Next Steps for Startups: Post-Incorporation Checklist

Congratulations on incorporating your startup! Now that your business is officially on the map, it is time to take the next crucial steps to ensure a solid foundation for growth and success. This checklist provides new businesses with a roadmap to navigate the post-incorporation phase efficiently.
 

1. Comply with the Corporate Transparency Act.
   Effective January 1, 2024, the Corporate Transparency Act (CTA) obligates specific entities to submit Beneficial Ownership Information (BOI) to the Financial Crimes Enforcement Network (FinCEN), with potential civil and criminal penalties for non-compliance. Startup owners must ascertain their business’s status as a “reporting company” and explore eligibility for exemptions. Companies established or registered before January 1, 2024, have until January 1, 2025, for initial BOI filing, while those established after this date must file within 90 days in 2024 and 30 days from 2025 onwards. FinCEN requires additional updates to the BOI report within 30 days of changes or the discovery of errors or inaccuracies. Additionally, businesses must identify (i) beneficial owners (i.e., persons with 25% or more ownership or “substantial control”) and (ii) up to two company applicants, while providing comprehensive details in the BOI report, including legal entity names, trade names, U.S. addresses, state of incorporation, tax and employee identification numbers, and individual beneficial owner information such as legal names, birthdates and addresses. Qualifying businesses must file their BOI report electronically at https://www.fincen.gov/boi. Additionally, businesses should consider dissolving any entities that are inactive or not essential, and contemplate amending your governing documents, such as your operating agreement, bylaws or shareholder agreement, to address the beneficial owners’ obligations regarding the provision of personal information. Implementing a company policy for maintaining and updating the BOI report will be critical to ensure compliance.


2. Issue Founder Equity/Ownership.
   Shortly after incorporating a new company, founders typically execute common stock purchase agreements to acquire shares, which requires board of director approval and payments from the founders for the shares (i.e., cash, IP, services). If the company lacks a bank account, founders can issue a cashier’s check to the company as proof of payment. Swift completion of this process is vital since, according to IRS rules, stock cannot be sold below fair market value at the time of the equity issuance, thus allowing founders to obtain substantial equity stakes at a low cost. Delays may render these transactions financially unfeasible with the rapid increase in the company’s value, so it is a good practice to promptly finalize these issuances, including obtaining signatures on purchase documents, processing checks from stockholders (if in cash), and maintaining detailed payment records in the company’s files. A well-maintained capitalization table and stock ledger is vital for the future growth of the company and smooth sailing in future diligence exercises.


3. File an 83(b) Election.
   If any founders or stockholders are receiving shares subject to vesting (or the right for the Company to repurchase), filing an 83(b) election with the IRS within 30 days of the share purchase is crucial, as there are no exceptions to this deadline. This election informs the IRS about the time, date and price of the share purchase, impacting the taxation of future share sale proceeds as income or long-term capital gains (in addition to the potential tax exposure at each vesting period). While traditionally requiring a wet-ink signature and physical mail submission, the IRS now accepts electronic signatures for 83(b) elections, temporarily easing the process.


4. Establish a Data Site.
   Create a secure document repository to store important legal, financial and operational documents. This will streamline future audits, due diligence and compliance processes. Maintaining organized legal documentation from the inception of a company is crucial, as external investors seeking to raise capital often review the company’s formation and stock issuance records. Utilizing a document room, such as Dropbox or Google Drive initially, to store all legal agreements facilitates smooth access for investors inquiring about the company’s legal documentation during future fundraising rounds with angel investors, venture capitalists and their legal counsel.


5. Acquire an Employee Identification Number (EIN).
   The Employee Identification Number (EIN) is a unique identifier assigned by the IRS to corporate entities, necessary for activities such as opening a bank account, securing a corporate credit card, hiring employees and filing annual corporate income tax returns. Obtaining an EIN is typically authorized by the company bylaws, enabling company directors to initiate the process and set up a bank account for the newly formed corporation.


