The Best Startup Incorporation Service
Every startup needs to go through the company formation process sometime in its life. However, after compiling over 50 stories from founders and testing various startup incorporation services ourselves, we've come to realize that some services are not as reliable nor robust as they should be. This is important, because any errors in the formation process require expensive legal work to correct, and in some casessuch as failing to file an 83b election in time, can take away much of the upside to starting a startup. Stripe Atlas is probably the highest-visibility startup incorporation/formation service out there, but we think most startups should use Clerky instead.
- Every startup needs to go through the company formation process.
- The formation process consists of incorporation, which creates the legal entity, and post-incorporation, which assigns ownership, assigns IP, etc.
- Incorporation allows you to separate your legal and financial liability from that of the company, and gives you an entity that multiple people can own.
- Startups aiming to do business in the US should incorporate as a Delaware C-corp or a Delaware LLC. This is the focus of this guide.
- Mistakes during company formation are usually costly (and sometimes impossible) to fix, in terms of both time and money.
- Thus, the most important thing during the company formation process is to ensure that the incorporation service doesn't make mistakes, and also doesn't make it easy for you to make mistakes. This was our main axis of evaluation.
- Company formation should be straightforward, so we closely look at how much time and energy you need to expend to achieve a faultless process.
- Other evaluation criteria that we've found to be important: customizability, support, price, and possible conflicts of interest.
- Our top choice was Clerky. We've talked with over 50 founders, and Clerky was completely issue-free for those who used it. This mirrored our own experience testing out the service, which we found to be the most error-proof. One drawback: Clerky only incorporates C-corps.
- Stripe Atlas, from what we've seen, is a bit hit-or-miss. Atlas is meant to be lead-gen for Stripe's other products, which leads to some user-unfriendly consequences: for C-corps, you're stuck with a mandatory bank account with a poor banking partner and lack of guidance through post-incorporation.
- Atlas does do a better job for LLCs, including partnering w/ a much more customer-friendly bank, and is the service we'd recommend if you need to incorporate as a Delaware LLC.
There are two main reasons to incorporate.
- Liability, both legal and financial. When you start a company, you'll be able to separate your personal finances and legal obligations from those of the company. This means you limit your liability for things that the corporation is involved in, including lawsuits, contracts with suppliers and customers, and corporate debts. C-corps are generally easier to retain and accumulate capital with, which becomes more important as your company gets largerC-corps are tax-paying entities, which means that the C-corps pay taxes on their income directly, while LLCs are usually flow-through entities, which pass income onto the owners to be taxed. , although both C-corps and LLCs have liability benefits.
- Shared Ownership. If you have (or want to have) cofounders, employees with equity, or investors, you'll need to create an entity that people can have shared ownership of. It is more straightforward to take on non-founder owners (e.g. investors and employees) with a C-corp than an LLC.
For a more in-depth overview, Fred Wilson from USV has written an overview of corporate entities. Stripe Atlas and Orrick have also written about incorporation to-knows, although some Atlas-specific references are out of date.
Why an incorporation service?
Incorporating a company is a mostly standardized process. However, it is also a process that doesn't have much leeway for mistakes. If you fail to file 83b elections, create an improper vesting schedule, or skip foreign qualification before doing business, among a number of other possible mistakes, then you'll have a big legal hairball to untangleIn the case of failing to file 83b elections, the mistake is practically unfixable..
This is why we wholeheartedly recommend the use of an incorporation service. Because the incorporation process is so standardized, incorporation services are able to use their scale to make the process significantly cheaper and faster than alternative methods. Moreover, this scale enables them to add detailed explanations and automated failsafes to the incorporation process, which helps give you more confidence in the process.
In general, we're convinced that an incorporation service should be the default for the incorporation process, rather than a lawyer. The biggest benefit of a lawyer used to be their ability to introduce special provisions in the various formation documents for your company. However, some of the services we tested (and the one that we recommend, ClerkyWe've even started to see some well-respected law firms move their own incorporation process onto Clerky) allow for a lawyer to edit and review the base documents. Therefore, unless you're doing something wild with your company's formation, we think that the best way to go about incorporating a company is to use an incorporation service to guide the process, and optionally use a lawyer to add in any custom provisions that fit your situation.
We went through the formation process through the the three main incorporation services available to startups — Stripe Atlas, Clerky, and Gust, by testing them ourselves. In the process, we've heard stories and gotten feedback from almost 50 founders about their company formation process. We'll also be commenting on alternatives such as having a lawyer-led process, and more general document services such as LegalZoom BizFilings
Our Recommendation: Clerky
Clerky was the incorporation service that gave us the most confidence as we progressed through the company formation process. They provided us with high-quality explanations and explicit instructions for each step in the company formation process, which we found to be especially critical for the offline components of the formation process (e.g. hand-writing and hand-signing your 83b election and foreign qualification registration, if applicable).
