Do You Want To Start-Up a New Business? At Some Stage, You’ll Need to Consider Business Incorporation.
At some stage in its life, every new business must go through the company formation process. Getting the formation process right is critical, as errors can result in expensive corrective work. Moreover, a missed filing of an 83B election could negate the benefits of a new start-up.
However, through our investigations into the company formation process and testing various services, we’ve discovered that some company formation providers are not as robust or reliable as others.
This article aims to give you information and insight into the company formation and incorporation process and assess some of the sector’s leading providers. Probably the most well-known operator in this field is Stripe Atlas. However, we concluded that Clerky could be a better choice for many start-ups. Read on to find out why.
Company Formation Process
The following bullet points are the headline issues and a summary of the company formation process, and what to look for when you’re assessing a service provider:
- All start-ups require the company formation process at some stage.
- Formation occurs in two parts, incorporation and post-incorporation.
- Incorporation creates the company as a legal entity.
- Post-incorporation assigns ownership, Intellectual property, etc.
- Incorporation enables you to keep your personal legal and financial liabilities separate from those of your company.
- Incorporation provides you with a commercial entity that multiple people can own.
- Start-ups that wish to conduct business in the United States should incorporate as a Delaware LLC or a Delaware C-corp.
- Errors made during the company formation process can be costly to rectify, both financially and time-consuming.
- When considering a company formation provider, an important consideration is that their service is straightforward and avoids errors.
- A good service will be quick and effortless on your part.
- Consider other aspects such as support, price, customization.
- Be wary of any conflicts of interest.
Summary of Our Findings
From our investigation, we concluded that Clerky provides the best overall service. Having spoken with several founders who had used Clerky to form their companies, we concluded that Clerky was free from any issues. This experience reflected ours when we tested the Clerky service. The one drawback we found with Clerky was that you are limited to forming a C-corps only.
The Stripe Atlas device, we found, was a bit sporadic. Atlas is designed as Stripe’s entry product and lead generator, which leads to several usability issues. One such case is having to accept a mandatory bank account when forming a C-corps. However, when incorporating an LLC, Atlas is a better service, and we would recommend this option if you’re incorporating it as a Delaware LLC.
Let’s have a closer look at each of these.
Establishing a Start-Up? Choose Clerky
As we mentioned, Clerky was the service that inspired us with the most confidence. They provided us with quality advice and explanations of what we needed to do at every stage of the formation process. Such detailed instructions are essential when forming a company, particularly during the formation process that involved offline components, such as signing an 83b election.
Clerky has a two-part company formation process, these being incorporation and post-incorporation. The incorporation element consists of filing your company with the State of Delaware, which you can complete in twenty-four hours if you use the expedited service. A standard filing will take around two to four weeks to complete. However, we could not find any way to forego the expedited option, so we had to proceed with that.
Post-incorporation includes documentation covering bylaws, IP assignment, and founder vesting. It is in this element that most of the legal modification work takes place. We also tested the option of filing for a foreign qualification. This option is required if you’re conducting business in states outside of Delaware.
We thought we’d try to stretch Clerky’s capability by modifying several post-incorporation documents, such as founder vesting information. We were able to complete these modifications quite quickly, and Clerky provided clear guidance throughout this process.
The overall level of support provided by Clerky was the best of all the incorporation services we tried. We compiled a standard set of legal queries and presented these to each of the providers’ support teams. Out of all of them, Clerky was the only one whose staff provided actionable advice to resolve our queries.
An excellent example of this support was when we asked to amend documents that we’d reviewed and realized some of the information was incorrect. Another aspect the Clerky team provided generous support with was legal information. The Clerky team appeared to have a good level of legal knowledge.
However, this wasn’t so with other providers. We tried to make amendments to our company’s formation documents with other providers. However, we did not receive any advice and were left to work out the solution by ourselves. It seemed these other support teams were working from predefined scripts.
The entire cost of Clerky’s incorporation and post-incorporation service was $700. This amount was $200 more expensive than Stripe Atlas and also more than Gust, a subscription service we tried.
Despite being more expensive, we believe that the Clerky service is superior and worth the extra cost. Indeed, when you consider the additional time we could have spent making corrections, we were happy to pay for Clerky’s high usability level.
Potential Downsides of Clerky
Clerky is fantastic for start-ups incorporating as a Delaware C-corp, and it is the service we’d recommend. However, if you are looking to form an LLC, you will need to look elsewhere for your company formation service. In the absence of any such option from Clerky, we’d recommend Stripe Atlas for an LLC formation.
