Company Formation

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Let’s dive into the details about company formation. Taking this step may seem complicated or overwhelming in the beginning, but luckily there are plenty of experts that can guide you in this – that’s their daily business. Your job is to understand the basics so you can make informed decisions with their support.

Incorporating a startup in the United States involves several standard steps and decisions. You should develop a basic understanding and then discuss it with the team that helps you incorporate. Below is a concise overview of the process, focusing on the most common approaches:

Choose Your Business Structure

Your legal structure determines liability, tax treatment and how you raise capital. Most venture-backed biotech startups form as a Delaware C-Corporation. Here’s a quick breakdown of the main options:

Sole Proprietorship: Simplest form, no formal incorporation, but offers no personal liability protection.
Partnership: For multiple owners, with general or limited partnerships; requires a partnership agreement.
Limited Liability Company (LLC): Combines liability protection with tax flexibility; popular for small startups. Not ideal for raising institutional capital
Corporation (C-Corp or S-Corp): C-Corp is standard for startups seeking venture capital due to its structure for issuing stock; S-Corp is for smaller businesses with tax pass-through benefits but has restrictions (e.g., U.S. shareholders only).
Most startups choose LLC or C-Corp for liability protection and scalability. If you’re seeking grants or VC funding, a Delaware C-Corp is the considered the standard option

Select a State for Incorporation

Delaware is popular due to its business-friendly laws, established corporate court (Court of Chancery), and investor familiarity. Over 60% of Fortune 500 companies are incorporated there, although tech companies have recently been rethinking using this state as a home base due to litigation battles (refer to the WSJ video, here). In biopharma, Delaware is still the go-to state.
Home State: Incorporating in your state of operation avoids additional fees for registering as a foreign entity elsewhere.
Talk to your legal advisor about Delaware vs your home state. Consider costs, tax implications, and legal requirements. Delaware’s franchise tax and filing fees are often offset by its advantages for VC-funded startups.

Choose a Business Name

Ensure the name is unique and complies with state rules (e.g., LLCs must include “LLC” in the name).
Check availability via the state’s business registry and secure a matching domain name.
Conduct a trademark search to avoid conflicts.

File Formation Documents

LLC: File Articles of Organization with the state’s Secretary of State. Includes basic details like name, purpose, and registered agent.
Corporation: File Articles of Incorporation, specifying name, stock structure, and agent.
Fees vary by state (e.g., $50-$200 in Delaware, higher in states like California).
Appoint a registered agent to receive legal documents (can be a service or individual).

Obtain an Employer Identification Number

Apply for a free EIN from the IRS online. Required for tax purposes, banking, and hiring employees.
It’s free and takes minutes to obtain.

Check and see if you’re eligible for a minority-owned, women-owned, veteran-owned, disable-owned, or small business certification

These are state and federal level certifications, and having these certifications, if eligible, can benefit you as you get set up and grow.
Generally based on 51% ownership.

Draft Internal Agreements

This is where you clarify ownership, decision-making and responsibilities, which is critical for avoiding future disputes.

LLC: Create an Operating Agreement outlining ownership, management, and profit distribution (not always required but highly recommended).
Corporation: Draft Bylaws for governance and issue stock to founders. A Shareholders’ Agreement may outline rights and restrictions.

Register for State Taxes and Licenses

Register with the state’s tax agency for sales, payroll, or other taxes.
Obtain necessary business licenses or permits (varies by industry and location; e.g., local permits for retail or health permits for food services).
Check state-specific requirements (e.g., California requires a Statement of Information within 90 days).

Open a Business Bank Account

Use the EIN and formation documents to open a dedicated account.
Separates personal and business finances, critical for liability protection.

Comply with Ongoing Requirements

File annual reports (e.g., Delaware’s $300 franchise tax).
Maintain records, renew licenses, and meet tax deadlines.
Track cap table changes with equity management tools such as Carta.
For C-Corps, hold board meetings and document major decisions.

Additional Notes:

Costs: Incorporation fees range from $50-$500 depending on the state. Legal services (e.g., via platforms like LegalZoom or attorneys) can cost $500-$2,000 for startups needing assistance.
Timeline: Incorporation typically takes 1-2 weeks, though expedited options exist.
Professional Help: Many startups use online services (e.g., Stripe Atlas, Clerky) or attorneys for complex structures, especially if seeking venture funding.
Location-Specific Nuances: States like California have additional taxes (e.g., $800 annual minimum franchise tax), while Nevada offers low fees but less legal precedent.

This process applies to most U.S. startups, but requirements vary by state and industry. Always check with the state’s Secretary of State website and consider consulting a lawyer or accountant for tailored advice.

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