One of the most common questions early startups ask is when should they incorporate their business?
There is no golden rule, the time to incorporate will vary depending on the specific circumstances of the business. There are however, a number of factors that will influence the decision to incorporate.
One of the best pieces of advice is “Don’t incorporate a hobby. Incorporate when you are serious about making your startup a business.”
In the early stages of your start up there’s a lot to consider, developing your product, validating your idea and finding your product / market fit. Legal matters are often kept out sight and out of mind.
At some point you will need to incorporate. Here are situations when it’s probably time to incorporate.
You start taking on risk
One of the key reasons to incorporate is to help protect the owner or owners from personal liability. A company is a separate legal entity and therefore creates a corporate veil between the owners and the company. If there is ever a dispute or issue the company can insulate the owners from liability.
Cash strapped startups may want the ability to pay in equity rather than hard earned cash. to do this, a formal share structure must be sent up. As part of the incorporation process each company will have a limited allotment of shares. These shares can be kept between the owners of the business or distributed to shareholders they see fit.
More than one founder means that there is always the potential for disputes. This problem can be managed through incorporation. After incorporation, owners are limited to the number of shares purchased. The owners have a clear idea that their investment in the company is determined simply by the number of shares they own and not by any pre-incorporation verbal or written promises.
It is much easier to raise capital if your business is incorporated. Many investors prefer to invest in an incorporated business as they know that there is some kind of formal structure set up in order to accept their investment.
Also many startups are short on cash and often need to pay employees and partners in equity rather than cash. Although it is possible to have pre-incorporation agreements to grant equity upon incorporation, it is simply easier to incorporate a company and grant stock options or equity to satisfy these promises.
Tax flexibility and incorporation tax benefits
Corporations are taxed at a lower rate than individuals. If you had any other business structure (a sole proprietorship or partnership), then you would need to pay taxes on your personal income tax statement even if that money is staying in the business. Incorporating a business will give the owners an option to be taxed as a corporation.
LawPath’s online Incorporation Solution allows to cost-effectively register a company in minutes. We then provide all the company legal documents and formation documents for you to print and download.
Unsure where to start? Contact a LawPath consultant on 1800LAWPATH to learn more about customising legal documents, obtaining a fixed-fee quote from our network of 600+ expert lawyers or to get answers to your legal questions.