Lead Thinking The Business of Software Development

Incorporating a LLC

So, following on from my last post on startups, here I explain the process of incorporating a LLC.

Which state?

First, you need to decide where to incorporate. Each state has different laws – and some are more suitable for incorporation than others.

Delaware is a popular choice because its a favorable and business friendly environment. Some 571,000 businesses have been setup there, including 58% of the Fortune 500.

Delaware imposes no state income tax on a business that does not operate within the state. That usually means if you don’t have a physical presence within the state, you’re exempt from that tax and will only have to pay the LLC franchise tax.

Delaware is also famous for it’s established body of laws and Chancery Court, which are unique to the state.

Anyone can set up a business in Delaware, without ever visiting the state. In addition one person can hold all the positions and be the sole owner of the business – perfect for Micro ISVs.

There are other popular states for incorporation, such as Nevada. It’s worth doing a bit of research to find out which one’s best for you.

Choosing a name

You’ll also need to decide upon a company name. This will be need to be unique inside the state – most incorporation services will do a free name check. This is also the time to think about a domain name too.

DIY or incorporation service?

You can file the incorporation forms yourself, paying a minimal filing fee. However I recommend getting a firm to do it for you, especially if it’s your first time, or you’re outside the US. There’s a good blog post here on the tradeoffs to both approaches.

Most firms will also offer to be your registered agent – though only if you incorporate through them. A registered agent is someone who is in charge of receiving court documents and forwarding them to you. Delaware law requires you to have one, but it’ll only set you back $50 a year.

I really recommend Harvard Business Services Inc for incorporation. Their cost was reasonable, and customer service was great.

Harvard’s basic international package is currently $450. Personally I don’t think it’s worth paying for the standard or premium packages – you can purchase a ‘corporate kit’ separately for much less.

When you incorporate with them, you’ll need the names of the Managing Members. These names aren’t registered with the Delaware state, but are for the documents showing the incorporating office has signed over control to you. Basically the system is designed to protect your anonymity. If  you assign yourself as a Managing Member of the LLC, you can assign others later without having to inform the state.

The other cost you’ll have is the annual Delaware LLC franchise tax. This is a flat fee of $250, due on June 1st. If your incorporating towards the end of the year, it might be worth waiting till January so you don’t need to pay that year’s franchise tax.

Next steps

Once you’ve incorporated, the next step is for all the members to sign the Operating Agreement – I’ll tackle this in the next post.