Business Formation

Business Formation & Legal Structure (Guided Interactive)

You've been building for weeks or months. Code is shipping. But here's the uncomfortable question: Who actually owns this company? Who owns the code? If something goes wrong, what are you personally liable for?

Most technical founders skip this section entirely. Then at funding time — or worse, during a co-founder conflict — they discover they've built everything under a structure that was never set up. This skill ensures you've asked the right questions and have a documented plan.

DISCLAIMER: This is NOT legal or tax advice. Consult a lawyer and accountant for your specific situation. This skill ensures you've asked the right questions.

Phase Overview

This skill works in phases:

• Phase 0: Understanding current status
• Phase 1: Entity structure (LLC vs. C-Corp)
• Phase 2: Co-founder agreements (equity, vesting, IP)
• Phase 3: Banking setup
• Phase 4: Bookkeeping & financial tracking
• Phase 5: Tax planning
• Phase 6: Insurance
• Phase 7: Contractor agreements
• Phase 8: Output & checklist
• Phase 9: Completion

Each phase uses AskUserQuestion guided interactions.

Phase 0: Current Status Assessment

Goal: Understand what you've already done (if anything).

I will ask:

• Have you formed any legal entity yet?
• Do you have co-founders?
• Have you opened a business bank account?
• Are you tracking expenses?
• Have you thought about fundraising?

Exit criteria: I understand your starting point. Move to Phase 1 (Entity Structure).

Phase 1: Entity Structure

Goal: Decide between LLC (simple, bootstrap) or C-Corp (fundraising-ready).

Re-ground: "We're deciding entity structure. This determines liability protection, tax treatment, and ability to raise funding."

Use AskUserQuestion tool:

SIMPLIFY: "LLC = simpler, cheaper setup ($100-500), but VCs won't fund it. C-Corp = more complex, pricier ($500-2K+), but required if you ever want institutional investment. If you think you might raise money in 2-5 years, pick C-Corp. If you're bootstrapping forever, LLC is fine."

RECOMMEND: "RECOMMENDATION: If you might raise funding, C-Corp now (you'll need it). If purely bootstrapped and solo, LLC is simpler.

• Completeness: 5/10 (no structure yet)
• Completeness: 7/10 (structure chosen, state not)
• Completeness: 10/10 (entity formed, state selected, paperwork filed)"

OPTIONS:

• (A) "I'm planning to raise funding. C-Corp (Delaware or home state)."
• (B) "I'm bootstrapping, solo founder. LLC is simpler."
• (C) "I have co-founders. We need C-Corp with proper equity structure."
• (D) "I'm not sure. What would you recommend?"

For C-Corp, ask:

• Delaware (best for funded startups) or home state (simpler)?
• Delaware has better legal precedent but you'll pay home state taxes anyway.

For LLC, ask:

• Will you ever want to raise institutional funding? If yes, you'll regret LLC.
• Are you solo or co-founders? (Co-founders should use C-Corp for equity clarity)

Red flags:

• "We'll form LLC now and convert to C-Corp later" (conversion is expensive/painful)
• "We'll figure out legal structure later" (do it now, easier)
• "We don't need liability protection" (you do)

Exit criteria for Phase 1: Entity type chosen (LLC or C-Corp) and state selected. Move to Phase 2 (Co-founder Agreements).

Phase 2: Co-Founder Agreements (If Applicable)

Goal: Document co-founder equity, vesting, and IP ownership.

Re-ground: "We're setting up co-founder agreements. This is the uncomfortable conversation that prevents breakups. Document equity, vesting, and IP ownership now."

Use AskUserQuestion tool:

SIMPLIFY: "Equity split: How much does each founder own? Vesting: How long before they own it fully? (Standard: 4 years with 1-year cliff.) IP assignment: Who owns the code? (Answer: the company, not individuals.) This conversation is awkward. Do it now anyway."

RECOMMEND: "RECOMMENDATION: Document everything in writing. Handshakes break apart when money's involved.

• Completeness: 2/10 (no co-founder agreement)
• Completeness: 6/10 (verbal agreement, not written)
• Completeness: 10/10 (written agreement signed by all founders)"

OPTIONS (if co-founders):

• (A) "Equal founders, equal time, equal risk. 50/50 split, 4-year/1-year cliff vesting."
• (B) "Unequal split: One full-time, one part-time. [60/40]?"
• (C) "One founder has pre-existing audience/product. [Custom split]?"
• (D) "I'm not sure how to split. What would you recommend?"

For co-founders, challenge:

• Are both founders equally invested (time, money, risk)?
• Is vesting locked in? (Without vesting, early departure is risky for remaining founder)
• Is IP ownership clear? (Company should own all code)
• Does everyone understand that unvested equity is lost if they leave?

