How to Start a SaaS Company: The Legal and Money Setup
Most SaaS founders build the product first and deal with the company later. That works until the first enterprise deal, the first tax notice, or the first co-founder who leaves. The entity work is not glamorous and it is not expensive, but doing it in the wrong order costs real money to unwind. Here is the sequence that holds up.
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Incorporate where your customers and investors expect
Jurisdiction is the first fork and the hardest to reverse. A Delaware C corporation is the default if you intend to raise from American funds, because their documents assume it. A UK limited company or an Estonian private limited company is cheaper to run and perfectly fine if you plan to stay revenue-funded. Redomiciling later is legal, slow and expensive, so pick against your funding intent rather than your postcode.
Formation services exist because the filing itself is trivial and the surrounding admin is not. Registered agent, EIN, founder share issuance, an operating bank account: those steps have dependencies and each one blocks the next. A packaged incorporation gets the chain done in the right order and usually ships partner credits alongside it, which is free money you would otherwise leave on the table.
The mistake to avoid is incorporating too early with the wrong people on the cap table. Once shares are issued, taking them back requires the holder's cooperation. If you are still deciding who the founders are, keep trading through a sole trader or a dormant entity and incorporate properly the week the team is settled.
Separate the money on day one
A business bank account is not a formality, it is the evidence that the company and you are different legal persons. Mixing personal and company spending is the single fastest way to weaken limited liability and to make your first accountant expensive. Open the account the same week the entity exists, before any revenue arrives.
Startup-focused banks beat high street branches on the things a SaaS company actually needs: instant sub-accounts, virtual cards per vendor, API access for reconciliation, and no minimum balance. Corporate card providers add spend controls and a partner perks catalogue that often covers a meaningful slice of your first-year infrastructure bill. Both are worth having, and neither charges you to hold the account.
Bookkeeping follows the same logic. Connect the accounting ledger to the bank feed from the first transaction and categorise as you go. Retrofitting eighteen months of unlabelled card charges before a funding round or a tax deadline is a genuinely miserable week, and it is entirely avoidable with an hour of setup.
Your own merchant account, or a merchant of record
This is the decision most SaaS founders get wrong by default. Running your own payment processor gives you the lowest headline rate, full control of the checkout, and complete ownership of the customer relationship. It also makes you the merchant, which means you are responsible for collecting and remitting consumption tax in every jurisdiction where you have customers.
A merchant of record sells the software to the customer on your behalf. They take a higher cut, and in exchange they own the tax liability, the invoicing, the fraud exposure and the chargeback fights. For a two-person company selling globally, that trade is usually worth it. For a team with finance headcount and mostly domestic revenue, it is not.
Switching later is possible but it churns every active subscription, because the billing relationship moves to a new entity. Cards have to be re-authorised and a slice of your base will simply not re-enter their details. Decide before you have recurring revenue worth protecting, not after.
Sales tax and VAT will find you eventually
Digital services are taxed where the buyer is, not where you are. The EU expects VAT on B2C sales from the first euro with no registration threshold, the UK has its own rules, and American states each set their own economic nexus trigger. None of this is optional and none of it is enforced immediately, which is exactly why founders ignore it until the liability is large.
Two things reduce the pain. Selling B2B rather than B2C shifts most of the EU liability to the buyer under reverse charge, provided you validate their tax number at checkout. And using a merchant of record removes the question entirely, because the tax obligation sits with them. Choose one of those deliberately instead of discovering the problem through a letter.
Whichever route you take, record the buyer's country and tax status on every transaction from the first sale. Reconstructing that data retroactively from card BINs and IP logs is the part accountants charge most for, and the part that turns a small back-tax bill into a large one.
Equity, vesting and the documents you cannot undo
Every founder gets vesting, including you. Four years with a one-year cliff is the convention because it survives the co-founder who leaves in month seven. Without it, that person keeps their full stake, contributes nothing further, and makes the company uninvestable. Agreeing this while everyone still likes each other takes twenty minutes; agreeing it afterwards takes lawyers.
Assign intellectual property to the company in writing, from every founder and every contractor. Code written by a freelancer belongs to the freelancer by default in most jurisdictions unless a contract says otherwise. This is the single most common finding in early diligence and the one that stalls deals, because it cannot be fixed without tracking down someone you stopped paying two years ago.
Keep the cap table in one authoritative place and update it the day anything changes. A spreadsheet is fine at three shareholders. What is not fine is three versions of the spreadsheet, which is what you get when the founder who maintains it goes on holiday during a SAFE round.
Terms, data protection and the first security questionnaire
Your terms of service and privacy policy are contracts, not decoration. A template is acceptable to start with, but read it and delete the clauses that do not describe your product, because a term you cannot honour is worse than no term at all. Name the governing law, the notice period for price changes, and what happens to customer data on cancellation.
The first mid-sized customer will send a security questionnaire and it will ask about sub-processors, data residency, encryption, access review and incident response. You do not need a formal certification to answer it, you need honest answers and a written policy. Draft that document before the questionnaire arrives, because the sales cycle stalls for exactly as long as you take to write it.
All of this costs money in tools before it earns any, which is why founder programmes exist. Incorporation packages, business banking bonuses, corporate card perk catalogues, discounted accounting and subsidised billing infrastructure are all available to a company that is a week old. The directory tracks the SaaS ones with their current terms, so you can claim them in the same sitting as the paperwork.
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Common questions
Do I need to incorporate before I get my first customer?
Before you take money, yes. Invoicing as an individual makes you personally liable for the contract and forces a messy migration of every subscription once the company exists.
Delaware or a company in my own country?
Delaware if you intend to raise from American investors, because their paperwork assumes it. Otherwise incorporate locally, because a foreign entity means foreign filings, foreign accountants and a bank that does not want you.
Do I have to charge VAT on SaaS subscriptions?
For EU consumers, yes, from the first sale. For EU businesses, reverse charge moves the obligation to the buyer if you validate their tax number. A merchant of record takes the whole problem off you.
Can I run a SaaS company as a sole trader?
Legally in most places, yes. Practically it caps you: no cap table, no investment, unlimited personal liability, and enterprise buyers whose procurement rules will not approve you.