Incorporate as soon as two things are true: you care enough about the company that you would be upset if a cofounder walked away with a share of it, and every founder is free to start it. For most teams that means the week the founders commit and have left their jobs, and before outside money comes in, before the company signs a contract or hires anyone, before a new cofounder joins and before the product becomes valuable.
Why earlier is better
The stock is cheapest at the start. Founders buy their shares for a tiny price, often a fraction of a cent each, because on the first day the company is worth almost nothing. That matters for tax. Founders buying restricted stock that vests over time file an 83(b) election within 30 days, which taxes them on the stock's value when they buy it rather than as it vests. If they pay full value, the tax is zero. Wait until there is traction or a term sheet and the stock is worth something, and founders have to pay more for it or pay tax on the difference. There are workarounds, but they cost money and raise questions in diligence.
Ownership is also easier to settle before anyone has contributed more than anyone else. The longer founders build without a written agreement, the more each of them comes to feel entitled to, and the harder the conversation becomes.
The intellectual property ends up in one place. Code written before incorporation belongs to whoever wrote it, and founder agreements assign it to the company, but a short history is easier to document than a long one.
And the tax clocks start. Holding periods for capital gains and for qualified small business stock run from the day you acquire your shares.
The one reason to wait
Do not start the company, write its code or sign the founder documents while any founder still works somewhere that could claim what you build.
Most employment agreements at technology companies include an invention assignment clause that gives the employer rights to inventions you create while you work there. Some reach only inventions related to the employer's business or made with its time and equipment; others reach much further. Some states limit these clauses. California Labor Code section 2870, for example, protects inventions developed entirely on your own time, without the employer's equipment or confidential information, unless they relate to the employer's business or come out of your work there. Many states have no such statute.
Even when the law is on your side, an employer's claim puts a cloud over the company's most important asset, and investors' lawyers will ask about it. So resign first, or get a written release from your employer. Reread your old agreements for invention assignment, non-solicitation and, where they are enforceable, non-compete clauses. Then incorporate and start building. If you have already built something while employed, tell a lawyer before you incorporate, not after.
Visas and taxes abroad
Two groups should get advice before filing. Founders on U.S. work visas can generally own stock in a startup, but working for it may not be allowed under their visa, so get immigration advice before the company pays you or you start working for it. Founders who live outside the United States, or plan to move, may owe tax at home on the stock, may face an exit tax on unrealized gains when they leave their country, or may need approval to own foreign shares. Talk to a tax adviser in that country before forming a U.S. company.
What starts the day you file
Once the state accepts the filing, a few clocks start. Each founder has 30 days from buying their stock to file an 83(b) election. The company owes a Delaware annual report and franchise tax every March 1, starting the year after it is formed. Its first federal tax return is due after its first tax year ends. Running Your Company has the full calendar.