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What's typically in a startup's certificate of incorporation?
Certificates of incorporation for startups typically contain a mix of standard boilerplate language that startup attorneys have coalesced around over time, as well as details that can vary from startup to startup.
The information that always differs between certificates of incorporation is the corporate name. The incorporator also often varies from startup to startup. We'll explain these two pieces of information and also discuss other information that is less commonly customized.
You don't need to study all this information to incorporate your startup. We recommend only reading the following section if you're curious or have questions about something in particular.
Some resources say that the corporate bylaws should be drafted along with the certificate of incorporation. While there's no harm in doing so, there's also not much reason to. The bylaws can't be adopted until after the incorporation is complete anyways. It's worth noting that other paperwork can be drafted ahead of time, if desired, as well — the bylaws are not unique in that respect.
No default. Every Delaware corporation must have a different name.
Perhaps the most fun thing you'll need to decide is what you want the corporate name of your startup to be.
The name of your corporation needs to (1) be available, (2) contain a corporate suffix, (3) not contain restricted words, and (4) not violate other naming rules in Delaware. Please see What are Delaware's rules for corporate names? for more details about these requirements. To determine if your desired corporate name is available, see How do I find out if a name is available in Delaware?.
When picking a corporate name, startups often also consider domain name and trademark availability. The safest way to do a trademark search is with a trademark attorney. Because that can be expensive, many startups perform a basic search on their own using the USPTO website. Most startup attorneys recommend waiting until after incorporation to file for a trademark, however, so that you don't need to transfer ownership of the trademark from yourself to the corporation later.
No default. The incorporator is almost always a founder, attorney, or paralegal.
The incorporator is the person who signs the certificate of incorporation. After the incorporation has been completed, the incorporator will typically need to sign a document appointing the initial board of directors.
As mentioned in the Legal Concepts handbook, it usually doesn't matter who the incorporator is, primarily because the corporation has no assets at the time of incorporation. If the incorporator elects an initial board of directors that his or her co-founders disagree with, they can simply incorporate a new corporation on their own. For this reason, the incorporator for a startup is often simply the founder who is most willing to handle the paperwork. Some law firms have a paralegal or attorney serve as the incorporator.
The incorporator's address will be included in the certificate of incorporation. Some incorporators use a P.O. box or private mailbox service to avoid putting their actual street address.
Delaware law permits certificates of incorporations to contain a list of the initial directors of the corporation. Most startup attorneys don't do this though. Having the incorporator elect the board of directors after incorporation provides more flexibility for last-minute changes and there's not much benefit to including the directors in the certificate of incorporation.
The default is an immediate effective date. Toward the end of the calendar year, some founders specify an effective date of January 1 of the next calendar year.
By default, certificates of incorporation are effective immediately when the Delaware Division of Corporations files them. It's possible to specify an effective date in the future though, if you don't want the certificate of incorporation to be effective immediately.
The two most common reasons for doing this are to (1) have the incorporation be effective on a date that has some personal significance to you, or (2) have the incorporation be effective on January 1 of the next calendar year. The latter is used toward the end of the year by some startups in order to avoid having to pay the franchise tax for the then-current year. Delaware doesn't prorate franchise taxes, so a corporation incorporated on December 31 of one year will pay the same franchise tax as if it had incorporated on January 1 of that year. It's worth noting that the corporation won't exist until the effective date, so it's important not to do anything with it until the effective date.
Clerky has special incorporation products for setting a future effective date of your choice. If you're interested in using these products, please contact us. In November of every year, we also enable the ability to specify a January 1 effective date for the following year with our standard incorporation products.
Online services have default registered agents. Individual attorneys and paralegals may have their own defaults as well. The default registered agent will vary between different online services, attorneys, and paralegals.
In order to incorporate in Delaware, your corporation must have a registered agent. The registered agent must be physically located in Delaware, and is responsible for receiving legal and government communications for the corporation. There are many companies in Delaware that provide registered agent services for a fee.
You can use your registered agent address as your business address.
Although registered agents provide your corporation with an address in Delaware, reputable registered agents typically only allow the address to be used for communications from the Delaware Division of Corporations and court-related notices, and return other mail to the sender. Consequently, startups should have a separate business address and use it exclusively whenever asked for an address (unless asked specifically for the registered agent's address).