Clerky's formation process through consists of two steps: incorporation and post-incorporation. Incorporation consists of the incorporation filing with the State of Delaware. This filing was expedited (24 hours) to avoid the time uncertainty around a non-expedited filing (2-4 weeks), although there was no option to forgo the expedited filing. Post-incorporation included documents for bylaws, founder vesting, and IP assignment, and is where the brunt of any legal modifications will occur. We were also able to do foreign qualification filings through Clerky, which you'd likely need to file if you're doing business in a different state than Delaware.
It was reassuring to find that there were uniformly positive responses across the 21 founders we talked to who incorporated through Clerky. This is important because it demonstrated to us that Clerky has been reliable for these founders, with no legal or filing mistakes, which we think is the most important aspect of any incorporation service. After using Clerky for ourselves, we think that they have a particularly robust front-end error checking, and are very explicit with the steps needed for a successful filingIf you're like us, you'd take this for granted, until you find out how mistakes as simple as company name typos are a result of bad UI..
When we wanted to stretch Clerky's capabilities and make some modifications to the post-incorporation documents (e.g. specific additions about vesting acceleration), we managed to do so with help from Clerky support. Out of the incorporation services we tested, we had the best experience by far with Clerky's support. When we asked a standardized set of legal questions to the support teams at each of the incorporation services we tested, Clerky's support team was the only one that provided actionable advice and answers. For example when we wanted to make an amendment to documents we had second thoughts about, or add custom provisions to our post-incorporation documents, we were able to get good legal information from Clerky support. We attempted to make these modifications to our formation docs with other incorporation services, but were given non-answers from support and were left to figure things out ourselves. It felt like that Clerky's support team had inherent legal knowledge (or close access to someone with that knowledge), while the other support teams were operating more out of a predefined support playbook.
Forming your company, including both incorporation and post-incorporation, cost around $700 through Clerky. This was $200 more than Stripe AtlasAnd more than Gust, which requires a subscription, in the short-term, but we think that Clerky's reliability is worth it, especially considering that you'll spend a lot more time and money correcting any incorrect filings or documents (more on this in the Stripe Atlas section).
Clerky's main strength is also its main weakness. Clerky's formation process is specialized for startups, specifically those described in this Paul Graham essay. If you're looking to incorporate a Delaware C-corp (which is nearly de facto required if you're looking to build a venture/accelerator-backed startupThough you can read more about the caveats in a post from Silicon Hills Lawyer.), we think Clerky is the best choice. However, if you want to incorporate as an LLC (and its less commonly seen relative: incorporating in a state other than Delaware), Clerky doesn't have anything. If you are looking to build a smaller, sustainability-focused bootstrapped business, and want to incorporate an LLC, then you won't be able to use Clerky. In that case, we would recommend Stripe Atlas.
Do note, however, that if you're an international founder, you probably won't be incorporating an LLC due to the legal and tax complexities around international owners, and instead will incorporate a C-corp. Therefore, for most international founders, we would still recommend Clerky.
The language of the documents is customizable, but there is no preexisting templates or language for provisions that are not included in the base document. This is unfortunately an inherent limitation of startup formation services in general, because it's harder to deal with custom legal provisions without a lawyer. Examples of non-standard provisions are more exotic types of vesting acceleration or classes of shares. That said, Clerky deals with this better than the other two startup incorporation services we evaluated. You can invite a lawyer to review and modify the documents, while keeping documents within Clerky and letting them handle the filings. Also, we've had good luck with Clerky support and getting sample language from them for simpler provisions.
For incorporating an LLC: Stripe Atlas
Stripe Atlas is the only startup incorporation service that will allow you to incorporate as an LLC and give you a US bank accountYou can't opt out of the latter.. These are its main distinguishing features from the other main incorporation services.
We think that Stripe Atlas' incorporation offering is quite strong if you want to incorporate as an LLC, and would recommend them if this is the path you want to take.
Recall, however, that if you're an international founder, you probably should be incorporating as a C-corp. Therefore, if you're incorporating an LLC, then you're likely a US founder, and the guarantee of a US bank account is not particularly helpful, although the banking partner for LLCs, AzloYou have a choice between Azlo and SVB for LLCs, isn't a bad default choice, and is relatively easy to switch away from if you desire.
However, if you want to incorporate as a C-corp, then Stripe Atlas has some shortcomings that you should be aware of. These cause us to recommend Clerky over Atlas for for C-corps, even for international founders.
