the way
in which it is taxed. C-Corporations are subject to a separate set of taxes
than their owners or operators are. A C-Corporation pays annual corporate
taxes based on its taxable net income, and then if it distributes any money to
its shareholders (known as “distributions”), the shareholders themselves are
required to pay personal income taxes on the amount they receive.
The third defining feature of a C-Corporation is that it comes with an out-of-
the-box mechanism for distributing equity. This is called stock. At incorpora-
tion, corporations authorize a certain number of shares of themselves (which
can be increased at any time) and can subsequently issue these shares to
their owners (such as founders and investors). Because this instrument is
well-understood, this is easy to accomplish without involving lawyers.
C-Corporations are by far the best-suited corporate entity for high-
growth startups. We’ll specifically address the reasons why this is so in
subsequent chapters.
B CORPS
Gust’s Guide to Startup Incorporation / 12
Most corporations are generally assumed to have the
primary goal of maximizing their value for shareholders. In
the past few decades, many companies (especially startups)
have shown interest in expanding their range of aims to
include various kinds of altruistic and socially positive
goals—traditionally solely the concern of nonprofit organizations—to which
the law refers generally as “public benefit.”
Corporations who seek to include some public benefit in their purpose
have a legal entity option called a Benefit Corporation (sometimes confused
with a B-Corporation). This entity is not available to companies in all states,
and generally diers primarily in ways that are related to its public benefit
goals, such as accountability to shareholders and transparency—for most
other structural and tax-related concerns, it is similar or identical to a
C-Corporation.
These companies can also (optionally) choose to become Certified B Corpo-
rations, which is a third-party certification oered by the group responsible
for the creation of the Benefit Corporation legal entity and is not a type of
corporate legal structure in its own right.
Benefit Corporations and Certified B-Corporations
Gust’s Guide to Startup Incorporation / 13
Some C-Corporations can optionally file Form 2553 with the
IRS, which changes the C-Corporation into a “Small Business
Corporation,” popularly known as an S-Corporation. S-Cor-
porations are essentially just an election for pass-through
taxation status, and are perhaps best considered a subcat-
egory of C-Corporation designed to compromise between the corporate
rigidity and standardization of a C-Corporation and the tax-invisible nature
of an LLC.
The rules that determine which businesses can elect to be treated as S-Cor-
porations are somewhat restrictive and a little confusing, but in practice end
up working for most high-growth startups. To be eligible, a company can’t
operate within certain industries, and must have fewer than 100 sharehold-
ers (although a married couple or an estate can count as a single sharehold-
er), all of whom are individuals (or “certain trusts” and estates) rather than
corporations or partnerships, and all of whom are residents of the United
States. In addition, an S-Corporation can only have one class of stock.
S-Corporations
CCORP BCORP LLC SOLE PROP. GEN.
PRTNRSHP
LTD.
PRTNRSHP
Oers 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 ✓✓✓
Ease of raising funds Easy Moderate Moderate Dicult Dicult Moderate
Ongoing record keeping reqs. Extensive Extensive Moderate Few Few Few
May have an unlimited number of
owners ✓ ✓ ✓ ✓
Gust’s Guide to Startup Incorporation / 14
Business structure comparison
Gust’s Guide to Startup Incorporation / 15
Now that we’ve looked at the myriad types of
companies available to an entrepreneur seeking
to become the founder of a high-growth startup,
we can compare them to each other on the
basis of their benefits and drawbacks. There are
two main categories of stakeholder a startup
founder should consider: themselves (and their
cofounders) and the investment community.
There’s a right answer—spoilers: it’s a Delaware
C-Corporation—but to understand exactly why,
we’ll walk through all the potential ramifications
of each choice.
The startup founder’s perspective
As Daniel DeWolf at Mintz Levin puts it, “Incorpo-
rating as a C-Corporation in Delaware is the gold
standard for high growth startups. It provides
limited liability, ease of use, ease of setup, the
ability to issue stock options, and tax benefits
upon sale for many qualified small businesses.”
The two key dierences between an LLC and a
C-Corporation are the ability to divide ownership
and the way in which their income is taxed.
