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 mins
November 29, 2022

Incorporating a Company - where do you start?

Month 2 of our  12 month roadmap from Concept to Pre-Seed

Digs into the questions founders may have around incorporating a business. Where should you incorporate and why the decision is actually an important one for the future of the company and its potential success.
The journey from Concept to Pre-seed

Once you have made the decision to begin, you may have weighed the pros and cons of building a start-up and have probably spent some time figuring out what the problem is that you’re going to tackle and maybe even begun to form your founding team…things are starting to get a little more serious at this stage.

Now it’s time to incorporate a company. But where do you start? Let’s take a look

What is a Company?

What is a company at its core? And what does it actually mean to incorporate a business?

In real terms, a company is a legal entity formed by a group of individuals (or individual) to engage in and operate a business. Company members share a common purpose and work to achieve specific, declared goals. 

Common forms of companies are: 

  • voluntary associations, which may include non-profit organisations
  • business entities, whose aim is generating profit
  • financial entities and banks
  • programs or educational institutions

Do I need to incorporate?

As our friends at HarperJames write: 

“A business can decide not to incorporate a company and can instead decide to operate by different means, for example either as a partnership or as a sole trader. It is important for business owners however to keep their business affairs separate and accountable from their personal affairs. The legal structure that is best for your business will depend on a range of factors specific to your business model. Before deciding on a legal structure for your business it is useful to get professional advice from a specialist corporate solicitor not least, to help you to consider the tax implications of adopting a particular structure.”

Overall if you’re looking to go down the route of hiring employees or raising capital, you might opt for a formal incorporation. 

What type of company should you incorporate? 

There are various different types of companies that can be set up, but if you are looking to start a business that will eventually issue shares (raise capital from external investors), then there are two main jurisdictions you should look into:

  • The United Kingdom (UK Limited Company)
  • The United States (Delaware Incorporation)

Both have their benefits and drawbacks, but ultimately this should be determined by where your team will be built, where your customers will reside and where you expect to raise money from investors. 

Where should you incorporate your start-up?

The decision as to where you should incorporate your start-up or business can have certain implications, especially if you are looking to raise funds from external shareholders/investors. 

The Argument for a UK Company

Generally, if you are based in Europe, the UK is often the destination of choice for many founders to incorporate, mainly due to friendly legal frameworks and generous tax reliefs for individual investors/angels. The streamlined legal infrastructure means companies aren’t left having to notarise documents (such as with Germany, Amsterdam, Spain etc.) and can theoretically complete funding rounds in a matter of days. 

As touched on above, different geographies have various schemes and incentives to encourage investments into businesses. The UK famously has the Enterprise (EIS) and Seed Enterprise Investment Schemes (SEIS) which are government led initiatives offering individual investors up to 50% income tax relief on the money they invest (more information here) when investing in early-stage companies.

One thing to consider when raising money is whether the Venture Capital or Angel investor you are pitching has any incentive for you to be incorporated elsewhere. Usually sticking to the eco-system you are in right in the early days makes the most sense, but as a company grows, especially through means of Venture Capital, there may be a good reason to open sub-entities as you go. 

The Argument for a US Company: 

Beyond the potential credibility it might provide your company, and aside from the market size and growth potential for growing a business in the US, there are various reasons, particularly if you are a tech-company, to HQ/register your company in the US, regardless of where you are actually based. 

Generally, when companies are looking to incorporate from outside of the US, they’re incentivised to do so in Delaware because of their business-friendly governance such as the Delaware General Corporation Law and the Limited Liability Company Act

Delaware business tax benefits 

One of the main reasons Delaware has attracted the eye of corporations across the world is the lenient taxes imposed by the state. Corporations registered in Delaware that do not do business in the state do not pay corporate income tax. Delaware also does not have a sales tax, investment income taxes, inheritance taxes or personal property taxes. 

Flexible Framework 

The legal framework for corporations in Delaware is most accommodating and general standard in the US. You can complete your incorporation paperwork quickly and the state will process it promptly. Also, business owners may not be required to identify shareholders and company officers; and, how you organise your corporation and allocate shareholder and board member responsibilities is left essentially to your discretion.

US Investors prefer Delaware corporations 

If you’re a start-up that anticipates needing outside investors to help scale your company, venture capitalists, private equity and investment banks often prefer investing in companies that are incorporated in Delaware. The Angel Investor Job Creation and Innovation Act created a 25 percent refundable tax credit for investors who invested at least $10,000 (for individuals) or $30,000 (for funds) in young Delaware-based companies in high-tech fields.

