Startup Incorporation Guide: How to Set Up Your Business the Right Way from Day One

Most startups don't fail because of bad ideas. They fail because of bad foundations. And one of the most consequential decisions you'll make as a founder happens before you write a single line of code or close your first sale: how you incorporate your business.

Get it wrong, and you'll spend months untangling legal messes, restructuring your entity for investors, or discovering that your co-founder owns equity they never earned. Get it right, and you'll have a clean foundation that supports fundraising, hiring, and growth for years to come.

This guide walks you through everything you need to know about incorporating a startup—from choosing the right entity type to avoiding the mistakes that trip up even experienced founders.

Why Incorporation Matters More Than You Think

Operating as an unincorporated business means you're personally liable for everything—debts, lawsuits, contracts gone wrong. Incorporation creates a legal separation between you and your business, protecting your personal assets while giving you a formal structure for ownership, taxes, and growth.

Beyond liability protection, incorporation is a practical requirement for:

• Raising capital: Investors won't write checks to an individual or informal partnership
• Hiring employees: You need a legal entity to run payroll and offer equity compensation
• Opening business bank accounts: Banks require incorporation documents and an EIN
• Signing contracts: Enterprise customers and partners expect to contract with a legal entity
• Protecting intellectual property: IP needs to be assigned to a company, not held by individuals

About 68% of Fortune 500 companies are incorporated in Delaware, and most venture-backed startups follow the same path. There are good reasons for this, which we'll cover next.

Choosing Your Entity Type

The two most common structures for startups are C corporations and LLCs. Your choice affects taxation, fundraising ability, and operational flexibility.

C Corporation

A C corp is the standard for venture-backed startups. If you plan to raise outside investment from VCs or angel investors, this is almost certainly the right choice.

Advantages:

• Venture capitalists expect and prefer C corps
• Clean equity structure with stock classes (common and preferred)
• 83(b) elections allow founders to minimize tax on stock appreciation
• No limit on the number of shareholders
• Well-established legal precedent, especially in Delaware

Considerations:

• Subject to double taxation (corporate tax on profits, then personal tax on dividends)
• The federal corporate tax rate is 21%
• More formal governance requirements (board meetings, minutes, annual reports)
• Delaware franchise tax starts at $175 annually

LLC (Limited Liability Company)

LLCs work well for bootstrapped businesses, consulting firms, real estate holdings, and businesses that don't plan to raise venture capital.

Advantages:

• Pass-through taxation (profits taxed once at the individual level)
• Flexible management structure
• Fewer formal requirements than a corporation
• Can elect different tax treatments (sole proprietorship, partnership, or S corp)

Considerations:

• Most VCs won't invest in an LLC due to tax complications
• SAFEs and convertible notes don't work cleanly with LLC structures
• Converting an LLC to a C corp later adds cost and complexity
• Some states charge higher fees for LLCs

Which One Should You Choose?

If you're building a technology company and plan to seek venture funding, form a Delaware C corporation. If you're starting a service business, freelancing, or building a lifestyle business, an LLC in your home state is likely the better fit. When in doubt, consult a startup attorney—getting this wrong early is expensive to fix later.

Why Delaware?

Delaware isn't just popular by accident. The state has spent over a century building the most business-friendly legal environment in the United States.

The Court of Chancery: Delaware's dedicated business court has no juries—cases are decided by judges who specialize in corporate law. This means faster, more predictable outcomes for business disputes.

Established case law: Decades of corporate litigation have created a deep body of legal precedent. Lawyers, investors, and board members know exactly how Delaware law works, which reduces uncertainty.

Privacy protections: Delaware doesn't require you to list officers or directors in your Certificate of Incorporation, offering more privacy than many other states.

No state income tax on out-of-state revenue: If your company is incorporated in Delaware but operates elsewhere, you typically owe no Delaware income tax. Delaware also has no sales tax.

Franchise tax: The tradeoff is Delaware's annual franchise tax and report filing requirement. The minimum is $175, and it's due by March 1 each year. For most startups, this is a manageable cost given the other benefits.

Even if you incorporate in Delaware, you'll still need to register as a "foreign corporation" in whatever state you actually operate in and pay taxes there. Delaware incorporation is about legal structure, not tax avoidance.

Step-by-Step Incorporation Process

Step 1: Choose and Reserve Your Company Name

Your name must be unique among entities registered in Delaware. It must end with a corporate designator like "Inc.," "Corp.," or "LLC." Check availability through the Delaware Division of Corporations website before filing.

Step 2: Appoint a Registered Agent

Delaware law requires every corporation to have a registered agent with a physical address in the state. This agent receives legal documents and official notices on your behalf. Services like CSC, Cogency Global, or the registered agent included with online incorporation platforms handle this for around $100–$300 per year.

Step 3: File Your Certificate of Incorporation

This is the core formation document. For a C corp, it includes your company name, registered agent information, authorized share structure, and incorporator details. The standard filing fee is $109, with expedited options available for additional fees.

For most startups, attorneys recommend authorizing 10 million shares of common stock at $0.0001 par value. This gives you plenty of room for founder shares, employee option pools, and future investment rounds.

