You’ve taken the plunge and formed your business as a Delaware corporation. What do you need to do next? This post, along with the companion piece 8 Legal To-Dos Before Your First Investment, is intended to help you identify other steps you should be taking as you launch your business and prepare to take on investment.
- Complete Issuances of the Founders Stock. Most companies issue stock to their founders at a very low price at the time of formation. It’s important that these issuances actually get finalized at or near the time of formation because, under IRS rules, if stock is sold at less than fair market value at the time of the sale the difference between the price paid and the fair market value will be considered compensation to the stockholder, which means he or she will have to pay taxes on it. When a company is in its infancy the fair market value of its equity typically is close to zero, which enables founders to purchase significant stakes in the company at a very low cost. But the company may increase in value very quickly, making these issuances cost prohibitive. So complete these issuances as soon as possible, including collecting all signatures on the purchase documents, receiving and cashing checks from the stockholders (assuming some or all of the consideration being paid for the stock is in the form of cash) and maintaining evidence of payment in the company’s records.
- File 83(b) Elections. If any stockholders are receiving stock that is subject to vesting they should strongly consider filing an 83(b) election with the IRS. For an 83(b) election to be effective it needs be filed within 30 days of the time of the sale of the stock, with NO EXCEPTIONS. For an explanation of what an 83(b) election is and whether it makes sense for you click here.
- Set up a Datasite. When a company is raising capital from outside investors, those investors will typically want to review the company’s legal documentation, including paperwork related to the company’s formation and issuances of stock. Keeping these documents stored in an organized fashion from the beginning will help avoid delays and speedbumps that can be associated with poor recordkeeping. Click here to see a sample VC due diligence request list and understand the type of documents you should be storing.
- Apply for an EIN. An Employee Identification Number, or EIN, is a unique number that identifies a company to the IRS. It is required to open a bank account, hire employees and file tax returns. You can apply for an EIN on the IRS’ website here.
- Open a Checking Account and Get a Company Credit Card. One of the key benefits of setting up a business entity is to protect the business’ stockholders from personal liability for liabilities of the business. As part of ensuring that these limitations on liability are respected, founders should set up a checking account and credit card in the name of the company and use those accounts (rather than personal accounts) for all payments made by or to the company. Founders can loan capital to the company but should keep good records of these transactions and avoid moving money back and forth between their personal accounts and the company’s accounts.
- File State and Local Registrations. Most states require companies that are formed in other states (like Delaware) to register to do business in the states in which they are doing business. If you are using a registered agent service such as Corporate Service Company or Corporation Trust Company, this company can help guide you through the process for a small fee, and your law firm should be able to help you coordinate this process as well. You should also look into whether you need to apply for a state level identification number and other state, county and/or city level registrations. Your state’s employment and tax agency’s website is a good source of information for this – California’s is located here.
- Get Insurance. As the business starts operating you will want to obtain some basic insurance, including general liability insurance and, in connection with hiring your first employees, workers’ compensation insurance. Your insurance needs and recommended policies will expand as your business grows, you have publicly available products and services, and your board of directors expands. A good insurance broker can be a huge help with this process — ask your mentors and advisors for recommendations.
- Prepare to Hire Your First Employee. Employment is a highly regulated area of law and there are several steps you should take to make sure you are complying with applicable rules and regulations. Many early stage companies outsource this task to payroll services providers, but for DIY-types the federal government has posted a useful guide here.
- Create a Capitalization Table. A capitalization table is a list of a company’s securities (i.e., stock, options, warrants, etc.) and who owns those securities, usually maintained in a spreadsheet. You should create a capitalization table so you understand the ownership structure of your company and can make decisions accordingly. Here is a great post on what a cap table is, why you need one and what it should look like (including a sample). Companies can coordinate cap table management with their outside counsel, and companies are increasingly using capitalization management services – ask your advisors for recommendations.
- Consider Hiring an Accounting Service. Each business has accounting, bookkeeping and tax needs and these will grow as your business grows. Some founders are comfortable doing this on their own, but many companies find that they can outsource these tasks and receive high quality service at a reasonable price. There are many services that are geared specifically towards startups – ask your mentors and advisors for recommendations.
Last reviewed: January 24, 2022