Hi again, (future) founders@Booth!
You know what time it is! As the air gets crisper here in Chicago, founders’ thoughts turn to legal entities. C-Corp? B-Corp? LLC? As we student entrepreneurs get ready for the New Venture Challenge (the Booth student entrepreneurship competition that happens every spring), one of the first big decisions we face is how to set up our company’s legal structure. Having agonized over this decision myself, I’m here to tell you how I thought about the problem, and what I eventually chose to do.
I do have to warn you here, I am not a lawyer. What I’ve learned over my time at Booth has helped inform my decisions, but please don’t decide anything for yourself without your own research.
The way I see it, there are two major sub questions within the question of what legal entity to form. One, what kind of legal structure is right for my company, and two, how do I actually go about creating that structure. The first question is really a personal preference that requires some soul-searching of your own goals and plans, whereas the second question has a MECE (mutually exclusive and collectively exhaustive) framework that you can use to make your decision.
For me, the first question came down to deciding whether or not I wanted to raise outside capital. For founders like me that do want to raise outside capital, it is important that you are structured as a corporation (and not a partnership), and that you are incorporated in a state where the corporate laws are well understood and established. This is because your investors will want to receive equity in your company in the way that all of their other investments distribute equity, and the potential hassle of filing partnership taxes and doing other partnership administrative work just adds headache for them. Of course, you may not want to raise capital, or may only plan to raise from a few people, and in these situations, a partnership structure may work well for you.
To help students with this decision, the Entrepreneurship and Venture Capital club at Booth hosted a “Legal Basics for Founders” session earlier this year, where Professor Underwood came and talked about the pros and cons of each structure, and pointed me in the right direction. As a student, you will have access to the University of Chicago Innovation Clinic, where second- and third-year law students provide pro bono legal services to startups and venture capital firms within and outside of the University of Chicago ecosystem.
While I was researching the different options, I also consulted other founders that I had met through my Booth network, and spoke to them about what informed their decisions. For me, it really helped to learn about how other people who had been in my exact shoes thought through their decision, and for almost every situation out there, there’s probably a Boothie who’s been in your shoes and is willing to help.
Once you’ve decided what your legal structure will be, you have three different options for setting up the actual entity. These options are: get a lawyer, use a tech-enabled solution, or do it yourself. This is another decision where the resources at Booth have really helped me.
The first option, to get a lawyer, can be done in several different ways. First, the Innovation Clinic is immensely helpful to Booth students, as entity formation is something they have a lot of experience in and frequently take on for students. Additionally, there are also other programs for students to access legal resources, hosted by law firms across the country. I am personally participating in the BASE Program, which is a legal accelerator hosted by Ballard Spahr that gives student entrepreneurs access to pro bono legal services. This program was recommended to me by a Boothie who participated in it last year, and has been invaluable to me in the early days of Commas.
The second option is to use a tech-enabled platform like Stripe Atlas to form your corporate entity. These platforms have the benefit of being easy-to-use and relatively comprehensive, which can be super helpful for students who are time constrained and want to get something launched quickly and without much effort. If you choose to use this kind of platform, you can also then run your incorporation documents by a lawyer to double-check that everything is as you expect.
The third option is to do the corporate filing yourself. This method, while time consuming, is often the cheapest way to establish a legal entity, as there are no additional fees you need to pay beyond the state required fees (and registered agent fee if you’re registering out-of-state). I took this route for my first company before business school, and learned a lot through the process. While it was a great learning experience for me, my general recommendation is to still hire a professional—whether that’s a technology platform or a lawyer—as there are also a lot of ways to make mistakes when doing this on your own. Especially because as Booth students, we have access to free legal help, it doesn’t make sense to try to do it all on your own. If you do choose to go with this option, I would still recommend running your incorporation documents by a pro bono service like the Innovation Clinic, as they can help review your filings and offer their expertise.
The important takeaway here is that while the act of creating a legal entity is a huge step in the journey of a founder, at Booth, it is not one that you have to take alone. Booth’s resources are meant to help you at every step along the way, and you should not hesitate to take full advantage of them while you’re here.