While it’s possible to develop workarounds for
an LLC to divide its ownership structure, notably
profits interest (which signals an intent to divide
profits at a later date, counting from when the
interest was granted) and capital interest (which
represent portions of the value of the company
if it were to be liquidated), these don’t exactly
translate to stock or ownership in the obvious,
comparatively intuitive ways that shares of a
C-Corp do.
4. Which Type of Company Should
a High-Growth Startup Choose?
Gust’s Guide to Startup Incorporation / 16
On top of these dierences, LLCs entirely lack a way to grant options, which
are a common equity incentive format that startups give to employees and
advisors that more or less represent the ability to purchase shares of the
company at a discount when it’s advantageous to do so. Since almost any
successful high-growth startup will seek professional investment, these
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.
Despite the comparative diculty an LLC introduces as a result of its inability
to directly issue stock, many startup founders are still hesitant to choose a
C-Corp structure. The number-one reason is because they’ve heard about
the “tax advantages” of LLCs: many first-time founders hear that a C-Cor-
poration’s profits are “taxed twice,” compared to an LLC’s profits, which are
only taxed once, and should therefore be avoided.
This belief is based on a misunderstanding of the pass-through taxation
structure. Since few high-growth startups turn profits in their first few years,
there is eectively nothing to “double-tax.” Startups tend to reinvest any
revenue they generate in growth, and no profits to tax means no tax on
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,
“double taxation” in a high-growth startup usually amounts to 2 x $0 = $0, or
double taxation on nothing.
However, LLCs operating at a loss do oer their owners the ability to pass
through some of that loss directly to their personal tax returns, thus reducing
their net taxable income. This is genuinely attractive to many startup entre-
preneurs, who are likely to be bootstrapping their businesses and forgoing
a salary, and are therefore very grateful to reduce their tax burden.
Startup founders who are interested in taking advantage of pass-through
taxation while still choosing the standard and well-suited C-Corporation
structure for their startup can choose to elect S-Corporation status. There
are two distinct disadvantages to this approach, one of which can be
handled easily and one of which cannot be mitigated at all.
The first disadvantage is that S-Corporations are eectively investor-proof.
S-corporations, as noted above, are limited to one class of stock and 100
individual shareholders (who cannot be businesses or partnerships). Still,
an S-Corp is perfect for an initially founder-funded startup, and then when
the startup’s first investors arrive, the company can simply drop its S-Corpo-
ration election and turn into an investor-friendly C-Corp with the ability to
issue the Preferred stock that they will insist on purchasing.
The second disadvantage is that an S-Corporation (as well as an LLC or any
other non-C-Corporation entity type) is not eligible to take advantage of the
Qualified Small Business Stock tax write-o, which can amount to millions
and millions of dollars in savings.
Gust’s Guide to Startup Incorporation / 17
QUALIFIED SMALL BUSINESS STOCK QSBS:
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 o 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?
A key consideration for everyone
Gust’s Guide to Startup Incorporation / 18
The investor’s perspective
Like founders, investors’ primary cause of
aversion to LLCs is the diculty created by their
non-standard equity mechanisms. Remember
that since LLCs are technically always partner-
ships, any equity-like features need to be cus-
tom-written into the operating agreement each
time they are issued in order to approximate the
equity functions of corporations.
Sophisticated professional investors often have
portfolios with dozens—or even hundreds—of
companies. If an LLC is among them, investors
are required to deal with these ad-hoc equity
agreements on an individual basis. Even though
these may look and behave similarly to stock
in a C-Corporation, the reality is that each one
must be treated separately because there are
no standards. Compare this to the known and
understood mechanisms of C-Corporation
shares, and it’s easy to understand why investors
prefer the known commodity: it’s less work for
the investors and their lawyers, making these
types of investments significantly more ecient.
It’s also important to note that the eciency
isn’t just a one-time benefit at the moment of
investment. It remains a concern for the duration
of the relationship as it impacts everything from
additional equity issuances to investor protective
provisions. The crux of this issue is the LLC’s
mandatory IRS form filing, known as a K-1.
Recall that the LLC is invisible for tax purposes.
In tax season, the partners (i.e. all equity-hold-
ers, including each of the investors) have to
file a document with the IRS that explains the
attributed income they received (whether or not
they actually received any of it in cash) from the
partnership. These forms are called K-1s, and
they are not popular with investors.
