So to make things real, and limit our personal liability in the business, and to have an option to write off our expenses, we needed to formally set up a company. There are some options and complexities here, but in the end we opted for an “S” Corp. What guided us in this direction? We wanted to create a company where there would be option to splice up portions of the company to future employees. From the research we did, a Partnership and LLC are less convenient when looking to divide out shares. So that that left us with the choice of an “S” Corp and “C” Corp. A “C” corp is the most robust option. It allows you to have different classes of shares, and a very large number of shareholder (actually not sure what the max is, but its greater that 100 for sure) One of the big disadvantages of a “C” Corp is that your income (yes some day we hope to have income) could be taxed both as corporate profits, and again on any dividends that are issued. An “S” Corp is a subsection of a “C”, its kind of like a starter corporation. It allows income to be “passed through” which basically means that for the shareholders, money made by the corporation can be taxed as if it were a salary. Limitations of an “S” Corp over a “C” corp include 1) A maximum of 100 shareholders 2) Only 1 type of stock (as far as I know it would be preferred stock) is allowed 3) Only legal residents of the US (either citizens or green card holders) are permitted to invest. For the moment, none of these 3 points are a concern to us. From what we also read, apparently its not too much to a big deal to convert an “S” Corp to a “C” Corp at some time down the line if the need arises.
So after settling on an “S” Corp, we now had to grapple with whether to incorporate the company in California or Delaware. Why Delaware? Anyone who has dealt with corporate contracts would often have seen that the opening text states the name of one of the companies, “is a Delaware company”. You see, Delaware is a small state that I guess felt they had to specialize in something to give it a notch up against other states. So Delawareans enacted some laws and established procedures that favor business. For example, for Delaware companies, the preferred shareholders can make some decisions, such as whether to sell the company or not, without requiring input from the holders of common stock. They also have courts (called courts of Chancery) where guilty and innocent verdicts are decided by a small team of judges rather than a jury, apparently companies prefer not to have to deal with juries. We also read that because of these advantages, many investors (particularly Venture Capitalists) will have a strong preference for investing in Delaware companies. The disadvantage for us, as a small operation setting out, is that it adds another layer of paper work. Because we are resident in California, we have to deal with the bureaucracy here no matter what. Adding Delaware to the mix just adds more complexity to something that we, without accounts and lawyers as of yet, we don’t want to deal it. So we opted to become a Californian “S” Corp. If we need to reincorporate as a Delaware company at some point in the future, we’ll deal with it then.
Most of our research was done on line, with some consultation with an accountant (poor guy didn’t really want to deal with us, being tax season he had a lot more on his mind.) We found the following sites to be pretty useful
http://www.startupcompanylawyer.com
http://entrepreneurs.about.com/od/businessstructure/Business_Legal_Organizational_Structures.htm
http://www.stephenlnelson.com
We submitted our registration for online at http://www.incfile.com/ cost, approx $300.
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