We often get asked by entrepreneurs in Armenia about what the best legal structure is for their business. Furthermore, as companies in Armenia look to raise money outside of Armenia, they are often asked if they are a Delaware C-Corp, the preferred structure for US VCs.
We decided to get the real scoop from the experts. Stepan Khzrtian, founding partner of LegalLab (based in Yerevan and LA) helps startups with company formation, fundraising legal docs and other key legal functions. Below, Stepan outlines the steps in setting up a Delaware Corporation:
(Please note that this is NOT legal and tax advice, and you should consult with your lawyer or tax professional.)
As companies in Armenia look to take their products global, tech entrepreneurs often eye Delaware as a location to set up headquarters and have first-hand access to markets, investments, talent, and exit opportunities.
The textbook business entity in this case is the Delaware C-Corp, and here is a general idea of what steps you need to take to set one up.
1. Filing Certificate of Incorporation with the Delaware Secretary of State
This is where it starts: the Certificate of Incorporation is the document which announces the birth of your future company. There are a number of items that have to go into the Certificate, including:
§ Name of your company
§ Registered agent and address in Delaware – this is the person or organization which will be accepting official legal correspondence (such as court service of process) directed to your corporation;
§ Number of shares the company has the right to sell (authorized shares) and the minimum value of each share (par value);
It is also good practice to include a paragraph which protects your directors from liability for errors made while acting in good faith. Another paragraph should allow the company to indemnify the directors and officers if they are ever sued for their actions in that capacity. Top management talent and professional advisors will be reluctant to join your company unless you have these protections in place. There’s a minimum $89 filing fee for new corporations in Delaware.
2. Getting an Employer Identification Number (EIN)
Once your corporation is set up, one of your next steps is getting an EIN, or tax code, for your new company. This can be done online or by submitting a paper application with the Internal Revenue Service (IRS), the federal tax authority of the United States. If submitted online, an EIN will be generated in minutes, without charge. You will be needing this EIN for a number of things, including opening a bank account, filing reports with state and federal authorities, and paying taxes.
3. Appointing Directors to the Board
Another step to be taken is appointing the first directors to the Board in case they are not named in the Certificate of Incorporation. The incorporator – the person who handles the paperwork involved with setting up the corporation – adopts a written decision naming the first directors of the company, and soon after resigns as incorporator.
You need at least one director who must be a natural person (as opposed to an organization). The director does not have to be a shareholder of the corporation nor a citizen or resident of the United States.
4. Drafting and Adopting the Bylaws
The bylaws is the document that governs the way the corporation is managed, regulating a number of issues such as the procedures for calling General Meetings and Board sessions, and the frequency with which these should be held; the titles and role and responsibilities of the officers – or managers – of the company, such as the President, Secretary, and Treasurer; how decision-making powers are shared among the shareholders, directors, and officers; the procedure for resolving internal disputes; and the process for amending the bylaws.
The bylaws are drafted by legal counsel and adopted by the Board of the corporation.
5. Opening a Bank Account
You’ve set up the corporation to do business, and before long you’ll be dealing with money – both spending it and (hopefully) making and attracting it. Also, one of the advantages of setting up a corporation in the U.S. is to have easy access to electronic payment gateways to charge your customers around the world. To do all this legitimately, you need a bank account.
While banks have some leeway in determining what they require to open an account for your Delaware corporation, almost all of them ask for some kind of local, physical presence by the person who will have the right to sign and draw funds from the bank account. Along with this, you would also need to provide a certified copy of your Certificate of Incorporation (which can be requested from the Delaware Secretary of State when filing the Certificate) and your EIN (tax code).
6. Granting Equity
With all the formalities checked, it’s time to become an owner of your company! On behalf of the corporation, the Board will grant equity to the founders according to their agreed shares and will also set the rules upon which the equity “vests” – or becomes the full property of the owner. To be clear, at this point the directors on the Board will probably be the founders themselves, so, essentially, the founders are giving shares to themselves.