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Insights
Employment Agreements vs. Independent Contractor Agreements: What Founders Should Know
Startups often rely on both employees and independent contractors. But these are legally distinct relationships - and using the wrong type of agreement can create serious legal and financial risks. Misclassification can lead to tax penalties, lawsuits, and regulatory violations, especially in strict states like California and New York.
Offer Letters for Startups: What Founders Need to Know
Hiring your first employees is an exciting milestone. But it’s not enough to agree on salary with a handshake. A clear, well-drafted offer letter sets expectations, outlines key terms, and helps reduce the risk of misunderstandings later.
Fired or Quit? Why It Matters Legally for Your Startup
When someone leaves your company, founders often want to just “move on” - but whether the departure was voluntary or involuntary has lasting legal and financial consequences. From unemployment claims to final pay rules, the details matter.
FAQs
Open allWhat’s the difference between general counsel and a board advisor?
A board advisor provides strategic or industry expertise but does not carry legal authority. General counsel, by contrast, ensures compliance, manages legal risks, and protects the company from liability. Both roles are valuable, but they serve different purposes.
When should a startup hire in-house general counsel?
Most startups rely on outside counsel in the early stages. Hiring a full-time GC typically makes sense once the company has raised a significant round (Series B or later), has 50+ employees, or is managing complex contracts and regulatory issues. Until then, fractional or outside GCs can provide cost-effective support.
Do I need to keep records after incorporation?
Yes. Recordkeeping is critical. You should maintain bylaws or operating agreements, stock records, board meeting minutes, financial statements, and compliance filings. These documents protect your liability shield and will be scrutinized by investors, lenders, or acquirers.
What if I want to change my business structure later?
You can convert your company from one entity type to another (for example, from LLC to C-Corp), but the process may have tax and legal consequences. Conversions are common as businesses grow, but they require careful planning and professional guidance.
What is an 83(b) election and why is it important?
An 83(b) election is a filing with the IRS that allows you to pay taxes on stock at the time it is granted rather than as it vests. For founders, filing an 83(b) locks in a low tax basis early, potentially saving thousands in future taxes. Missing the 30-day filing deadline can create serious tax consequences.
Do I need a lawyer to incorporate?
You are not legally required to hire a lawyer to incorporate, and many states allow you to file online. However, legal guidance is highly recommended, especially if you have multiple founders, plan to raise capital, or need to issue equity. Mistakes at this stage can be costly to fix later.
Will incorporation affect my taxes?
Yes. Your entity type determines how your business is taxed. LLCs and S-Corps typically use pass-through taxation, where income flows to your personal return. C-Corps pay taxes at the corporate level, and shareholders are taxed again on dividends. Each structure has pros and cons depending on your income, growth goals, and fundraising plans.
What documents do I need after incorporation?
At a minimum, you’ll need:
- Articles of Incorporation (or Certificate of Formation)
- Bylaws (corporation) or Operating Agreement (LLC)
- Board resolutions and organizational meeting minutes
- Restricted stock purchase agreements and vesting schedules
- 83(b) elections for founders receiving restricted stock
- Intellectual property assignment agreements
- Annual compliance filings and reports
How long does incorporation take?
Most states process incorporation filings within a few business days. In some cases, you can pay for expedited service and receive approval within 24 hours. Applying for an EIN online usually takes less than 10 minutes.
What happens if I don’t incorporate?
Without incorporation, you are personally liable for all debts, contracts, and lawsuits related to the business. You also lack formal ownership agreements, making disputes with partners more likely. Banks and investors are unlikely to take your business seriously without a formal entity.
Should I always incorporate in Delaware?
Yes. Many startups begin as LLCs for simplicity and later convert to C-Corps to raise capital. However, conversions carry legal and tax implications. It’s usually easier and cheaper to start as a C-Corp if you know you’ll need it, but conversion is always an option.
Do I need an EIN if I don’t plan to hire employees?
Yes. Accepting investments before incorporation can create serious legal and tax problems. Incorporation ensures you can issue equity properly, protect personal assets, and provide investors with legitimate ownership records.
Do I need to incorporate before raising money from friends and family?
Yes. Accepting investments before incorporation can create serious legal and tax problems. Incorporation ensures you can issue equity properly, protect personal assets, and provide investors with legitimate ownership records.
Why do investors prefer C-Corporations?
C-Corps allow multiple classes of stock, an unlimited number of shareholders, and provide a clear framework for equity compensation. Venture capitalists are familiar with Delaware C-Corp law, which gives them confidence that governance and shareholder rights will be handled consistently.
What is the best business structure for a small startup?
It depends on your goals. If you are self-funded and want flexibility with minimal compliance, an LLC is often the best choice. If you plan to raise venture capital or scale nationally, a Delaware C-Corporation is the standard. For mission-driven ventures, a Public Benefit Corporation or non-profit may be more appropriate.