Registered agents typically also serve as a filing agent for their customers. Filing agents make filings with government agencies, such as the Delaware Division of Corporations. Registered agents charge a fee for their filing agent services.
Registered agent service can seem like a commodity in many ways, especially because early-stage startups don't receive that many legal or government notices. But if your registered agent makes a mistake and doesn't send a legal or government notice to you, your startup may end up suffering the consequences. In addition, if you run into any issues with a filing with the Delaware Division of Corporations, good registered agents are more likely to be able to effectively help. Many startups don't experience issues with filings, but it does happen occasionally.
Some of the registered agents that experienced startup attorneys recommend the most are CSC, CT Corp, Incserv, and Vcorp. If you work with an experienced startup attorney to incorporate, you'll likely use one of these or a well-regarded boutique alternative.
When you use Clerky to incorporate, you'll appoint CSC as your startup's registered agent. CSC is a Fortune 500 company used by many top law firms, and is considered one of the top registered agents. This is different from nearly all other online services, who partner with discount registered agents used primarily by regular small businesses.
Type of Corporation
Under Delaware law, there are regular corporations and a few special types of corporations, including PBCs. Most startups are regular corporations. Those that aren't typically have a social mission and choose to be PBCs instead. It's practically unheard of for startups to incorporate as any of the other special types.
Delaware law doesn't provide a specific term for corporations that don't have a special type. For lack of a better alternative, we're using the term regular corporation for this. Some people also use the term general corporation.
Clerky has incorporation products for both regular and public benefit corporations. We built our public benefit corporation products in partnership with B Lab, the non-profit organization that sponsored the public benefit corporation legislation in Delaware.
Public Benefit Corporations
Delaware PBCs are Delaware corporations that meet certain requirements and are "intended to produce a public benefit … and to operate in a responsible and sustainable manner".1 Some advisors have concerns about whether investors will be less likely to invest in a startup that's a public benefit corporation, since they're not solely profit-driven. Others have observed no significant difference and note that many top venture capital firms have invested in PBCs.
Delaware public benefit corporations are eligible to apply for certification as a B Corporation. The certification is performed by B Lab, the non-profit organization that sponsored the public benefit corporation legislation in Delaware.
Public benefit corporations are the same thing as B corporations.
Public benefit corporations are not the same thing as B corporations, though they are related. B corporation status is given by a non-profit organization called B Lab. In order to be certified as a B corporation, Delaware corporations typically must be public benefit corporations. However, simply because a Delaware corporation is a public benefit corporation doesn't mean it's also a B corporation.
Misconception: C Corporations & S Corporations
One common point of confusion is over C corporation and S corporation status. Many people think these statuses are set in the certificate of incorporation, but they're not. C corporation and S corporation status are the two possible statuses corporations can have with the IRS for tax purposes. These statuses don't affect whether a corporation is a regular or public benefit corporation. Both regular and public benefit corporations can be either C corporations or S corporations.
C corporation and S corporation status get their names from the two subchapters of the US tax code that determine how corporations are taxed, subchapter C and subchapter S. By default, all corporations are taxed under subchapter C and are referred to as C corporations. After incorporating, a corporation can make an election with the IRS to be taxed pursuant to subchapter S instead, making it an S corporation.
A corporation can incorporate as an S corporation.
Because corporations can only obtain S corporation status by making an election with the IRS after incorporation, it's impossible to incorporate as an S corporation.
Startups are almost always C corporations. Some advisors suggest startups should elect for S corporation status because S corporations have pass-through taxation, much like LLCs. However, startup investors typically do not want pass-through taxation. In addition, S corporations have restrictions that make venture capital investment and equity compensation difficult.2 As a result, it's extremely rare for startups to elect S corporation status.
As an example, S corporations can only have one class of stock and their stockholders can only be individuals, certain kinds of trusts, and estates. In addition, S corporations can't have more than 100 shareholders.
Misconception: B Corporations
Another common point of confusion is over B corporation status. Many people think B corporation status is an alternative to C corporation or S corporation status. In reality, B corporation status doesn't have any relationship to C corporation or S corporation status.
