10 Frequently Asked Questions About Startups

Starting a business is one of the most exciting and challenging undertakings an entrepreneur can pursue. Interest in entrepreneurship is at an all-time high, and there have been spectacular success stories of early-stage startups growing into multi-billion-dollar companies—from Uber and Facebook to WhatsApp, SpaceX (a trillion-dollar company), and Airbnb. Yet behind every headline-grabbing success story lies years of hard work, countless decisions, and no shortage of obstacles. Understanding the fundamental questions that come with building a startup from the ground up is an essential first step for any aspiring founder.Starting a business entails understanding and dealing with many issues—legal, financing, sales and marketing, intellectual property protection, liability protection, human resources, and more. Whether you are a first-time entrepreneur or a seasoned business professional exploring a new venture, getting clear answers to the most common startup questions can help you avoid costly mistakes and put your company on a stronger footing from day one. Below are ten frequently asked questions about startups, along with thorough answers drawn from the expertise at AllBusiness.com.1. What Kind of Legal Entity Should I Set Up for My Startup?One of the first and most important decisions a founder must make is how to legally structure the company. The founders of a company must initially determine whether to organize the business as a limited liability company (LLC), a general partnership, a sole proprietorship, or a corporation. If formed as a corporation, the company must also decide whether to file an election to be taxed as an "S corporation" rather than a "C corporation." Each structure carries distinct tax implications, ownership rules, and protections for the founders.As a general rule, you should never form a company as a general partnership or sole proprietorship, as these structures carry the significant disadvantage of potential personal liability for the debts and liabilities of the business. If the company plans to bring in outside investors, it will most likely need to be structured as a C corporation, since venture capitalists typically invest only in preferred stock issued by C corporations. An S corporation can be a solid starting point for a simple company with one or two individual owners, and it can always be converted to a C corporation as the company grows and brings in additional investors.An LLC offers another viable option, providing limited liability protections similar to a corporation along with favorable flow-through taxation. However, LLCs can be somewhat more complex to set up, maintain, and file taxes for than S corporations. The right choice ultimately depends on how many owners the company will have, whether outside investment is anticipated, and how the founders wish to handle taxation and decision-making authority.2. Where Should I Incorporate My Startup?Corporations are formed under the laws of a specific state, and the choice of where to incorporate can have real legal and financial consequences. Many advisors recommend incorporating under Delaware law, given that Delaware has a well-developed body of corporate law, a specialized Court of Chancery for business disputes, and is widely preferred by investors and venture capital firms. However, another reasonable approach is to incorporate in the state where the business is actually located, which can save on fees, filings, and administrative complexities in the early stages.If the company grows and begins attracting venture capital or institutional investors, it can always reincorporate in Delaware later. The key is not to let the incorporation decision paralyze early progress—getting the business legally established quickly and correctly is far more important than perfecting the state of incorporation at the outset. What matters most is that the proper entity is formed, corporate formalities are observed, and personal and business assets are kept clearly separate from day one.3. How Should Equity Be Divided Among Co-Founders?Equity division is one of the most sensitive and consequential decisions a founding team will face, and it is essential to address it early and put the agreed-upon terms in writing. There is no single correct formula, but the split should take into account the relative value of each founder's contributions, who originated the core idea, the amount of time each founder will commit to the business, the compensation each founder is accepting in lieu of full market salary, and whether any founder is contributing cash as an investment in the company.It is also important to build in vesting provisions tied to continued participation in the business. You do not want to give away a significant equity stake to a co-founder who departs after only a few months. A standard approach is a four-year vesting schedule with a one-year "cliff," meaning no equity vests until the founder has been with the company for on