In the first month of a startup, founders are often consumed by innovation, product development and go-to-market strategies. While these aspects are undoubtedly crucial, there’s an equally important facet that warrants immediate attention — establishing a robust legal and financial infrastructure.
This article serves as a checklist for startup founders who have recently incorporated their startup. Here’s what you need to do next and why it’s important. By understanding and implementing these foundational elements, startups can navigate the complexities of the business landscape with increased confidence, compliance and control, paving the way for sustainable growth and success.
You should work with legal counsel to ensure compliance. If you’re looking for legal counsel, feel free to reach out to us here.
Post-Incorporation Legal Work
If you have just filed your certificate of incorporation with the Secretary of State but done nothing else, you have a little more legal work to handle as soon as possible, ideally within the first 7 days. This set of documents is sometimes referred to as the post-incorporation process, which brings you from a newly minted company to a fully functional company.
You’ll need to at least complete the following steps before you can legally open a bank account, hire contractors or employees, or start doing business. There may be some variation, depending on the needs of your company or the preferences of your counsel. But the list below has become a fairly standard set of initial documents for a venture-backable startup.
- Action of Incorporator
- Initial Board Consent
- Restricted Stock Purchase Agreements
To learn more about the post-incorporation process, click here. If you’re looking for legal counsel on the post-incorporation process, please check out our transparent flat fees and feel free to reach out to us here.
Obtaining a Federal Tax ID Number for Your Corporation
After forming your corporation, obtaining a federal tax ID number (also known as an Employer Identification Number, or EIN) from the IRS is necessary. This nine-digit number identifies your corporation for tax purposes.
To obtain a Federal Tax ID number for your corporation, follow these steps:
- Complete Form SS-4. Complete Form SS-4 online, by fax or by mail. The form requires basic information about your corporation such as its legal name, mailing address and business purpose.
- Submit Form SS-4. Submit Form SS-4 to the IRS. The processing time for online applications can take up to two weeks while paper applications can take up to four weeks.
- Receive Your EIN. Once processed, the IRS will assign your corporation a unique EIN that should be used when filing tax returns and other required documents.
Obtaining a federal tax ID number for your corporation is important to stay compliant with IRS regulations and avoid any potential penalties. To learn more about the EIN, click here.
Qualifying in Your Home State
In addition to obtaining a federal tax ID number, you must also register your corporation with the state where it is doing business. If your corporation is incorporated in the state where it does business, then you don’t need to worry about this. However, many startups incorporate in Delaware but are headquartered in other states.
It’s important for startups to qualify to do business in their home state. This process varies by state, but is generally known as foreign qualification or an application of authority. The basic idea is that you’re informing your home state that your corporation, which was incorporated in another state, will also operate in your home state. If you’d like to learn more about foreign qualifications, click here.
Corporate Minute Book
Keeping clean corporate records is essential for startups. If you start doing it cleanly from the outset, it will be way easier than trying to organize during due diligence. The corporate records used to be kept in a literal binder. These days, it’s generally a shared drive. Keeping clean corporate records on a shared drive is not only a legal necessity but also plays a vital role in ensuring the smooth operation, financial accountability and growth of a new corporation. To learn more about a corporate minute book, click here.
Set Up a Bank Account and Corporate Credit Card
Setting up a bank account and corporate credit card after incorporating is a smart move for startups for several reasons:
- Financial Separation. It helps in keeping the business’s finances separate from the personal finances of the owners. This separation is crucial for maintaining the corporate veil, which protects the personal assets of the owners from business liabilities.
- Streamlined Accounting. Having dedicated financial accounts for the business makes it easier to keep track of expenses, revenues and other financial transactions, streamlining accounting and bookkeeping processes.
- Expense Management. Corporate credit cards can offer expense management tools that can be helpful for startups to track and categorize expenses, making it easier to manage budgets and prepare financial reports.
- Building Credit History. Using a corporate credit card responsibly can help a startup build its credit history. A good credit history can be advantageous when the business needs to secure loans or other forms of financing in the future.
- Rewards and Perks. Many corporate credit cards offer rewards programs, cash back or other perks that can be beneficial for the business, such as travel rewards or discounts on business services.
- Investor Confidence. Potential investors and lenders are likely to have more confidence in a startup that has well-organized financial records and separate business accounts, as it demonstrates a commitment to professionalism and proper financial management.
Setting up a bank account and corporate credit card is not only a smart move but often essential for the successful and compliant operation of a startup.
Getting insurance is a smart move for startups because it provides a safety net against various risks and liabilities that can threaten the business’s stability and growth. Here’s why it is important and the types of insurance that startups should consider:
- Risk Management. Startups often operate in uncertain environments. Insurance helps in managing risks by providing financial support in case of unforeseen events such as accidents, lawsuits or property damage.
- Legal Compliance. In many jurisdictions, certain types of insurance such as workers’ compensation and general liability are legally required. Having these insurances ensures that the startup complies with legal obligations.
- Contractual Requirements. Some clients or vendors might require proof of certain types of insurance before engaging in a contract. For example, a landlord may require a startup to have general liability insurance as a condition for leasing office space.
Types of insurance startups should consider:
- General Liability Insurance. Covers legal costs and payouts if the business is sued for things like injury or property damage.
- Property Insurance. Covers loss and damage to company property due to events like fire, theft and natural disasters.
- Workers’ Compensation Insurance. Required by law in most places, it covers medical costs and partial wage replacement if employees get injured or become ill due to work-related activities.
- Professional Liability Insurance (Errors and Omissions). Protects against claims of negligence, mistakes or failure to deliver services, which is especially important for service-based businesses.
