Contributor: Darby Wong, Co-founder and CEO of Clerky

Incorporation is an important step in any startup’s journey. If handled properly, it can be a straightforward process. 

But if you aren’t familiar with the nuances of startup incorporation the process can be time-consuming and expensive, according to Darby Wong, co-founder of Clerky, an online legal service for startup founders.

Wong details the keys to incorporating a startup, plus common mistakes and how to avoid them.

Why should startups incorporate?

Incorporation creates a legal entity that allows startups to raise money, hire employees and establish clear ownership structures. Investors—especially institutional ones—typically require an entity to invest their capital because it provides a defined framework for ownership, control mechanisms and conflict resolution. 

“With angel investors, seed investors, venture capitalists—they don’t want to wire their money to an individual,” Wong said. “Investors want to know their money is going into a legal entity that owns the intellectual property and has founders in it for the long haul.”

When should startups incorporate?

Startups should consider incorporation based on several key factors, with outside investment being one important trigger. Wong said incorporation resolves a logistical obstacle before founders approach potential investors: the ability to open a bank account to receive transfers.

“You don’t want to be distracted with these kinds of things at critical moments, like when you have investors waiting to wire funds,” Wong said. “There’s the adage ‘time kills all deals.’ You want to remove any avoidable source of delay.”

Other important incorporation timing factors include protecting founders’ intellectual property, establishing liability protection as customer relationships begin, and creating a foundation for hiring employees. The specific timing depends on each startup’s unique circumstance.

Incorporation also directly impacts the founder's personal finances, as it’s a critical early step in creating legal separation between personal and business assets and liabilities.

Where do startups incorporate?

For high-growth startups, Delaware is the dominant choice for incorporation.

More than 67% of all Fortune 500 companies and more than half of all U.S. publicly traded companies are incorporated in Delaware, according to Delaware Division of Corporations’ 2023 Annual Report. 

“The biggest reason Delaware is popular, by far, is because of the ecosystem that has developed around it,” Wong said. “Every startup attorney is going to be familiar with Delaware law.”

Small founders may consider alternative incorporation jurisdictions such as Nevada or Wyoming, as these states are often seen as offering favorable privacy protections and tax benefits. But these options remain uncommon for venture-backed startups seeking to raise capital, Wong said.

How should startups incorporate?

There are several business structures that a founder could choose, such as an LLC or corporation. 

High-growth innovation startups typically incorporate as C corporations, while traditional small businesses more commonly form as LLCs. This distinction is important for startups planning to raise venture capital.

C corps offer several key advantages that make them a standard choice for high-growth startups: 

• They provide a well-defined default structure established by statute, creating consistency and predictability that investors understand and prefer 
• They establish clear corporate governance; shareholders own the company, directors provide oversight, and officers manage operations
• They allow for an unlimited number of shareholders, unlike S corporations which limit ownership to 100 shareholders

“With C corps, it’s this very modular standardization that people have built around, and you’re just not going to get that with other entity types,” Wong said.