These shortcomings break down into two main components:
First, Stripe Atlas is a program designed to funnel you into the Stripe ecosystem. This isn't necessarily an issue in itself, but comes into play because we found that Atlas focused its efforts on our Stripe account and bank account, while leaving us more to our own devices to deal with some of the most important parts of the company formation process, such as 83b elections and founder vesting.
Second, is Atlas' choice of C-corp banking partner, SVB. A lot of founders have had uniformly negative feelings about SVB, which we'll discuss below. We think that for international founders, the benefit of a guaranteed US bank account is diminished quite thoroughly by the fact that the bank is SVB.
We've learned from founders that their experiences with Stripe Atlas have been thoroughly bimodal — that is, some have used Atlas without a hitch, and others have seen fundamental issues in the company formation process.
Our experience with Atlas is that Stripe is relatively hands-off throughout the process, except for the parts that directly benefit them (i.e. setting up a Stripe account and an SVB bank account). The parts that we think are the most important to get correct, the 83b elections and post-incorporation documents such as founder vesting agreements, didn't get as much love from Stripe. Stripe didn't help us with 83b elections despite them arguably being the most important part of the company formation processIf you don't file an 83b election in time, you lose much of the upside of starting a startup., and a founder told us that they actually ended up using Clerky's documents to file them. Stripe did provide a lot of legal templates, but not as much guidance on which ones to use, nor any way to execute them. In all, we felt that this part of the company formation process was treated as a second-class citizen within Atlas, despite it forming the backbone of a company.
The second main contributor to some of the negative sentiment about Stripe Atlas is their choice of banking partner. If you incorporate as a C-corp, you are stuck with Silicon Valley Bank. A common complain about SVB is their monthly account maintenance fee of $25 for empty accounts, though we don't think that is particularly important in the long run. The big concern for us is that with SVB, you have to jump through lots of hoops to accomplish seemingly mundane tasks, like calling to enable deposits. Normally, this wouldn't be an issue if you could forgo the account, but you can't. Instead, you have to cancel the account by faxing a notice to SVB with company letterhead, which was a tremendously distracting process for us. You can read a bit more about SVB in our guide to Stores of Money.
We've heard from international founders that some US banks won't approve accounts for Delaware companies if the founders are international. Therefore, we can understand the appeal of a guaranteed bank account through Atlas. However, there are a new set of startup-for-startup banks that are a lot more customer friendly, and that allow US companies with international founders. One of these banks is Mercury, which we recommend for international founders who've just formed a new company.
Commentary on Alternatives
GustGust was the third startup-oriented formation service that we tested. Gust is unique in that it doesn't provide standalone company formation services, but rather, in their own words, a "Company as a Service™ (CaaS™) platform." This means that if you use Gust to incorporate, you are, willingly or unwillingly, going to get a variety of additional recurring services tacked on.
We found that Gust provided a solid formation process through their Gust Launch product, as did the founders we talked to who used Gust. Incorporation was rather straightforward, and post-incorporation guidance was well-explained and justified at every step. Support was a bit less knowledgeable than we would've liked on legal matters, but that was somewhat expected due to Gust's more general focus on company backend services. In general, Gust provided us with a solid and robust formation process. Just like Clerky, however, Gust only incorporates C-corps.
The primary concern for us was that there was a mandatory "company-as-a-service" wrapper around the company formation process. It seemed pretty clear to us that by packaging recurring services onto the company formation process, Gust justified turning company formation into a subscription service, despite it being a one-time process. These recurring services include services like cap table software and a private founder community, although we think that there are better (free) alternatives for both. We think that founders would be better served by using one-off formation services like Clerky or Stripe Atlas, because they are better aligned with the one-off amount of work required to form the company.
Incorporating through a lawyer is usually about 2-5x more expensive and time-consuming than using a formation service due to the lack of automation. Also, due to the manual nature of many law firms, we've heard that a lawyer-led formation process can be surprisingly error-prone, although this depends on your specific partner.
We've actually seen some lawyers at pretty big law firms move their incorporation process onto Clerky, as the automated process helps to fend off somewhat common copy-and-paste errors. If you have some nonstandard terms that you need to add to your post-incorporation documents, we would recommend engaging a lawyer but keeping the process firmly within Clerky.
Generic legal document filing services
There are a lot of legal-filing services such as LegalZoom BizFilings, and RocketLawyer. These services are usually a bit cheaper, but only provide incorporation services. Therefore, common startup post-incorporation matters, such as founder vesting/stock grants, bylaws, and 83b elections, are not dealt with at all. These services are typically less robust and a bit more error-prone, because error-checking is diminished in light of their larger variety of document types. More importantly, because post-incorporation matters are typically more important for startups than the actual incorporation itself, we can't recommend in good faith any service that disregards that part of the formation process.