The Complete Guide to Setting up your US Tech Startup

Choosing your entity type determines your entire trajectory

The entity decision cascades through everything, tax treatment, fundraising capability, equity compensation, and administrative burden. The two viable paths for tech startups are Delaware C Corporation (for VC-track) and LLC with potential S Corp election (for bootstrapped businesses).

Delaware C Corporations are non-negotiable for venture funding. VCs require them because they can issue multiple stock classes (common and preferred), grant tax-advantaged Incentive Stock Options (ISOs), and qualify for Section 1202 QSBS, potentially excluding up to $15 million in capital gains from federal taxes after a 5-year holding period. The trade-off is double taxation: the corporation pays 21% federal tax on profits, then shareholders pay again on dividends. For unprofitable startups burning cash toward growth, this rarely matters, and the QSBS benefits far outweigh it.

LLCs work well for bootstrapped businesses because of pass-through taxation and administrative simplicity. However, VCs typically won't invest in LLCs due to complications for tax-exempt investors and lack of standardized deal structures. The key optimization: once your LLC generates $40,000+ in annual profits, elect S Corporation taxation by filing Form 2553 with the IRS. This lets you pay yourself a "reasonable salary" (subject to payroll taxes) while taking remaining profits as distributions without the 15.3% self-employment tax, potentially saving $10,000+ annually.

The S Corporation itself has critical limitations: maximum 100 shareholders, all must be US citizens or residents, and only one stock class allowed. These restrictions make S Corps incompatible with institutional fundraising but excellent for profitable lifestyle businesses.

Where you incorporate matters less than you think

Delaware's popularity for startups stems from its specialized Court of Chancery (judges instead of juries), extensive corporate case law, and VC familiarity, not tax advantages. If you're raising venture capital, Delaware is the default choice. If you're not, incorporating in your home state often makes more sense.

The Delaware trap for bootstrapped founders: A solo consultant in Texas who incorporates in Delaware pays Delaware annual fees ($175+ franchise tax for corporations, $300 for LLCs) plus Texas foreign qualification fees ($750) plus Texas reporting requirements. Total overhead for perceived sophistication that provides no practical benefit.

Delaware costs for corporations include a $89-169 filing fee, $175+ minimum annual franchise tax (calculated using authorized shares or assumed par value method, use the latter), and $50 annual report fee. The franchise tax can balloon to $80,000+ if you authorize 10 million shares and use the wrong calculation method. Registered agents cost $50-300 annually.

Wyoming offers the strongest privacy protections (no public disclosure of owners) and lowest ongoing costs, $100 filing fee, $60 annual report, no state income tax. It's excellent for holding companies, real estate, and privacy-conscious bootstrapped businesses but lacks Delaware's VC recognition.

California's $800 minimum franchise tax applies to all LLCs and corporations doing business in the state regardless of where incorporated. "Doing business" includes having employees, customers, or generating revenue there. If you're California-based, you'll pay this whether incorporated in Delaware or California, Delaware incorporation just adds extra fees on top.

Foreign qualification is required when you operate in a state different from your incorporation state. This means registering as a "foreign" entity, paying additional filing fees ($70-750 depending on state), and complying with that state's reporting requirements. You cannot avoid home-state taxes by incorporating elsewhere.

Formation services range from $39 to $819 with significant quality differences

The formation service you choose should match your trajectory. For VC-track startups, document quality matters enormously, improperly structured founder stock or missing IP assignments can derail fundraising.

Clerky ($427-819) produces the gold standard for VC-track startups. The Company Lifetime Package at $819 includes Delaware C Corp formation, all post-incorporation setup (bylaws, stock issuance, 83(b) election support), stock plan adoption, and unlimited SAFEs, convertible notes, and hiring templates. Y Combinator recommends Clerky for portfolio companies, and every major law firm accepts Clerky documents without revision. The ROI calculation is simple: one hour of startup lawyer time costs $500-1,000, and proper formation documents can save 10+ hours of legal work during your seed round.

Stripe Atlas ($500) bundles Delaware C Corp formation with EIN acquisition, first-year registered agent, Mercury bank account setup, and $100,000+ in partner perks. It's designed for international founders and those building Stripe-powered businesses. The integrated banking setup can shave weeks off your timeline. Limitation: Delaware only, and you're locked into the Stripe ecosystem.

Northwest Registered Agent ($39 + state fees) delivers exceptional value for bootstrapped founders. The price includes formation documents, first-year registered agent service, privacy protection (their address on public filings), and dedicated customer support. For a Wyoming LLC, total first-year cost is approximately $139. No upsells, no confusing tiers, just straightforward service.