For solo founders:

• Skip this phase. Move to Phase 3 (Banking).

Common vesting mistake:

• 50/50 split without vesting → Founder B leaves month 2, still owns 50%. Nightmare.

Correct approach:

• 50/50 split WITH 4-year vesting, 1-year cliff.
• Founder B leaves month 2: owns 0% (still in cliff).
• Founder B leaves month 18: owns 25% (vested 18 months of 48).
• Founder B leaves month 48: owns 100% (fully vested).

Exit criteria for Phase 2: If co-founders, equity split, vesting schedule, and IP assignment documented and signed. Move to Phase 3 (Banking).

Phase 3: Banking Setup

Goal: Set up a business bank account (non-negotiable).

Re-ground: "We're setting up a business bank account. This is non-negotiable for tax clarity and credibility."

Use AskUserQuestion tool:

SIMPLIFY: "You need a separate bank account for business money. Not your personal account. Keeps expenses clear, makes taxes easier, shows you're serious. Options: Traditional bank (slow), Stripe Treasury/Mercury (built for startups), or credit union."

RECOMMEND: "RECOMMENDATION: Startup-focused option (Mercury, Stripe Treasury) is fastest and has best UX.

• Completeness: 2/10 (no business account)
• Completeness: 6/10 (traditional bank, older tech)
• Completeness: 10/10 (startup bank, open, integrated accounting)"

OPTIONS:

• (A) "I'll use Mercury, Stripe Treasury, or similar (startup-focused)."
• (B) "I'll use traditional bank (Wells Fargo, Chase, etc.)."
• (C) "I don't have an account yet. I need to set one up."

Requirements:

• EIN (Employer Identification Number — free from IRS)
• Business license (automatic when you form entity)
• Articles of Incorporation/Organization
• ID

Exit criteria for Phase 3: Business bank account opened. Move to Phase 4 (Bookkeeping).

Phase 4: Bookkeeping & Financial Tracking

Goal: Set up a system to track income and expenses.

Re-ground: "We're setting up bookkeeping. Track every dollar in/out. Saves headaches at tax time and when fundraising."

Use AskUserQuestion tool:

SIMPLIFY: "Income: every dollar coming in. Expenses: every dollar going out, category, business purpose. Receipts: save for 7 years. At MVP stage, you can DIY. Later you'll hire accountant, but they'll want clean records."

RECOMMEND: "RECOMMENDATION: Pick one tool and stick with it.

• Completeness: 2/10 (no system)
• Completeness: 6/10 (spreadsheet or basic tracking)
• Completeness: 10/10 (Wave/QB Online, integrated, clean)"

OPTIONS:

• (A) "Wave (free, good for MVP)."
• (B) "QuickBooks Online (~$30/month)."
• (C) "Spreadsheet (annoying but functional)."
• (D) "I don't have a system yet. I need to set one up."

Exit criteria for Phase 4: Bookkeeping tool chosen and set up. Move to Phase 5 (Tax Planning).

Phase 5: Tax Planning

Goal: Understand your quarterly tax obligations.

Re-ground: "If you're making money, the IRS expects quarterly tax payments. Estimate now, avoid penalties later."

Use AskUserQuestion tool:

SIMPLIFY: "You pay estimated taxes 4x/year (April 15, June 15, Sept 15, Jan 15). Need to set aside ~25-30% of net income. If you don't have revenue yet, you can skip this. Once you do, get accountant to calculate your quarterly amount."

RECOMMEND: "RECOMMENDATION: Get advice from CPA. Costs $500 now, saves thousands in penalties.

• Completeness: 3/10 (no tax planning)
• Completeness: 6/10 (understand obligation, not calculating)
• Completeness: 10/10 (CPA confirmed quarterly amounts)"

For state taxes:

• Sales tax: Do you sell digital/physical products? Most states require collection.
• Payroll tax: Do you have employees (including yourself as W-2)?
• State income tax: What state are you in? (CA/NY tax, TX/FL don't)

Exit criteria for Phase 5: Tax obligations mapped and CPA consulted (if you have revenue). Move to Phase 6 (Insurance).

Phase 6: Insurance

Goal: Get basic liability coverage.

Re-ground: "Do you need insurance? Probably basic general liability. Cheap ($400-1500/yr), gives credibility, protects against accidents."

Use AskUserQuestion tool:

SIMPLIFY: "General liability covers accidents/injuries on your property. Professional liability covers if your product causes damage. Cyber liability covers data breaches. At MVP stage, get basic general liability and revisit as you grow."

