Startup Business Formation

Startup Business Formation Skill

Overview

Comprehensive business formation guidance for startups, focusing on Delaware C-Corp formation (the VC-standard structure) plus foreign qualification for any U.S. state. This skill provides step-by-step processes, legal document templates, state-specific guides, and compliance tracking.

When to Use This Skill

Automatic Triggers

• User mentions "incorporate", "form a company", "Delaware C-Corp"
• Discussion of entity types (LLC vs C-Corp vs S-Corp)
• Questions about foreign qualification or multi-state registration
• Equity structuring, founder vesting, or stock allocation
• 83(b) election questions (CRITICAL tax election)
• Business formation costs or timelines
• Annual compliance requirements

Manual Invocation

Use when you need comprehensive business formation guidance including entity selection, incorporation process, state registration, equity structure, and ongoing compliance.

Core Capabilities

1. Entity Selection & Strategy

• Entity Type Comparison: C-Corp, S-Corp, LLC, B-Corp, Non-Profit
• Delaware C-Corp Advantages: Why it's the VC-standard
• State Selection: When to incorporate in Delaware vs home state
• Tax Implications: Corporate vs pass-through taxation
• Future Fundraising: Entity requirements for VC/angel investment

2. Delaware C-Corp Formation

• Name Selection: Availability checking and reservation
• Registered Agent: Delaware requirement and service providers
• Certificate of Incorporation: Filing and template guidance
• Corporate Bylaws: Standard provisions and customization
• Organizational Meeting: Initial board resolutions
• Stock Issuance: Founder shares and documentation
• 83(b) Election: CRITICAL 30-day filing requirement
• EIN Application: Federal tax ID number
• Bank Account: Corporate banking setup

3. State Foreign Qualification

• When Required: "Doing business" definitions by state
• Application Process: State-by-state procedures (all 50 states)
• Registered Agent: Home state requirements
• Timeline: Typical 1-3 weeks per state
• Costs: Filing fees ranging from $100-$500 per state
• Ongoing Compliance: Annual reports and franchise taxes

4. Equity Structure & Founder Agreements

• Founder Stock Allocation: Splitting equity among co-founders
• Vesting Schedules: 4-year vest with 1-year cliff (standard)
• Option Pool: Sizing for employee equity (typically 10-20%)
• Stock Purchase Agreements: Founder stock documentation
• Capitalization Table: Initial cap table setup
• Board Composition: Initial board structure
• Voting Rights: Stock class structure

5. Critical Tax Elections

• 83(b) Election: File within 30 days of stock grant (NO EXCEPTIONS)
• S-Corp Election: When and why (not recommended for VC-backed)
• Qualified Small Business Stock (QSBS): Section 1202 benefits
• State Tax Registrations: Sales tax, employer withholding

6. Ongoing Compliance

• Delaware Annual Report: Due March 1st each year (~$300)
• Delaware Franchise Tax: Due June 1st (minimum $450)
• Home State Annual Reports: Varies by state
• Corporate Minutes: Annual meetings and documentation
• Stock Ledger: Maintaining accurate ownership records
• Financial Statements: Recommended annual audit/review
• Securities Compliance: Rule 701, 409A valuations

7. Legal Document Generation

• Certificate of Incorporation: Delaware-compliant template
• Corporate Bylaws: Standard provisions
• Board Resolutions: Initial and ongoing
• Stock Purchase Agreement: Founder agreements
• Stockholder Agreement: Voting and transfer restrictions
• 83(b) Election Form: IRS filing template
• Foreign Qualification Applications: State-specific

Available Resources

Reference Guides (reference/)

1. delawareccorpformation.md - Complete Delaware incorporation guide
2. foreign_qualification.md - State-by-state qualification process
3. entity_comparison.md - Detailed entity type comparison
4. equity_structure.md - Founder equity and vesting guide
5. compliance_calendar.md - Annual filing requirements
6. legal_documents.md - Document overview and templates

