Incorporating a startup business is a big decision, and requires careful research and planning. If you incorporate too soon then there is a risk you might be wasting your time and money by paying unnecessary fees and taxes or filing unnecessary reports. If you register your company too late then you could face late mover disadvantages and unlimited liability.
Here are some reasons why you should take the step of incorporating your business:
Introducing a new product/service to the market:
A company should generally incorporate before launching a product or a service because of potential liability issues. Without incorporation, creditors/customers will be able to touch the owner’s personal assets if there are any kind of issues. With incorporation comes an official structure, a corporate veil, which will protect the personal assets of the company’s owner(s) from business debt.
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.
Raising capital/Attracting investors
It is much easier to raise capital if your business is incorporated. Many investor 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.
Hiring employees/third party
Incorporation status can affect the liability of the business to third parties and its employees. If a business needs to engage in third party or employment contracts, it is advised to incorporate the business so that the party enters into an agreement with the company instead of the owner(s).
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.
Looking to incorporate? LawPath’s new 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.