6. Establish a Business Bank Account.
   Establishing a business bank account for your new company is essential for separating personal and business finances, requiring company formation contracts and the EIN during the account application process. This separation is critical to mitigate personal liability risks for founders, co-founders or company shareholders in case of business liabilities. Although founders can self-fund their companies, maintaining proper documentation is crucial to avoid complications and the risk of comingling funds. Setting up a checking account and credit card in the company’s name can protect stockholders from personal liability, and the company should use these business accounts for all transactions. Founders can provide loans to the company, but meticulous record-keeping and refraining from intermingling personal and company funds are best practices.


7. File State and Local Registrations.
   Many startups opt to form as a corporation in Delaware, a common choice despite founders residing outside the state given Delaware’s popularity for corporate registrations. However, startups registered in Delaware must also register to do business in their home state(s) and other states of operation. To register as a foreign entity a company must obtain a registered agent in each relevant state and fulfill all annual franchise tax obligations. Utilizing third-party services or seeking legal assistance can aid in the registration process. Additionally, exploring state-specific requirements, such as obtaining a state-level identification number, can be done through your state’s employment and tax agency’s website.


8. Create a Capitalization Table.
   A “cap table,” or capitalization table, built off of the stock ledger, serves as a comprehensive record of a company’s securities, including stocks, options and warrants, detailing their specific ownership. Initially, the cap table encompasses founders, advisors and consultants to track the ownership structure. Providing investors with a copy of the cap table is common during fundraising, particularly in the initial stages of investment. Companies can manage their cap table with external counsel or explore capitalization management services, seeking recommendations from advisors for efficient coordination. A “pro forma” cap table is a forward-looking cap table that shows the impact of a planned financing transaction on the company’s existing equity ownership.


9. Double Check that All Essential Legal Documents Have Been Filed.
   After incorporating a business, the required legal documents vary based on the nature of the business and its services. Essential post-incorporation documents may include the Action by Sole Incorporator, Bylaws, Unanimous Written Consent for the first board meeting, Founder’s Stock Purchase Agreements (with optional 83(b) filings), Intellectual Property Assignment/Bill of Sale (when transferring intellectual property), Indemnification Agreements for directors, Written Consent of Stockholders (in specific situations), Stock Certificates for founder’s shares, Applicable Securities Filings for stock issuances, and Form SS-4 (application for EIN). Incorporating is just the beginning, and these additional steps are crucial for a comprehensive and legally sound business establishment.


10. Get Business Insurance.
    Startups typically consider acquiring business insurance at key milestones such as acquiring paying customers, hiring the first W-2 employees, leasing office space or bringing on an external board member through a priced financing round. The scope of insurance needs for a startup will expand as the business grows and begins to offer publicly available products and services. Engaging a reputable insurance broker proves invaluable in navigating this process efficiently.


11. Preparing to Expand Your Team
    If you are ready to expand your team, understand the legal and regulatory requirements for hiring employees. Develop employment contracts, establish payroll systems and ensure compliance with labor laws. It is crucial to possess well-crafted offer letters and employee proprietary information and inventions assignment agreements for an efficient onboarding process that safeguards the company’s intellectual property and confidential information. Neglecting to include enforceable intellectual property assignment language or non-disclosure agreements in employment or contractor agreements may result in complications for the company in the future. Additionally, consider creating a stock option plan which will allow the company to offer equity to new employees, a frequent practice for startups.


12. Consider Hiring an Accounting Service
    Every startup encounters diverse accounting and bookkeeping requirements, a complexity that expands with the company’s growth. As revenue and employment numbers increase, startups often enlist external accounting services to manage their books and file quarterly tax returns with estimated payments. The evolving needs of accounting, bookkeeping and taxes are inherent in business growth. While founders may oversee these tasks independently, many opt for outsourcing, leveraging specialized startup-oriented services recommended by mentors and advisors for high-quality and cost-effective solutions.

Conclusion
By diligently following this checklist, startup founders can navigate the post-incorporation landscape with confidence and lay the groundwork for sustained success. Each step contributes to building a strong and compliant business infrastructure that will support your startup’s growth journey.