Step 4: Draft Bylaws and Corporate Resolutions

Bylaws govern how your company operates internally—board meetings, officer roles, voting procedures, and stock transfer rules. While not filed with the state, they're legally required and essential for governance.

Initial resolutions formally appoint officers, adopt bylaws, authorize the issuance of shares, and establish the company's fiscal year.

Step 5: Obtain Your EIN

Apply for an Employer Identification Number from the IRS. This is your business's tax ID, required for opening bank accounts, filing taxes, and hiring employees. If you have a U.S. Social Security Number, you can get an EIN online in minutes. Without one, the process takes several weeks via mail or fax.

Step 6: Issue Founder Shares and File 83(b) Elections

Issue shares to all founders according to your agreed equity split. Founders typically purchase shares at par value (fractions of a penny per share).

Critical step: File 83(b) elections with the IRS within 30 days of receiving shares. This election lets you pay tax on the value of shares at the time of purchase (essentially nothing) rather than when they vest (potentially millions). Missing this deadline is one of the most expensive mistakes a founder can make, and it cannot be corrected after the fact.

Step 7: Set Up Your Cap Table

Your capitalization table tracks ownership—who holds how many shares of what type. Start clean and keep it updated. Most startups reserve 10–20% of shares for an employee stock option pool. Tools like Carta, Pulley, or even a well-maintained spreadsheet work for early-stage companies.

Step 8: Open a Business Bank Account

With your Certificate of Incorporation, EIN, and corporate resolutions in hand, open a dedicated business bank account. Never mix personal and business finances—this is one of the fastest ways to lose your liability protection (a concept called "piercing the corporate veil").

Online Incorporation Platforms

Several platforms streamline the incorporation process, handling paperwork, filings, and post-incorporation setup in one place.

What they typically offer:

• Certificate of Incorporation filing
• EIN acquisition
• Registered agent services (first year included, then annual renewal)
• Template legal documents (bylaws, IP assignment agreements, stock purchase agreements)
• 83(b) election filing
• Business bank account setup
• Partner discounts on tools and services

These platforms generally charge $300–$500 for the complete package, which is significantly less than the $3,000–$5,000 a startup attorney would charge for similar formation work. However, if your situation involves multiple founders with complex equity arrangements, international considerations, or unusual business structures, legal counsel is worth the investment.

The Seven Mistakes That Cost Founders the Most

1. Incorporating Too Early

Incorporating feels like progress, but it creates real obligations—franchise taxes, annual reports, registered agent fees, and potential tax filings. If you're still validating your idea, wait until you have a co-founder agreement in place, are ready to accept money, or need to sign contracts.

2. Skipping Founder Vesting

Even if you and your co-founder are best friends, implement vesting schedules. The standard is four-year vesting with a one-year cliff. Without vesting, a co-founder who leaves after three months walks away with their full equity stake while you build the company alone.

3. Forgetting the 83(b) Election

You have exactly 30 days from the date you receive restricted stock to file this election. There are no extensions, no exceptions, and no way to fix it after the deadline. Set a calendar reminder the day you issue shares.

4. Not Assigning Intellectual Property

Any code, designs, or ideas created before incorporation technically belong to the individuals who created them, not the company. Execute IP assignment agreements immediately upon formation so all intellectual property is owned by the corporation.

5. Giving Away Too Much Equity

Equity is your most valuable and limited resource. Before promising 5% to an advisor or 10% to an early contractor, understand the long-term implications. Once equity is granted, getting it back is nearly impossible without creating legal headaches.

6. Mixing Personal and Business Finances

Using your personal bank account for business transactions undermines the liability protection that incorporation provides. Open a business account immediately and route all business transactions through it.

7. Ignoring Ongoing Compliance

Incorporation isn't a one-time event. You must file annual reports, pay franchise taxes, hold annual board meetings (even if informal), and keep corporate records. Falling out of compliance can result in your entity being dissolved by the state.

After Incorporation: Building Your Financial Foundation

Once your business is legally formed, the next critical step is setting up proper financial tracking. Many founders treat bookkeeping as something to worry about later, but starting with clean financial records from day one saves enormous time and money when tax season arrives, when investors request financials, or when you need to understand your burn rate.

Key financial priorities for newly incorporated startups:

• Separate bank account: Already covered above, but worth emphasizing
• Expense tracking from day one: Every business expense should be recorded and categorized
• Revenue recognition: Understand when and how to record income
• Tax obligation tracking: Quarterly estimated tax payments, franchise taxes, state registrations
• Cap table maintenance: Keep ownership records current as you issue shares or options

Take Control of Your Startup Finances

Incorporating your business is just the beginning. From tracking startup expenses to managing investor funds and preparing for tax obligations, maintaining clear financial records is essential for every founder.

Beancount.io offers plain-text accounting that gives you complete transparency and control over your financial data—version-controlled, auditable, and free from vendor lock-in. Whether you're tracking pre-revenue expenses or scaling post-funding, you'll always know exactly where your money stands. Get started for free and build the financial foundation your startup needs to grow.