How To Form A Company

By Zach Simkin, Wharton MBA 2014 and School of Arts and Sciences Undergrad 2006; Co-Founder, Senvol

Amidst the hectic nature of early-stage startup life, I realized a few months ago that our startup had come to the point where we needed to officially form a company. I did not anticipate how long it would take me to decipher exactly what needed to be done, in what order, and at what cost. I spent the better part of a full week figuring this out. It was a somewhat frustrating experience and the time that I spent on this would have been better spent working on our startup itself.  In an effort to help other entrepreneurs avoid the time drain I went through, I created a Standard Operating Procedure document for startup formation and shared it with my fellow entrepreneurs in the Wharton Venture Initiation Program. Below is a summary of the key components in the process:

Operating Agreement: This is the governing document that establishes how your startup will be run.  It will cover everything ranging from member voting rights to profit payouts. It’s tempting to put off the creation of an operating agreement, but I highly advise against waiting. Early on you want to make sure that you and all of your co-founders are on the same page.  Operating agreements can always be amended, so don’t feel as if it is absolutely final.

Company Name: Anyone who has been through this process knows that coming up with a good name is hard enough, but that’s just the first step. There are a whole slew of additional searches that you’ll want to conduct in order to avoid a potential conflict. These searches include:  trademark, domain name, state registry in the state where you are filing (some states don’t allow two companies with the same name), Google, and even social media sites such as Twitter, Facebook, YouTube, and Pinterest. A pre-existing company with the same name isn’t necessarily a deal-breaker, but I advise consulting with an attorney, especially for a proper trademark search.  After searching and settling on a name, you’ll also want to register your trademark with the USPTO.

Formation: Once you’ve selected a name, the next step is to actually form your company. You need to consider which state to file in (I recommend Delaware) and what type of entity to form (i.e. LLC, C-Corp, S-Corp, etc.). You may also need to file for a foreign qualification if you register your company in one state but are conducting business in other states as well. Check the rules and regulations of each state that you conduct business in for more information.

Federal Tax ID # and Bank Account: After your company has officially been formed, you need to get a Federal Tax ID # (aka EIN) so that you can open a bank account. Obtaining a Federal Tax ID # is free (and easy – so don’t pay for a third party service to do this for you), and many local banks offer free checking accounts.

Insurance: Although obtaining insurance is not required to form or operate a company, it is often advisable to do so. Many startups are eligible for general liability insurance through a basic Business Owner’s Policy (BOP).  Depending upon your startup and what it does, you may also need additional insurance such as product liability insurance or worker’s compensation insurance. I advise consulting with and getting quotes from multiple insurance brokers.

Dissolution:  Hopefully your startup will be a wild success and this section will never be applicable to you, but I figured it is worthwhile to include. If your business fails, closing up shop and dissolving the company isn’t free. Make sure to set aside an appropriate amount of money.

For the full Standard Operating Procedure document, please email Wharton Entrepreneurship. I hope that this was helpful and good luck with your startup!

 

Zach SimkinBio: Zach Simkin is a current MBA student at The Wharton School and is also an organizer of the Founders’ Club, a university-wide club that supports students who are actively starting a business or have done so in the past.  Before coming to Wharton, Zach was the Director of Corporate Development at HYSO LLC, a startup that manufactures public health and hygiene products, including the only patented and EPA-registered device for automatically disinfecting door handles.  Prior to that, Zach started his own collegiate marketing company that established a new out-of-home advertising medium integrating local and national advertisements.  Zach holds a BA in Economics from the University of Pennsylvania.