Document Templates (templates/)

1. certificateofincorporation_template.md - Delaware C-Corp certificate
2. bylaws_template.md - Standard corporate bylaws
3. boardresolutiontemplate.md - Initial board resolutions
4. stockholderagreementtemplate.md - Founder stock agreements
5. 83belectiontemplate.md - IRS 83(b) election guide
6. foreignqualificationtemplate.md - State application template

State-Specific Guides (states/)

Top 10 startup states with detailed formation guides:

• California - High costs, significant ongoing compliance
• New York - Moderate costs, complex requirements
• Massachusetts - Tech hub, moderate complexity
• Texas - Business-friendly, low costs
• Florida - No state income tax, simple process
• Washington - Tech hub, no state income tax
• Colorado - Growing startup ecosystem
• Illinois - Major city presence
• Georgia - Growing tech scene
• North Carolina - Research Triangle ecosystem

Utility Scripts (scripts/)

1. formation_checklist.py - Interactive formation task tracker
2. cost_calculator.py - Total formation cost calculator
3. compliance_tracker.py - Annual compliance deadline tracker
4. document_generator.py - Generate documents from templates

Examples (examples/)

• typicalsaasformation.md - SaaS startup formation example
• hardwarestartupformation.md - Hardware/inventory considerations
• singlefounderformation.md - Solo founder special considerations
• multistateformation.md - Operating in multiple states

Formation Process Timeline

Week 1: Planning & Preparation

• [ ] Choose entity type (C-Corp recommended for VC fundraising)
• [ ] Decide on incorporation state (Delaware vs home state)
• [ ] Select company name and check availability
• [ ] Identify founder equity split
• [ ] Draft vesting schedule
• [ ] Choose registered agent service
• [ ] Gather founder information (names, addresses, SSNs)

Week 2: Delaware Formation

• [ ] File Certificate of Incorporation with Delaware ($89 state fee)
• [ ] Receive Certificate from Delaware (typically 5-7 days)
• [ ] Draft and adopt Corporate Bylaws
• [ ] Hold organizational meeting (can be written consent)
• [ ] Appoint initial directors and officers
• [ ] Issue founder stock
• [ ] Execute Stock Purchase Agreements

Week 3: Federal & Post-Formation

• [ ] File 83(b) elections (MUST be within 30 days of grant!)
• [ ] Apply for Federal EIN (IRS Form SS-4)
• [ ] Open corporate bank account
• [ ] Set up accounting system (QuickBooks, Xero, etc.)
• [ ] Create initial capitalization table
• [ ] Prepare corporate minute book

Week 4+: Home State Qualification

• [ ] Determine if foreign qualification required
• [ ] File foreign qualification application in home state
• [ ] Appoint home state registered agent
• [ ] Register for state taxes (sales, employer withholding)
• [ ] Obtain business licenses if required
• [ ] File initial annual reports if due

Ongoing: Compliance

• [ ] Annual Delaware report (due March 1)
• [ ] Annual Delaware franchise tax (due June 1)
• [ ] Home state annual reports (varies)
• [ ] Corporate minutes for major decisions
• [ ] Update cap table with any stock changes
• [ ] 409A valuations if issuing options (every 12 months)

Cost Breakdown

Delaware C-Corp Formation

| Item | Cost | Notes | |------|------|-------| | DE Certificate of Incorporation | $89 | State filing fee | | DE Registered Agent (annual) | $50-300 | Delaware address required | | Expedited Filing (optional) | $50-1,000 | Same-day to 24-hour processing | | Legal Document Preparation | $0-2,500 | DIY vs attorney vs online service | | Subtotal Delaware | $139-3,889 | First year |

Home State Foreign Qualification

| Item | Cost | Notes | |------|------|-------| | Foreign Qualification Filing | $100-500 | Varies by state | | State Registered Agent (annual) | $50-300 | Home state address | | Business License | $50-500 | If required in your city/county | | Subtotal Home State | $200-1,300 | First year |