 

So now you’ve decided - how do you begin incorporating a company? 

UK Incorporation: 

The first step in this process is to decide on a name that isn’t in the registry yet. The naming criteria requires company names to end with Limited or Ltd, and must be unique. You can check for conflicts through Companies House.

Once you’ve found the perfect name, head to Companies House and begin their straightforward process to register your company.

Throughout the application you will have to assign the company directors. The company must have at least one director and directors are responsible for all the decision making in the company and making sure the company meets all the legal requirements. Directors do not have to live in the UK but must have a UK registered office address. As a director, your name and service address will appear on the Companies House public register. 

Next, choose your shareholders and share structure. You also need at least one shareholder, which can simply be yourself. You can appoint yourself as the director and be the sole shareholder in your company. Shortly after forming your company, you will need to adopt Articles of Association. 

What are Articles of Association? 

Articles of association are key provisions for a company - the articles are a fundamental cornerstone of how a company is run and managed. They set out the rules that are chosen by the company’s members on how to govern the company’s affairs. The articles also instruct the company’s officers how to manage and operate the company on a day-to-day basis. A company’s articles act as a statutory contract between the company and its members, and also between each of the members themselves.

The Articles deal, among other things, with the following: 

  • How shareholders appoint and remove directors to run the company 
  • How to issue new company shares 
  • How dividends are paid 
  • How shares change hands 
  • How directors’ and shareholders’ meetings are organised and run 

Comment from Ceo of Cliff.ai

Aayush: “We were thinking of where to incorporate and were based in Europe at the time. We ultimately landed in the UK because we engaged with investors there (Concept included) and found that the best and most straightforward decision for the company was to incorporate in the UK. Concept made the process much easier by pointing us in the right direction and ultimately leading our pre-seed round. The UK was by far the easiest option in terms of setting up a company when we initially thought of where to set up across Europe.’’

US Incorporation: 

For the sake of simplicity, we will touch on mainly the process of setting up a business in Delaware, US. This is generally the standard for start-ups looking to incorporate in the US.  

  1. Choose a name for your business.

Similar to above, this is the first step. Like most states, Delaware's Division of Corporations offers the ability to conduct a name search for your LLC.

  1. Designate a Registered Agent in Delaware.

A registered agent can generally be any named individual/company. However, the registered agent must have a physical address in Delaware. This means a member of the corporation can act as the registered agent if desired, or a third-party registered agent service like MyCorporation can be used.

  1. File Certificate of Incorporation in Delaware.

In order to form a Delaware Corporation, particularly one that issues stock, you must complete and file a Certificate of Incorporation (PDF)(88.5 KB) with the Delaware Division of Corporations. As seen in the template, you must include details such as; Company Name, Name and Street address of the registered agent, General Purpose clause, List the total number of shares and allocation to each individual and the name and mailing address of the Delaware corporation incorporators. 

  1. Create your Corporate Bylaws.

Corporate bylaws are a detailed set of rules agreed upon and adopted by the board of directors after a corporation is formed, that specify the internal management structure of the corporation. These are similar to the articles of association. 

  1. Appoint your Corporate Directors.
  2. Hold the First Meeting of the Board of Directors.
  3. Authorise the issuance of shares of stock.
  4. Obtain your Delaware Business licence and permits 
  5. Get an EIN number for your business

 

Comment form Stewart at GTI: 

“If you haven’t done it before, it can be tricky to set up a Delaware entity and the required documentation. You need a USA law firm to do this. You will also need an accounting firm to handle required USA tax filings and transfer pricing arrangements with the U.K. entity. Those are the two main starting points. If you have staff in the US then you will need a payroll provider that can handle all the state-level tax filings and 401k (pension) contributions. You should also carefully consider where you locate your employees, as each state has very different employment laws. If you have people in various states, you will have to ensure you comply with all the state level laws

Also don’t forget the expectation of health insurance coverage, which in the USA is extremely expensive for employers versus U.K.

I’d say the main thing is don’t attempt a DIY approach, whilst there may be some tools out there that can make the process easy, getting some advice from people on the ground there is much advised. Get solid lawyers and accountants who can manage all the essentials for you. The USA is far more complicated and challenging for routine business administration than the U.K.”