If an investor held a stake in an LLC (i.e. was a
partner) in any given year, the IRS requires that
the file a K-1 in order to complete their taxes, so
the investor’s tax filing can easily be blocked by
a single company’s tardiness in distributing the
forms. In other words, a startup founder can ac-
cidentally expose their investors to tax penalties
for late filing, which is unlikely to have a positive
eect on what should be a mutually beneficial,
satisfying relationship.
Between the sheer annoyance of K-1s, the
legal and accounting diculties created by
LLCs’ ad-hoc approaches to equity, S-Corpora-
tions’ inability to issue preferred stock or take
investment from business or partnerships, and
the $10M+ in potential tax exemptions available
only to C-Corporations, professional startup
investors almost exclusively choose to invest in
C-Corporations..
Delaware’s filing oces and court
systems are prompt and oer good
customer service.
The state has predictable, well-
developed corporate laws that
experienced businesspeople and
lawyers worldwide understand.
The laws are the most business-
friendly and protective of a company
and its management and board of
directors.
As it grows with more board
members and investors, a Delaware
corporation oers flexibility for Board
actions and shareholder rights.
Benefits of incorporating in Delaware:
Gust’s Guide to Startup Incorporation / 19
Why Delaware?
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-
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.
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
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 /20
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 In-
corporation, which means picking a name, signing a document, and sending
it to the oce 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
issue shares of stock. Most high-growth startup companies, including all
those who use Gust Launch, authorize themselves to issue 10,000,000
shares, each at a par value of at least $0.00001.
Setting a company up with millions of shares lets the company give relatively
small grants to advisors and employees. To understand why millions of
shares are necessary, it’s important to mention that most shareholder grants
4 To learn more about vesting, read “How Vesting Protects Companies and Founders” on the Gust Launch Blog.
use vesting, which (in extremely simplified language) makes the shares
available incrementally over time4. Startup grants often vest over 48 months,
meaning that 1/48 of the shares vest every month. If a startup has 10,000,000
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
shares per month). By contrast, if you authorized only 5,000 shares, an 0.1%
grant would be 5 shares. This math doesn’t work nearly as well, because a
grantee cannot easily vest 5 shares over 48 months.
Watch a video demo of the Gust
Launch incorporation process
Gust’s Guide to Startup Incorporation / 21
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.
Gust’s Guide to Startup Incorporation /22
6. How Company Formation Works
The term “company formation” refers to a series of decisions to make
and documents and actions to adopt reflecting those decisions that
ensure that the brand-new C-Corporation has the structure and traits that
investorsexpect.
Some online incorporation services either skip the formation step or simply
send the founder general-purpose documents that aren’t appropriately
customized for specific types of companies—for example, a family-run
retail store would have very dierent formation documents than a ven-
ture-funded startup. Often, a startup will bring in an experienced lawyer at
this point if they are using one of the more general-purpose online legal
filing services.
We’ll describe the Gust Launch approach, which takes the process step by
step, using online documents specifically intended for startups.
Establish corporate bylaws
STEP ONE:
Immediately after filing for incorporation, a
company needs to draft and adopt its bylaws.
These are operating rules to specify the orga-
nization, structure, and governance functions of
the corporation.
Gust’s Guide to Startup Incorporation / 23
There are a few other pieces to the bylaws.
Many will be dierent for startups than for other
kinds of companies. For example, startups can
save countless time and money by including
provisions in their bylaws to take advantage of
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
as Gust Launch, that use documents appropriate
to startups.
BASIC CATEGORIES OF BYLAWS
how the company’s stock ownership is tracked, including how the company records
ownership, rights to receive dividends from the stock, and other specifications.
Stock:
the organization’s top management, what they do for the organization, and how
they will be appointed. In the beginning, this might mean co-founders as well as
any advisors or investors the company has.
Ocers:
people who own shares of the company have meetings and vote to elect Board
members, among other things.
Stockholders:
this section specifies the number of people on the Board, what their powers are,
and the rules that apply to them.
Board of Directors:
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 ocer is sued,
the corporation will pay the attorney fees and any damages assessed, rather than
leaving the founder on their own.