Federal & Other Setup

| Item | Cost | Notes | |------|------|-------| | Federal EIN | $0 | Free from IRS | | Corporate Seal | $15-50 | Optional but recommended | | Stock Certificates | $20-100 | Pre-printed or custom | | Minute Book Binder | $30-100 | Physical or digital | | Subtotal Federal | $65-250 | One-time |

Annual Ongoing Costs

| Item | Cost | Frequency | |------|------|-----------| | DE Annual Report | $300 | Annually (due March 1) | | DE Franchise Tax | $450+ | Annually (due June 1) | | DE Registered Agent | $50-300 | Annually | | Home State Annual Report | $0-800 | Annually (varies by state) | | Home State Registered Agent | $50-300 | Annually | | Tax Return Preparation | $500-3,000 | Annually (accountant) | | Annual Total | $1,350-5,150 | Per year |

Total First Year Cost

• DIY Budget: $1,500-3,000
• Online Service (Stripe Atlas, Clerky): $500-1,500 + state fees = $2,000-3,500
• Attorney: $2,000-5,000 + state fees = $3,000-7,000

DIY vs Legal Service vs Attorney

DIY Formation (Using This Skill)

Best For: Technical founders comfortable with legal documents, budget-conscious early stage

Pros:

• Lowest cost ($1,500-3,000 total first year)
• Complete control and understanding
• Learn the formation process
• Comprehensive templates provided

Cons:

• Time-intensive (20-30 hours)
• Risk of errors in legal documents
• No legal review or advice
• Must stay current on law changes

Recommended When:

• Pre-funding, bootstrapping
• Simple cap table (1-3 founders)
• No complex IP assignments needed yet
• Comfortable reading legal documents

Online Legal Services (Stripe Atlas, Clerky, LegalZoom)

Best For: Speed and convenience with moderate budget

Pros:

• Streamlined process (2-4 weeks)
• Document review by attorneys
• Tested, standard templates
• Moderate cost ($2,000-3,500)
• Good for simple structures

Cons:

• Less customization
• Still requires your time (10-15 hours)
• May need attorney later for complex issues
• Upsells for additional services

Recommended When:

• Raised pre-seed/friends & family
• Standard founder equity split
• Want professional review
• Value speed over cost savings

Startup Attorney

Best For: Complex situations, high-growth potential, raised funding

Pros:

• Expert guidance and advice
• Customized for your situation
• Handles complex cap tables
• IP assignment support
• Prepares for fundraising
• Ongoing legal counsel relationship

Cons:

• Highest cost ($3,000-7,000+ formation, $300-600/hour ongoing)
• May be overkill for early stage
• Still requires your input and decisions

Recommended When:

• Raised significant funding (seed+)
• Complex cap table or multiple stock classes
• IP assignments from previous employers
• International founders
• Regulated industry
• Planning Series A within 12 months

Hybrid Approach (Recommended)

Many successful startups use a hybrid approach:

1. Formation (DIY or Online Service): Use this skill or Stripe Atlas/Clerky for initial formation
2. Legal Review (Attorney): Have attorney review documents before signing ($500-1,500)
3. Fundraising (Attorney): Engage attorney for first funding round
4. Ongoing (As Needed): Use attorney for complex issues only

This saves 50-70% vs full attorney formation while getting expert review on critical documents.

Common Mistakes to Avoid

Critical Mistakes (Can't Be Fixed Later)

1. Missing 83(b) Election Deadline: Must file within 30 days of stock grant. Missing this can cost founders tens of thousands in extra taxes. NO EXCEPTIONS.
2. Wrong Entity Type: Converting LLC to C-Corp later is expensive and complicated. Choose C-Corp from start if planning to raise VC funding.
3. Poor Founder Vesting: Not having founder vesting can kill future fundraising. Investors require 4-year vesting with 1-year cliff.
4. No IP Assignment: Founders must assign IP to company. Can't raise funding without clean IP ownership.