While C corporation and S corporation are tax statuses corporations can have with the IRS, B Corporation status refers to a certification from a non-profit organization called B Lab. B Corporation status has no tax implications. Accordingly, each B Corporation must either be a C corporation or S corporation.
Type of Stock
It's a good idea to incorporate with preferred stock to accommodate future investors.
Some advisors may suggest incorporating with preferred stock as well, to accommodate future investors. This is likely misguided advice, however, since the terms of the preferred stock will need to be negotiated with investors. If the terms have not yet been negotiated, there would be no point to incorporating with preferred stock because the certificate of incorporation would almost certainly need to be amended later anyways once the terms of the preferred stock were set.4
In theory, a startup could authorize what's known as "blank check preferred stock", which allows the company to issue preferred stock without having to set its terms in the certificate of incorporation.
In practice, this is exceedingly rare for startups. Knowledgeable venture capital firms will typically force removal of blank-check preferred stock because it reduces the control they have over future issuances of preferred stock, which is deeply undesirable from their perspective.
Some online resources say it's common for startups to have blank check preferred stock, but these resources may be referring to public companies they consider startups. It is common for public companies to have blank check preferred stock.
Number of Authorized Shares
The default is 10 million authorized shares. For idiosyncratic reasons, some startups might have a different number, usually in multiples of 1 million shares (e.g. 15 million shares, 20 million shares, etc.).
The certificate of incorporation needs to set the number of shares the corporation is authorized to issue. The certificate of incorporation does not issue shares to anyone. It only defines the maximum number of shares the corporation can issue.
The standard number of for startups is 10 million. Startups typically only deviate from this if there's a specific reason. There's no particular significance to 10 million, other than that it's what people are used to, it makes quickly calculating percentages easy, and it's large enough to provide a sufficient level of resolution for ownership percentages.
Our incorporation product has a default of 10 million authorized shares, but you can change this if you need to. We don't recommend changing it unless you're being directed to by an experienced startup attorney.
Some advisors may suggest authorizing only 5,000 shares, in order to minimize the Delaware franchise tax. These advisors are typically more used to working with regular small businesses than startups. The difference in franchise tax is usually around $225 ($400 compared to $175). Most startup attorneys would recommend against this though. With only 5,000 authorized shares, the startup will be restricted to issuing equity in multiples of 0.02% (1 / 5,000), which doesn't provide the degree of precision that most startups want.5 Even if that degree of precision isn't necessary at formation, it will almost certainly become necessary as the startup hires more people and goes on to raise venture capital.6
Some people think that the savings in franchise tax for those who authorize only a small number of shares will be much larger than the $225 mentioned earlier. This is based on a belief that authorizing 10 million shares will result in a Delaware franchise tax in the tens of thousands of dollars. There are, however, two methods for calculating the Delaware franchise tax: the Authorized Shares method and the Assumed Par Value method. Corporations can use whichever method they prefer. The Authorized Shares method will indeed result in a large franchise tax for corporations that have authorized 10 million shares, and the Delaware Division of Corporations defaults to that method in the franchise tax notices it sends out to corporations. However, most early-stage startups will be able to use the Assumed Par Value method to get the franchise tax down to around $400.
While fractional shares are technically possible, they are uncommon and add undesirable complexity to legal paperwork.
The startup will typically need to amend its certificate of incorporation as part of a venture capital financing. If there are only 5,000 authorized shares though, the startup will almost certainly need to implement a stock split. The cost of that could easily dwarf the savings in franchise tax.
The par value is almost always either $0.0001 or $0.00001.
The certificate of incorporation will need to specify the par value of the shares. The par value is the lowest amount that each share can be sold for. Startups typically set this to an extremely small value, such as $0.0001 or $0.00001.
The forms in our incorporation product specify a par value of $0.00001. It's extremely rare for a startup to need to change this. As a result, the only way you can change this is by working with a startup attorney.
Some people mistakenly think the par value should be based on how much the company is worth or how much money is being used to capitalize the corporation. Startup attorneys typically advise against setting the par value based on those factors. This is because the par value establishes the lowest amount a share can be sold for, which has the effect of setting the lowest possible per share fair market value. Because a higher fair market value means equity compensation will be worth less, startups typically consider setting a higher par value undesirable.