- Product Liability Insurance. Essential for companies that manufacture or sell physical products, it covers lawsuits due to damages caused by the use of the product.
- Cyber Liability Insurance. Protects against data breaches and cyberattacks, which is increasingly important in the digital age.
- Directors and Officers Insurance (D&O). Protects the personal assets of a company’s directors and officers, as they can be held personally responsible for their company’s actions or failures.
- Health Insurance. Provides health benefits for employees.
- Key Person Insurance. Protects the company in case a key executive or employee who is critical to the business is lost.
- Business Interruption Insurance. Covers the loss of income due to a disaster that disrupts the operation of the business.
The specific types and levels of insurance a startup should get may vary depending on factors such as industry, location, size and the nature of the business. It is advisable to consult an insurance expert or broker to determine the most appropriate coverage for the startup.
Prepare a Cap Table
A cap table, short for capitalization table, is a document or spreadsheet that provides a detailed overview of a company’s ownership structure. It lists all the securities the company has issued, such as shares, options, warrants and convertible notes, and shows who owns them, effectively tracking the equity ownership of a company.
The cap table usually includes information on:
- Common shares owned by founders and employees.
- Preferred shares owned by investors.
- Stock options / stock grants and any other equity incentives that are part of an employee stock option plan (ESOP).
- Warrants, which are similar to options but often issued to investors.
- SAFEs / Convertible Notes or other convertible securities that can be converted into stock.
By organizing this information, a cap table helps companies, especially startups, to understand how much of the company each stakeholder owns (their equity percentage) and what the company’s ownership structure would look like under various scenarios (e.g., if all convertible securities were converted to stock).
Cap tables are essential tools for financial planning, investor relations and legal compliance. They are especially critical during fundraising and acquisitions, as they help in understanding how these events will affect ownership percentages and dilution. Preparing a cap table right after incorporation is essential for startups to maintain a transparent record of ownership and securities. This record is invaluable for decision-making as it presents a clear picture of ownership stakes, aiding in equity compensation planning, fundraising, valuation analyses and ensuring legal compliance. Moreover, an organized cap table appeals to potential investors, who typically require insights into the company’s ownership structure and the availability of equity for issuance.
Keeping the cap table updated is equally critical. It enables startups to efficiently analyze the impact of new funding rounds or stock issuances on dilution and valuation. Furthermore, an up-to-date cap table is vital for executing exit strategies, understanding tax implications and resolving ownership disputes. It also prevents the last-minute scramble to update records during crucial events such as fundraising or legal proceedings, saving time and averting costly errors.
To download a free template and learn about building cap tables and other financial models, check out Foresight.
Set Up a Payroll Processor
Setting up payroll immediately after incorporation is a prudent step for startups as it streamlines the compensation process and ensures legal compliance. As a startup begins to hire employees, having a structured payroll system in place is essential to ensure that they are paid accurately and on time, which boosts morale and fosters loyalty. Additionally, a payroll system helps in the accurate deduction and remittance of taxes and other statutory contributions, thereby keeping the company compliant with labor and tax regulations. It also aids in maintaining organized records, which are invaluable during financial audits or when seeking investments, as they reflect the startup’s commitment to professionalism and governance. Rippling, Gusto and Justworks tend to be popular among startups. Click here to compare those options.
Bookkeeping and Accounting
Setting up a bookkeeping and accounting system immediately after incorporating is smart for startups due to several reasons:
- Financial Visibility and Control. A proper accounting system provides clarity on the company’s financial position, helping entrepreneurs make informed decisions. Understanding cash flows, expenses and revenues is crucial for managing a startup effectively.
- Legal / Tax Compliance. Compliance with tax laws and regulations is essential for any business. An accounting system helps ensure that all financial transactions are recorded accurately and that the company is prepared for tax filing and reporting.
- Investor Readiness. Potential investors and lenders will likely request financial statements to assess the startup’s viability and management. Having an organized accounting system demonstrates professionalism and makes the business more attractive to investors.
- Budget Management. Startups often operate with limited resources. An accounting system helps in creating and managing budgets, ensuring that the company operates within its means and allocates resources efficiently.
- Cash Flow Management. Startups need to carefully manage their cash flow to ensure that they can cover operating expenses. An accounting system helps monitor receivables, payables and cash on hand.
- Time-saving: As the business grows, financial transactions become more complex. Setting up an accounting system early saves time in the long run by streamlining financial processes from the start.
- Performance Analysis: Through financial reports generated by an accounting system, startups can analyze performance trends, identify profitable areas and spot issues before they become significant problems.
By having an efficient accounting system, founders and team members can spend less time on administrative tasks and focus more on core business activities and growth strategies. So, setting up a bookkeeping and accounting system right from the incorporation stage lays the foundation for financial discipline, informed decision-making, legal compliance, and ultimately contributes to the startup’s success and sustainability. QuickBooks, Freshbooks, NetSuite and Xero tend to be popular among startups. Click here to compare those options.
In conclusion, while the early days of a startup can be exciting and fast-paced, it’s crucial to prioritize setting up a strong legal and financial infrastructure. By following the checklist outlined in this article, startup founders can ensure compliance, control and confidence in navigating the complexities of the business world. From post-incorporation legal work, obtaining a federal tax ID number and setting up a bank account to getting insurance, preparing a cap table, and setting up payroll and accounting systems, these foundational elements lay the groundwork for sustainable growth and success. So, while innovation and product development are undoubtedly essential, don’t overlook the importance of establishing a strong legal and financial foundation for your startup.