LegalZoom ($0-500+) charges premium prices for generic documents and aggressive upselling. Their $0 "basic" tier excludes essential components (operating agreement, EIN) and takes 30 days. Registered agent service costs $199-299 annually, separate from formation. For the same total cost, Clerky or Stripe Atlas provides dramatically better value for startups.

Firstbase.io ($399) targets international founders with both Delaware and Wyoming options, US address services, Mercury banking integration, and compliance autopilot ($399/year ongoing). At $100 less than Stripe Atlas with more flexibility on state choice, it's a compelling alternative.

DIY filing costs $50-500 in state fees but sacrifices attorney-reviewed documents, 83(b) election reminders (miss the 30-day deadline and face devastating tax consequences), proper stock issuance documentation, and IP assignment agreements. Only appropriate for single-member LLCs with no equity complications.

Your banking choice affects more than you expect

The 2023 Silicon Valley Bank collapse reshaped startup banking. Mercury captured $2 billion in deposits within 5 days of SVB's failure and now serves over 40% of recent Y Combinator batches. Modern neobanks offer features traditional banks cannot match.

Mercury provides free accounts with no minimums, unlimited domestic and international USD wires at no cost, up to $5 million FDIC insurance through their sweep network (Mercury Vault), and up to 4.85% yield on idle cash through Mercury Treasury. Integration with QuickBooks, Xero, and Stripe is seamless. The IO Mastercard offers 1.5% unlimited cashback with a $25,000 minimum balance requirement. For early-stage startups, Mercury is the default choice.

Brex targets well-funded companies with requirements of $50,000+ cash (VC-backed) or $1 million+ revenue. The value proposition is credit limits 10-20x higher than traditional cards without personal guarantees. Rewards are aggressive: 7x on rideshare, 4x on travel, 3x on restaurants. Brex Cash offers up to $6 million FDIC insurance. If you've raised a seed round and need substantial credit capacity, Brex delivers.

Rho stands out for up to $75 million FDIC insurance per entity and comprehensive spend management. It's designed for mid-market companies ($10M-$1B revenue) needing treasury management, AP automation, and multi-entity support. Less relevant for early-stage but worth considering as you scale.

Relay serves small businesses implementing "Profit First" cash management with up to 20 checking accounts for categorizing funds. At $0-90/month depending on tier, it's excellent for businesses needing envelope-style budgeting.

Traditional banks (Chase, Bank of America) make sense when you need branch access, SBA loans, or will deposit significant cash. Chase Business Complete Banking costs $15/month (waivable with $2,000 minimum balance) with 100 free transactions. The value diminishes for tech companies doing primarily electronic transactions.

Post-SVB lesson: Don't concentrate 100% of deposits with one institution. Keep operating funds with Mercury/Brex and sweep excess to Treasury bills or diversify across banks for deposits exceeding FDIC limits.

Payment processing: Stripe dominates but alternatives exist for specific needs

Stripe charges 2.9% + $0.30 for online card payments, adding 1.5% for international cards and 1% for currency conversion. ACH Direct Debit costs 0.8% capped at $5, use this for large transactions to dramatically reduce fees. At $100,000+/month volume, negotiate custom rates (achievable: ~2.2% + $0.30). Stripe's developer experience, 135+ currencies, and ecosystem (Billing, Atlas, Tax) make it the default for tech startups.

Paddle operates as a Merchant of Record, meaning Paddle legally sells your product and handles all sales tax/VAT compliance across 200+ countries. The 5% + $0.50 rate is significantly higher than Stripe, but you eliminate the complexity of sales tax registration and filing in dozens of jurisdictions. For SaaS companies selling globally without resources for international tax compliance, the premium is often worth it.

For subscription billing, Stripe Billing (0.5-0.8% additional) works well for simple subscription models with Stripe's integrated dunning recovering approximately 38% of failed payments. Chargebee ($0-599/month + 0.75%) provides superior functionality for complex pricing models, revenue recognition, and multi-gateway support, but requires Stripe/Braintree underneath. The decision point: Stripe Billing until $1M+ ARR with simple pricing, then evaluate Chargebee if you need usage-based billing, complex proration, or gateway flexibility.

Square optimized for in-person payments at 2.6% + $0.10 (recently reduced from 2.6% + $0.15). Less relevant for pure-SaaS but valuable if you have any physical retail component.

