We’ll go into each step in more detail — but here is an overview of what’s important to do upfront.

Step 1: Form a C-Corp

Step 2: Purchase Founder Shares From the Company

Step 3: File an 83(b) Election

Step 4: Establish a Business Bank Account

Step 1: Form a C-Corp

When considering the structure of your new business venture, it is crucial to understand the differences between a startup and a small business, as this will significantly influence your decision-making process. If your goal is to launch a startup, which typically involves a high-growth potential and a focus on innovation, you will need to prepare for a unique set of challenges and opportunities.

The most common type of startup company is a Delaware C-Corp, and most incorporation tools will handle this setup for you. You can reach out to the Taxagon team to better understand company setup details, such as business structure and taxes. For immigrants in the U.S., this process may require additional considerations.

How C-Corps Operate

C-Corps provide the most flexibility and support for raising capital. Most investors prefer to invest only in a C-Corp to avoid any unforeseen tax liabilities.

A major advantage of C-Corps is that they make all shareholders eligible for the Qualified Small Business Stock (QSBS) exemption, one of the most favorable tax breaks in the U.S. The QSBS exemption allows investors and founders to exclude up to 100% of capital gains on the sale of qualified stock, provided the shares were held for at least five years. This exclusion can apply to gains up to $10 million or 10 times the original investment, offering significant tax savings and making C-Corps particularly attractive for high-growth startups. As a result, this tax incentive often draws investors and aligns them with the long-term success of the business.

Unlike an LLC or S-Corp, a C-Corp is NOT a pass-through entity. Pass-through entities automatically pass profits and losses to shareholders, while a C-Corp retains them at the corporate level until a distribution is made.

A perceived downside of C-Corps is "double taxation" — profits are taxed at the corporate level and again when distributed as dividends. However, as a startup, you’ll likely operate at a loss for a while, so this may not be an immediate concern.

Step 2: Purchase Your Founder Shares From the Company

This is a simple yet often mishandled step.

In a C-Corp, you need to have a record of purchasing your shares from the company.

Using Taxagon as an example:

Taxagon creates 10,000,000 shares in the new entity, each valued at $0.00001/share, making the company worth $100.

You need to pay $85 to acquire 85% of the company, or 8.5 million shares. Document this transaction!

The remaining 15% forms an employee option pool for future hiring.

Documenting this purchase is crucial because, if your company is sold for a significant amount and you claim the QSBS exemption, you’ll need clear records of purchasing shares directly from the company.

Step 3: File an 83(b) Election

This is a frequently misunderstood and costly step if missed. An 83(b) election informs the IRS that you wish to be fully taxed on the current value of all shares now rather than as they vest.

Why an 83(b) Election Matters

Consider a scenario — two co-founders, Sam and Taylor of SkyTech Inc., are each vesting their equity over four years.

Both bought shares at $0.00001/share, but only Sam filed an 83(b). Here’s the difference:

After one year, SkyTech Inc. raises $2M at a $20M valuation, increasing the internal share price to $1/share.

Sam filed the 83(b), so as shares vest, Sam is covered. Since Taylor did not file an 83(b), every time shares vest, Taylor owes taxes on the “value” of the shares since issuance.

Worse, Taylor may not have cash available to cover the taxes on these shares as they vest, resulting in significant unexpected expenses.

How to File an 83(b)

The 83(b) election must be filed by mail within 30 days of the stock grant — it’s an outdated but essential process.

If you work with Taxagon for incorporation, we can assist with this filing process and ensure everything is submitted accurately.

Step 4: Set Up a Business Bank Account

Avoid mixing personal and business expenses, as separating them later is time-consuming and complicated.

Consider using one of these platforms for a business bank account:

• Mercury

  They have built the best business banking platform

• Ramp

  Best platform for a corporate credit card and expense management.

• Meow

  We think the team is innovating really fast — they have a very competitive business banking product.

Optional: Loan a Small Amount to the Business

You may need to make business purchases before raising any capital.

One solution is to create a loan agreement between yourself and the business. You can personally lend money at a market interest rate (currently around 4.5%). After raising funds, you can repay yourself (the loan repayment is untaxed).

Contact Taxagon team for further discussion. Email us [email protected]