RECOMMEND: "RECOMMENDATION: Get general liability now. Revisit quarterly.

• Completeness: 2/10 (no insurance)
• Completeness: 6/10 (researched but not purchased)
• Completeness: 10/10 (general liability active)"

OPTIONS:

• (A) "I'll get general liability through online platform (fast, cheap)."
• (B) "I'll use broker for personalized advice."
• (C) "I'm not sure. Help me decide."
• (D) "I don't think I need it."

Exit criteria for Phase 6: General liability insurance obtained (or decision made to skip for now). Move to Phase 7 (Contractor Agreements).

Phase 7: Contractor Agreements

Goal: Document agreements for any contractors/consultants.

Re-ground: "If you're hiring contractors (design, engineering, marketing), you need a written agreement. Protects IP ownership and clarifies scope."

Use AskUserQuestion tool:

SIMPLIFY: "Contractor agreement covers: scope of work, payment, timeline, IP ownership (company owns the work), confidentiality. Without it, contractor might own the code they wrote. Not OK."

RECOMMEND: "RECOMMENDATION: Use template ($20-100 from LawDepot/Rocket Lawyer) or get lawyer ($500-1500) for custom.

• Completeness: 2/10 (no contractors yet)
• Completeness: 6/10 (hiring contractors, no written agreement)
• Completeness: 10/10 (all contractors have signed agreements)"

OPTIONS:

• (A) "No contractors yet."
• (B) "I'm hiring contractors. I'll use template."
• (C) "I'm hiring contractors. I'll get custom agreement from lawyer."

Exit criteria for Phase 7: Contractor agreements in place (if applicable). Move to Phase 8 (Output).

Phase 8: Output & Lock OPS-CHECKLIST.md

Goal: Generate comprehensive operations checklist.

I will produce OPS-CHECKLIST.md containing:

# Operations Checklist

## Entity Structure
- [ ] Status: [Not Started / In Progress / Complete]
- [ ] Type: [LLC / C-Corp / Delaware C-Corp]
- [ ] Filing date: [YYYY-MM-DD]
- [ ] Next: [action needed]

## Co-Founder Agreements (if applicable)
- [ ] Status: [Not Started / In Progress / Complete]
- [ ] Equity split: [%]
- [ ] Vesting schedule: [4-year/1-year cliff / other]
- [ ] IP assignment: [Signed / Not signed]
- [ ] Next: [action needed]

## Banking
- [ ] Status: [Not Started / In Progress / Complete]
- [ ] Bank: [Mercury / QB / Traditional / etc]
- [ ] Account opened: [Date]
- [ ] Next: [Fund it / Set up transfers]

## Bookkeeping
- [ ] Status: [Not Started / In Progress / Complete]
- [ ] Tool: [Wave / QB Online / Spreadsheet]
- [ ] Set up: [Date]
- [ ] Next: [Start tracking expenses]

## Tax Planning
- [ ] Status: [Not Started / In Progress / Complete]
- [ ] CPA selected: [Yes / No]
- [ ] Quarterly amounts: [Calculated / TBD]
- [ ] Next: [Schedule with CPA]

## Insurance
- [ ] Status: [Not Started / In Progress / Complete]
- [ ] General liability: [Active / Not needed / TBD]
- [ ] Other coverage: [None yet]
- [ ] Next: [Purchase / Schedule review]

## Contractor Agreements
- [ ] Status: [Not Started / In Progress / Complete]
- [ ] Templates obtained: [Yes / No]
- [ ] Contracts signed: [# of contractors]
- [ ] Next: [Send to contractors / Prepare]

## Priority Actions
1. [Highest priority item]
2. [Second priority]
3. [Third priority]

## Notes
[Any blocking items or concerns]

Escape Hatches

If founder says "just do it" or expresses impatience:

• Fast-track to artifact generation phase
• Use best available information to fill gaps
• Note any assumptions made

If founder's answers cover multiple questions:

• Smart-skip already-answered phases
• Acknowledge what was covered and move forward

Phase 9: Completion & Handoff

Completion status: Once OPS-CHECKLIST.md is saved, the skill is complete.

Completion Status

DONE — OPS-CHECKLIST.md written and saved. DONE_WITH_CONCERNS — Checklist written but gaps flagged for later review. BLOCKED — Cannot proceed; missing legal advice or co-founder decisions. NEEDS_CONTEXT — Need additional information from founder before completing.

Next Step: Proceed to runway-calculator. Return to z-combinator orchestrator for routing.

Key Principle

Don't skip this. Most technical founders do. They regret it at funding time or during co-founder disputes. Do it now when it's simple.