Payroll complexity scales faster than you expect

Gusto ($49/month + $6/person) is the default for early-stage startups with its Simple plan covering unlimited payroll runs, automated tax filing, and direct deposit. The catch: multi-state payroll requires the Plus plan at $80/month + $12/person. A single remote employee in another state triggers state tax withholding obligations, unemployment insurance registration, and workers' compensation requirements, you'll need that upgrade.

OnPay ($49/month + $6/person) includes multi-state payroll in the base price, making it more cost-effective than Gusto for distributed teams. Customer support ratings exceed Gusto's, and all features are bundled, no tiers to navigate.

Rippling ($8-25+/person) shines for tech companies with 20+ employees needing unified HR and IT management. The platform handles device provisioning, app access management, and payroll in one system. 90-second payroll runs for fully onboarded employees. Overkill for small teams; essential for scaling distributed engineering organizations.

Justworks PEO ($79-109/person) uses a Professional Employer Organization model where Justworks becomes the employer of record for tax purposes. The value proposition: enterprise-level health insurance rates for small teams and automatic compliance across 4,000+ tax jurisdictions. At 10 employees, that's $790-1,090/month, expensive, but potentially offset by health insurance savings of $200-400/person versus small group rates.

International contractors require specialized platforms. Deel ($49/contractor/month) and Remote.com ($29/contractor/month) handle compliant payments in 150+ countries. For full-time international employees without establishing local entities, both offer Employer of Record services at $599-699/person/month, expensive but cheaper than the $15,000-50,000 cost of establishing a foreign subsidiary.

The misclassification trap: Treating employees as contractors to avoid payroll taxes and benefits can result in IRS penalties of up to 40% of unpaid taxes, DOL back wages for three years, and California willful misclassification penalties of $10,000-25,000 per worker. Apply the IRS three-factor test (behavioral control, financial control, relationship type) and when in doubt, classify as employee.

Tax setup mistakes can cost millions in lost benefits

Get your EIN immediately and for free. The IRS EIN Assistant at IRS.gov provides instant approval Monday-Friday 7 AM-10 PM Eastern at no cost. Services charging for EIN acquisition are capturing money for a free 5-minute process.

Section 83(b) elections must be filed within 30 days of receiving restricted stock, no exceptions. This election lets founders pay tax on stock at the grant-date value (typically pennies) rather than at vesting (potentially millions). Missing the deadline means paying ordinary income tax as stock vests at fair market value. A founder receiving $100,000 worth of stock that appreciates to $500,000 could face $185,000 in additional taxes from missing this filing. Send via certified mail to the IRS, keep proof of mailing, provide copies to your company, and attach to your tax return.

Section 1202 QSBS provides up to $15 million (or 10x your cost basis, whichever is greater) in federal capital gains tax exclusion for qualified small business stock held over 5 years. Requirements: domestic C corporation, gross assets under $75 million at stock issuance, 80%+ of assets in active qualified business. Excluded businesses include professional services (consulting, law, engineering), financial services, hotels, and restaurants. Critical: S Corp election disqualifies stock. Structure as C Corp from day one if you expect significant exit value.

R&D tax credits offset up to $500,000/year in payroll taxes for qualifying startups. Eligibility: gross receipts under $5 million, no gross receipts in years prior to the 5-year period ending with the current year. Software development activities often qualify if they involve technical uncertainty and systematic experimentation. Document project descriptions, time tracking, and expenses contemporaneously. File Form 6765 with your return, then apply the credit via Form 8974 with quarterly payroll.

SaaS sales tax varies wildly by state. Approximately 25 states tax SaaS in some form, Texas, New York, Pennsylvania, Massachusetts among them. California generally does not tax SaaS (surprising many). Economic nexus thresholds (typically $100,000 in sales) determine when you must register and collect. Use TaxJar or Avalara for automated calculation and filing. Paddle's Merchant of Record model eliminates this complexity entirely by handling all tax obligations.

Operations infrastructure costs $250-2,000 monthly depending on stage

Physical addresses solve the problem of needing a real street address for bank accounts, state registration, and IRS correspondence without leasing office space. Stable charges $49/month ($24.50 for early-stage companies under $1M revenue) for unlimited mail handling, scanning, check deposits, and integrations with Slack and Google Drive. Their addresses are specifically designed for bank acceptance. Northwest Registered Agent at $125/year handles registered agent requirements in any state, service of process, annual report reminders, and compliance alerts.

