The Legal Blueprint for Startups: What Founders Must Know Before Incorporating

When founders dream up the next great venture, legal structuring is often the last thing on their minds. But as anyone who’s scaled a business knows, ignoring early-stage legal decisions can turn a dream into a nightmare. To dissect this topic we brought on Eric Broad, founder and CEO of Bowery Legal, to dive deep into the practical legal groundwork every startup needs.

From choosing the right entity to setting up proper documentation, here's your guide to laying the foundation for long-term success.

LLC, C Corp, or S Corp? Why Structure Matters

One of the most common questions early-stage founders wrestle with is: “What kind of entity should I form?”

It’s not a one-size-fits-all answer. The choice largely hinges on your business model, growth trajectory, and funding strategy. If you're planning to raise venture capital, the answer is almost always a C Corporation (C Corp), specifically a Delaware C Corp. That’s because venture funds have tax constraints that limit their ability to invest in LLCs and typically require the fiduciary framework that a C Corp provides.

But what if you're bootstrapping a services business like a law firm or an agency? An LLC could be more advantageous, thanks to its pass-through taxation model, which avoids the double taxation associated with C Corps. LLCs also provide flexibility in distributing profits to founders and partners without corporate tax implications.

However, Eric warns against trying to "outsmart" the system. Legislators have intentionally designed tax incentives like Qualified Small Business Stock (QSBS) to benefit high-growth C Corps. Trying to maneuver around these structures could mean missing out on significant tax advantages down the line.

The Delaware Gold Standard (and Why You Should Probably Stick to It)

Yes, there’s been buzz about companies incorporating in Texas or Nevada, but for 99% of startups—especially those seeking venture funding—Delaware is still the playbook. Delaware offers a robust legal framework, predictable case law, and investor familiarity, all of which smooth the road when you’re fundraising or scaling.

While certain professional services (e.g., law firms, medical practices) may need to incorporate in the state where they’re licensed, tech and product-driven startups typically go with Delaware.

Beyond Incorporation: The Documents That Matter

Filing your Certificate of Incorporation is just the first step. Eric emphasizes that founders must also:

• Form a board of directors
• Issue founder stock and equity grants
• Execute IP assignment agreements to ensure all intellectual property is owned by the company, not individual contributors
• Adopt an equity incentive plan to attract talent

Skipping any of these steps can lead to major complications—especially if a co-founder exits or investors start diligence on your company.

For LLCs, things can get even more complex. Crafting an operating agreement requires careful consideration of ownership percentages, governance structures, and profit-sharing mechanisms. Ironically, setting up an LLC often demands more upfront legal thought than incorporating a C Corp.

When’s the Right Time to Incorporate?

Eric’s rule of thumb? The moment you move beyond the idea stage and start building with third parties—whether it’s co-founders, contractors, or employees—you need to formalize your entity. This protects your IP, clarifies ownership, and sets expectations among all stakeholders.

Delaying incorporation could open the door to costly disputes or IP issues later.

Don’t DIY Your Legal Foundation

While it may be tempting to cut corners and piece together templates from the internet, Eric and Phuong’s discussion highlights why experienced legal counsel is non-negotiable. The upfront investment in proper structuring pays dividends when you’re raising capital, hiring key employees, or eventually exiting your business.

After all, as Mark Davis reminded us in the episode, this is why the “gods created lawyers.”

Key Takeaways:

• Tech startups raising VC should almost always be Delaware C Corps.
• Service-oriented businesses might lean towards LLCs for tax efficiency.
• QSBS and other tax incentives are built for C Corps—don’t miss out.
• Don’t wait too long; incorporate as soon as third-party involvement begins.
• Avoid legal shortcuts—work with professionals to get it right.

For a deeper dive into early-stage legal strategy, check out our earlier post on building a resilient startup foundation here or read about scaling from inception to Series A here.

FAQs

Why is Delaware the default for startups?

Delaware offers established legal precedent, investor familiarity, and founder-friendly corporate governance rules. It’s the gold standard, especially for venture-backed companies.

Can I start as an LLC and convert to a C Corp later?

Yes, converting from an LLC to a C Corp is common and not a taxable event. However, converting a C Corp to an LLC typically is a taxable event, so plan accordingly.

What’s QSBS, and why should I care?

Qualified Small Business Stock (QSBS) allows founders and investors in qualifying C Corps to exclude up to $10 million (or 10x their investment) from federal capital gains taxes if certain criteria are met.

When is the latest I can wait to incorporate?

Incorporate before you start building anything with a co-founder, contractor, or third party to protect your IP and avoid disputes later.

Should solo founders incorporate early?

Even solo founders benefit from incorporating early, especially when hiring contractors, building an MVP, or preparing to fundraise.

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