Expensive Mistakes (Can Be Fixed But Costly)

1. Incorrect Stock Allocation: Changing cap table post-funding is complex. Get it right initially.
2. Missing Foreign Qualification: Can result in fines, inability to sue in state courts, back taxes.
3. Inadequate Option Pool: Too small = need to increase later (dilutes founders). Too large = unnecessary dilution.
4. No Stockholder Agreement: Disputes over stock transfers, tag-along/drag-along rights cause problems later.

Annoying Mistakes (Easy to Fix)

1. Forgetting Annual Reports: Late fees are minor but annoying. Set calendar reminders.
2. Incorrect Minute Book: Easy to recreate but time-consuming.
3. No Cap Table Software: Starting with spreadsheet works, but switching to Carta/Pulley later is easier if you start early.

Equity Structure Best Practices

Founder Stock Allocation

Equal Split (50/50, 33/33/33):

• Pros: Simple, shows unity
• Cons: Doesn't reflect contributions, can cause resentment
• Best for: Truly equal co-founders with similar roles

Weighted by Role:

• CEO: 30-40%
• CTO: 25-35%
• Other founders: 10-25% each
• Pros: Reflects contribution and responsibility
• Cons: Can be contentious to negotiate
• Best for: Founders with different roles/experience

Dynamic Equity:

• Track hours/contributions and adjust equity over time
• Pros: Truly fair based on contribution
• Cons: Complex, ongoing negotiation
• Best for: Early stage with uncertain roles (not recommended for VC fundraising)

Vesting Schedule (Industry Standard)

4-Year Vest with 1-Year Cliff:

• Stock vests over 4 years
• First 25% vests after 1 year (the "cliff")
• Remaining 75% vests monthly over next 3 years
• If founder leaves before 1 year: gets nothing
• If founder leaves after 2 years: keeps 50%

Why This Matters:

• Investors require founder vesting (no negotiation)
• Protects remaining founders if someone leaves early
• Standard across all VC-backed startups
• Usually includes acceleration on acquisition (single or double trigger)

Acceleration Provisions:

• Single Trigger: Vesting accelerates on acquisition (not recommended)
• Double Trigger: Accelerates only if acquired AND founder is terminated (standard)
• Partial Acceleration: 25-50% accelerates (common middle ground)

Employee Option Pool

Initial Pool Size: 10-20% of post-money equity

• 10-15%: Capital-efficient, SaaS, fewer early hires
• 15-20%: Hardware, requires large team, competitive hiring market

When to Create:

• Before first fundraise (comes out of founder equity, not investors)
• Or after fundraise (cleaner cap table initially)

Option Grant Best Practices:

• First 10 employees: 0.5-2.0% each (weighted by seniority/risk)
• Employees 11-50: 0.1-0.5% each
• Later employees: 0.01-0.1% each
• 4-year vest with 1-year cliff (same as founders)
• 10-year exercise window (or post-termination exercise period)

83(b) Election - CRITICAL

What Is an 83(b) Election?

An IRS tax election that allows founders to pay taxes on unvested stock at the time of grant (when value is very low) rather than as it vests (when value is higher).

Why It Matters

Without 83(b) Election:

• Year 1: 25% vests, company worth $1M, you owe taxes on $250K income (at ordinary income rates!)
• Year 2: 25% vests, company worth $5M, you owe taxes on $1.25M income
• You owe taxes on paper gains without any cash to pay them (DISASTER)

With 83(b) Election:

• Day 1: Pay tax on $1K total value (when par value is $0.001/share)
• Years 1-4: No tax as stock vests
• E

…

Source & license

This open-source skill is cataloged on AgentStack and links to its original source — we do not rehost the code.

• Author: wrm3
• Source: wrm3/aiproject_template
• License: MIT

Install and usage instructions live in the source repository linked above.