Of course, if you are an international or foreign founder, you are unlikely to want to form an LLC. Complexities around tax and legal aspects for international owners mean that a C-corp is generally a more suitable option. So, in this case, we still recommend Clerky.
Another limitation of the Clerky service is its lack of templates. Although the document text is customizable, it lacks any templates, nor does it have any language for excluded provisions in the base document. However, this limitation is not peculiar to Clerky. It is more difficult dealing with the custom legal requirements of a new start-up without using a lawyer.
Different classes of shares or variations in vesting acceleration are examples of non-standard provisions. Clerky dealt with such conditions more effectively than the other two company formation services we tried. Clerky allows lawyers to review and make modifications to documents while maintaining all documentation within the system.
Incorporating an LLC? Stripe Atlas is the Way to Go
When it comes to incorporating an LLC, you have limited options. Stripe Atlas was the only service we tried that would allow us to incorporate as an LLC. It also provided us with a U.S. bank account. Unfortunately, you cannot opt-out of the bank account option, which is a shame because there are better banking options available.
Stripe Atlas is the best-known provider of company formation services, so we had to try their services to determine why. What follows here is our experience of trying their offerings.
Overall, the Stripe Atlas incorporation service is quite strong. Indeed, if you are going to incorporate an LLC, then they are the service to choose. Of course, you should remember that, for international founders, you should be looking for a C-corp incorporation service.
As it is only likely to be an American citizen who is incorporating an LLC, the benefit of an included U.S. bank account in the Stripe Atlas is somewhat redundant. However, if you need a bank account, the choice of banking partners is adequate, with SVB of Azlo on offer. These banks are okay as default options, and there is an option to switch from these two once incorporation is complete.
For C-corp incorporations, Stripe Atlas has several shortcomings of which you need to be aware. These shortcomings led us to recommend Clerky over Stripe Atlas for C-corp incorporations. These shortcomings can be divided into two main issues.
To start with, the Stripe Atlas program is designed to lead you onto other Stripe products. Although this is not a significant issue in itself, we found that Atlas tended to focus its efforts on our Stripe and bank accounts. We’d have preferred it provided the advice we needed to help with the company formation process, such as founder vesting and 83b elections.
The second issue was the choice of banking partner offered by Atlas. Although we have no strong feelings either way about Silicon Valley Banking (SVB), several of the founders we spoke with had had negative experiences. Therefore, we feel bound to comment that international founders could benefit if the Atlas bank account offering were a different bank.
One common criticism of SVB is the $25 monthly maintenance charges for empty accounts. However, we feel that these charges are insignificant compared to the hoops SVB requires you to jump through. For instance, you must call SVB if you want to make a deposit. This slight inconvenience would not usually be an issue. However, because you have to accept the account with the service, it is an annoying feature of the Atlas offering.
If you want to cancel the SVB account, you must fax SVB a notice to that effect on paper that bears your company letterhead. This process is frustrating, time-consuming l, and generally distracting.
On the whole, the experiences that founders had with Stripe Atlas were generally bi-modal. Some had hassle-free experiences, but others were left frustrated with the process.
Many international founders have had experiences of U.S. banks not approving accounts for internationally-owned Delaware companies. This situation goes some way to explain why the Atlas service appeals so much to international founders.
However, quite a few new banks are available to start-ups that are both more user-friendly and deal with U.S. companies with international founders. One such bank is Mercury, and this is a bank we would recommend to any international founder.
A Third Option – Gust Launch
Gust Launch is providing a new and unique approach to company formation. Their service is not to offer a standalone formation and incorporation service. Instead, Gust offers a CaaS™ (Company as a Service) platform. The convenience of the Gust service does come with a potential downside. You will have various additional services tagged onto your Gust plan, and these will likely be recurring.
Our Gust Launch service experience was generally positive, and it provided a robust company formation process. The founders we spoke to also had positive impressions of this CaaS service. Incorporation is straightforward, with plenty of support and well-explained guidance for post-incorporation.
We found that the Gust support team was not as knowledgeable as other service providers in terms of legal matters. Gust’s focus on back-end support may help explain why their legal support falls a bit short. Another shortcoming of the Gust service is that it’s limited to C-corps incorporation.
The most concerning feature of Gust is that you have to accept ‘company-as-a-service’ branding across the whole company formation process. Gust seems to have developed what should be a one-off process into a subscription service. They have managed this by bundling several recurring services such as cap table software and an online community for founders. There are certainly better and free alternatives for business networking available.