What to Consider When Launching Your Startup

When launching a startup, there are several key considerations that you should keep in mind. It's important to carefully evaluate each of these elements to make informed decisions that align with your business objectives and long-term plans. Here’s a guide for startup founders to build your company. 

Define Your Purpose

Clearly define the purpose of your business and revisit this regularly. Whether it's to aggressively grow and sell your business as soon as possible, or run it as a long-term “lifestyle” business, your initial actions will have significant impacts on your long-term trajectory and potential liquidity exit events. 

If you want to scale quickly and sell your business for a large valuation, this usually requires taking on several rounds of funding, where you will have less ownership and control over time. Otherwise, building a long-term lifestyle practice should have more focus on sustainable growth and profitability. As a result, you will have more leadership control, but your company valuation might be lower in comparison, if and when you’re ready to exit.

There are many different paths you can take for your startup. Your goals should dictate your operational decisions which are discussed below.

Business Structure

A corporation is a business structure that shields its shareholders from personal responsibility for the business’s debts or liabilities. If a company becomes insolvent, creditors can not pursue the shareholder’s personal assets. Establishing a corporation is highly recommended for additional asset and liability protection for you and your potential co-founders. 

There are several entity types available but generally, startups targeting venture capital should incorporate as C-Corporations.

Forming a Corporation Process

Once you’ve decided to form a corporation, consider which state to incorporate in, as each state has advantages and disadvantages. Different states have different startup and ongoing requirements. 

Companies often elect to establish their corporation in Delaware, due to its laws that protect owners and investors. The common reasons Delaware is commonly utilized are no state corporate income tax (though the corporation would still pay taxes in other applicable states of business) and favorable and predictable court rulings that protect investors.

With that said, there still are downsides. There are additional processes to which you must adhere to incorporate in Delaware and/or be able to transact business in your home state (California for example). In addition, if there are legal disputes, you might need to travel there regularly if you don’t live there already. 

It’s important to understand the tradeoffs for incorporating in different states and how they may affect your business.

The process for forming a corporation differs by state, but there are a few common steps regardless. First, you will need to choose a name for your business and search to see if it’s available via online databases. Next, you will need to create Articles of Organization. This document highlights key information and responsibilities. You will then create your bylaws and appoint your board members. After you’ve had your first board meeting, you can issue stock (see below for a very important planning strategy at this stage!). Finally, you will pay the applicable fees and file for an EIN (Employer Identification Number), even if you don’t have employees. This is like your business’ social security number, and how the government will identify it. An additional recent requirement is filing a Beneficial Ownership Information report soon after you form your entity.

Once you’ve incorporated your startup, you are ready to open corporate bank accounts and start your business operations. 

Taxation Election

C-Corporations are subject to double taxation (at both the corporate and personal levels). However, the top corporate tax bracket is far lower than the top personal tax bracket. The higher your personal tax bracket is, the more beneficial it could be to structure your organization as a C-Corp. 

Business Insurance

While the corporate structure does provide some protection from your personal assets, it’s also recommended to protect your company against various types of risk. Depending on your business goals, services, and risk exposure, you may want at least general liability and/or professional liability insurance coverage. General liability, as the name suggests, is generalized liability coverage for lawsuits, injury or property damage. Professional liability coverage (errors and omissions or E&O) only covers lawsuits over the financial losses someone may experience because of your work.

QSBS (Qualified Small Business Stock)

Technology startups can often issue equity that can meet the rules for Qualified Small Business Stock (QSBS, Section 1202). Qualifying for QSBS treatment can provide significant tax benefits by excluding or reducing capital gains taxes when the stock is sold.

The tax exemption allows savings up to the greater of $10 million or ten times the shareholder's basis. There are many variables to be aware of to utilize potential QSBS exclusions, so it’s pivotal to plan as early as possible. 

The company must be a domestic C-Corporation, must have had less than $50 million in gross assets at the time the stock was issued, and must be an active business. Additionally, you must hold the stock for a minimum of 5 years before the sale. In many cases, it is common to file an 83(b) election to start the clock on your holding period for QSBS exemption, especially when there would be no negative tax implications as a result. 

Employees and Benefits

Depending on your goals and if you intend to hire employees, there are several operational services to consider. You will want to set up payroll services. In addition, you will want to offer a benefits package to attract and retain the type of talented team members you are looking for. As a tech startup, your prospective team will often expect equity compensation, especially if they are early employees. Startups need to consider how to manage these benefits as early as possible. Whatever direction you go, it’s crucial to utilize platforms that can be automated and integrated as much as possible. 

Work with a Professional

Starting a business or startup can be complicated and have numerous moving parts. It's highly recommended that you begin working with a professional early to formulate, implement, and maintain an effective strategy. Also make sure to work with a professional who has expertise with your unique situation and understands the dynamic frameworks you need to be aware of. A team consisting of financial planners, tax professional, and attorneys should be consulted to ensure you are not missing anything at any point.