Indemnification:
Gust’s Guide to Startup Incorporation /24
Move from incorporation to ownership
There are several ways to go about the next formation steps. Gust’s process
is optimized for simplicity and speed of execution.
In the incorporation process, the person signing and filing the Certificate
with the state of Delaware is known as the “Incorporator,” and has certain
initial duties specified by the Certificate and by Delaware law. For conve-
nience, Gust asks the primary founder to sign as Incorporator, and in that
role to adopt the initial bylaws by signing an “Action of the Incorporator.” By
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).
The new Board is empowered by the bylaws to appoint ocers of the
company. The next step is for the Board’s newly appointed initial member
to appoint the company’s first CEO (usually themselves), secretary, and
treasurer (the three “statutory” ocer positions required by Delaware
and the bylaws), as well as any other initial ocer positions they wish to
set up initially. The co-founding team are now the ocers and Board of the
company, but they do not yet actually own the company. In fact, nobody does.
That’s what shares of stock are for. The next step is to solve thisproblem.
STEP TWO:
Gust’s Guide to Startup Incorporation /25
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
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
“granted,” meaning that the shares are sold to one
or more people or business entities. The initial stock
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 participants5.
Once the Board approves the initial stock grants, the CEO oversees and signs the issuance and grant
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
file their 83(b) elections, which relate to taxation of future gains in value of vested stock.
5 For more background on how this all works, check out Gust’s guide to startup equity terms and principles.
STEP THREE:
Obtain a charter by filing its Certificate
with Delaware
Apply for and receive an EIN from the
IRS so that it can open a bank account,
hire employees, and pay taxes
Adopt bylaws containing the rules and
structure that investors expect, and set
out its operations and powers
Elect a Board of Directors
Appoint the founder and others to
be ocers
Issue and sell stock to founders, giving
them ownership of the company
Incorporation & company
formation, step by step:
1.
2.
3.
4.
5.
6.
Gust’s Guide to Startup Incorporation /26
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
thatstate.
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
the fee which the company must pay to file it), but most states refer to this
document as a “Certificate of Authority.” The requirements of the applica-
tion may dier but usually include a mix of information about your business
(such as how many shares you’ve authorized) and sometimes a certification
from your state of incorporation called a “Certificate of Good Standing” that
attests that your business conforms to local laws.
The fee is generally a flat rate, and for the most part, this fee is not especially
substantial: it’s on the order of a few hundred dollars. However, in a few
states, the burden can vary greatly, especially for high-growth startups. For
example, in Virginia, the fee is calculated on the basis of the number of
authorized shares, which results in a fee of over $2,500 for startups with
10,000,000 shares. Nevada, on the other hand, calculates its fee according
to the value of the startup’s equity using a minimum par value of $0.001
per share, which ends up putting the fee for new startups with 10,000,000
shares at around $75.
Actually filing for foreign qualification is as simple as looking up the forms
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
a lawyer about this process is often advised. A Gust Launch subscription
includes the process of foreign qualification and files the appropriate
documents on its startup’s behalf, leaving founders responsible only for the
fees charged by the state as well as a small filing fee charged by our filing
partner, which depends on the state in which you wish to qualify.
Gust’s Guide to Startup Incorporation / 27
Gust is the global SaaS platform for founding, operating, and investing in
scalable, high growth companies. Gust’s online tools support corporate legal
and financial formation and operation for entrepreneurs, as well as deal flow
and relationship management for investors, from startup through exit. As the
world’s largest community of entrepreneurs and early-stage investors from
191 countries, Gust pioneered the equity funding collaboration industry and
is the ocial platform of the world’s leading angel investor federations and
venture accelerators. More than 500,000 startups have already used Gust to
connect with over 70,000 investment professionals. Gust powers the ocial
online hubs of the world’s largest innovation ecosystems including New
York City (Digital.NYC), Boston (StartHub.org) and London (Tech.London).
For more information about Gust, please visit gust.com.
Credits
CONTRIBUTORS: EDITOR:
Alan McGee
Head of Product
Ryan Kutter, Esq.
Relationship Manager
Gil Silberman
Startup Lawyer
David S. Rose
Founder & CEO
Andrew Crimer
Marketing Manager
ABOUT GUST