Insurance requirements escalate with funding. Pre-seed, basic General Liability ($500-2,500/year) may suffice. Once you raise capital, D&O insurance becomes non-negotiable, VCs require it to protect directors' and officers' personal assets from lawsuits. Expect $4,000-7,000/year for D&O. Tech companies need Tech E&O (errors and omissions) covering software failures and service delivery issues. Cyber liability ($2,000-4,000/year) covers data breaches, ransomware, and notification costs, essential for any company handling customer data. Vouch and Embroker specialize in startup insurance with online quotes and packages designed for tech company needs.

Equity management should not happen in spreadsheets once you have employees or investors. Errors in cap tables discovered during due diligence can delay or kill deals. Carta offers a free Launch tier for companies under 25 stakeholders and $1M raised, with paid plans starting at $2,800/year. Pulley provides comparable functionality at $1,200/year with notably faster customer support. Both handle 409A valuations (required annually or at material events for stock option grants), cap table management, and option grant administration.

Contract templates from Y Combinator (SAFEs, side letters) are free at ycombinator.com/documents and represent the standard for early-stage fundraising. Clerky's templates cover formation through seed round. Cooley GO provides free generators for SAFEs and term sheets. Essential documents from day one: Founders Agreement with vesting, Confidential Information and Invention Assignment Agreement (CIIA), IP Assignment for pre-formation work, and consulting agreements with IP provisions.

The mistakes that kill startups often happen at formation

Wrong entity choice for business goals ranks highest. Forming a C Corporation when bootstrapping saddles you with double taxation and no benefit. Forming an LLC when planning VC fundraising requires an expensive, disruptive conversion, and you lose the QSBS clock.

Missing 83(b) elections happens because the 30-day deadline is absolute and falls during the chaos of company formation. The cost: potentially half of your liquidity proceeds in taxes that could have been long-term capital gains.

Improper IP assignment creates catastrophic problems during due diligence. If founders developed code before incorporation without assigning it to the company, or if contractors worked without IP assignment clauses, the company may not own its core assets. Every founder, employee, and contractor needs a CIIA signed.

No founder vesting means a co-founder who leaves after three months retains their full equity stake. Standard vesting is 4 years with a 1-year cliff, VCs will require this regardless, so implement it from formation.

Mixing personal and business finances exposes owners to personal liability by piercing the corporate veil. Open a business bank account immediately and maintain strict separation.

Delaware franchise tax surprises occur when companies authorize 10+ million shares (common for optionality) without understanding the tax calculation. Using the Authorized Shares Method, 10 million shares generates approximately $80,000 in annual franchise tax. Using the Assumed Par Value Capital Method, the same company might owe only $400. Always calculate both and pay the lower amount.

Missing state registrations for remote employees creates compliance debt. Each employee in a new state requires state tax registration, unemployment insurance registration, and workers' compensation coverage, all before their first paycheck.

Practical setup checklist by stage

For pre-seed bootstrapped founders, the minimal viable stack costs approximately $300-500 for year one:

• Formation via Northwest Registered Agent ($39 + ~$100 state fees)
• Mercury banking (free), Gusto Simple for payroll once needed ($55/month)
• QuickBooks Simple Start or Wave for accounting ($0-35/month)
• Stable for mail ($24.50/month early-stage rate)
• Basic general liability insurance ($500-1,500/year)
• Total monthly ongoing: approximately $100-200

For seed-stage funded startups, expect $1,500-3,000 monthly:

• Formation via Clerky ($819 one-time)
• Mercury or Brex banking (free)
• Stripe for payments (2.9%)
• Gusto Plus for multi-state payroll ($80 + $12/person)
• QuickBooks Online for accounting ($65/month)
• Carta or Pulley for equity management ($100-250/month)
• Vouch/Embroker insurance package ($700-1,500/month)
• Stable for mail ($49/month).

Timeline for a funded startup formation:

• Day 1-3: Form Delaware C Corp via Clerky or Stripe Atlas
• Day 1: Apply for EIN online (instant)
• Day 3-7: Open Mercury account (requires EIN, formation docs)
• Day 7-14: Set up Stripe account
• Day 14-30: Issue founder stock with 83(b) elections (file within 30 days)
• Day 30: Establish cap table in Carta/Pulley
• Day 30-60: Set up payroll if hiring
• Before first employee: Register for state unemployment and workers' comp

The complexity of US business formation is real, but the paths are well-established. Match your entity and service choices to your actual business model, not aspirational positioning, and you'll avoid the expensive mistakes that plague underprepared founders.

Compliance calendar: critical deadlines

Missing corporate filing deadlines results in penalties of $220/shareholder/month for S Corps and Partnerships, 5%/month of unpaid tax for C Corps, and potential loss of good standing. Set calendar reminders 30 days before each deadline.