Five-minute general counsel: Answers to incorporation questions

Several years ago, I switched my law practice from mass torts (plane crashes and shipwrecks) in New York City to corporate law at a large Silicon Valley law firm. As a result of that experience and clients I worked with in the years following the dotcom bust, I developed a number of simplifying rules about corporate transactions, particularly general corporate, corporate structure and corporate governance.

One question almost every first-time entrepreneur (and most second-timers) have is “How do I incorporate?” When you do it properly, this isn’t particularly earth-shattering legal work; I’ve done this sort of work for companies using firm quotes of $2000 + state filing fees for a full incorporation package, including a lot of form documents necessary to engage new employees, issue stock to founders, etc. That figure includes my time advising on everything from the number of directors to how to divide up stock to what provisions founders need to protect themselves from each other. It’s clear that the fee involves mostly the ancillary advice about what to do, not filling out forms.

For the purposes of this question, you should have already determined that you (a) need to form an entity, (b) that entity should be a corporation, and (c) you want to be expedient while avoiding future expenses.

In general, companies should incorporate in Delaware if they’re going to be venture-funded and have the modest amount of extra money to lay out for administrative costs. That said, many, many companies in the SF Bay Area simply incorporate in California to reduce those expenses, particularly if they’re going to bootstrap for a while. VCs and other investors in the area are very familiar with California companies and don’t get bothered by it at all. What I would recommend against, in general, is incorporating anywhere else besides those two states. The costs will go up for regular compliance and administration, and you’ll only have to reincorporate later if you get funding.

You will likely¬† need specific advice on the entity selection question, which depends heavily on the type of business you’re considering and the plans you are making. Sometimes a corporation isn’t the best choice.

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