A new business is thrilling- filled with concepts, energy, and motivation to make a difference. Yet, as you are busy working on product development, acquiring new customers, or fundraising, there is one major decision that can be hanging over your head: whether to incorporate your startup.
Incorporation is not just a legal procedure: it shapes the organization of your business, limits your liability, and preconditions the development. But it is something that makes many entrepreneurs feel overwhelmed to pick a specific time.
In this article, we will deconstruct what assists in timing the best time to organize, to enable you to make wise and confident decisions and prevent the various pitfalls. When is the actual question?
Stage 1: Early Concept and Idea Development
You may not need to incorporate when brainstorming, testing prototypes, or casually scouting the opportunities. Depending on how much you are earning at this stage, the incorporation cost may exceed the advantages when you are not raking in money through sales.
With that said, when considering incorporation at the pre-incorporation stage, when you will have co-founders, it may make sense to do so as well. Formal structure could help to avoid conflicts over equity, ownership, or contributions that frequently appear between partners in the future.
See also: Why Every Startup Needs a Solid Business Plan
Stage 2: Building a Prototype or MVP
The moment when you start developing a minimum viable product (called MVP) or a prototype, you can start searching in freelancer networks or hire some workers using contracts, or find partners. These activities give legal and monetary duties. At this point, incorporating can offer protection against liability, and it can also give you the framework on which new roles, equity, and ownership definitions can be made.
But when you are doing something alone with no significant exposure to risk, you may prefer to postpone incorporation until traction becomes more obvious.
Stage 3: Bringing in Co-Founders or Partners
Incorporation becomes very significant when you are not the sole entity in the undertaking. Without that, written contracts, agreements, or tacit promises may create conflict. Formalization of your structure establishes expectations regarding how you divvy up equity, the power to make decisions, and the expectations regarding responsibilities.
As an example, most of the early teams promise to equally share ownership, but become in conflict with the changing levels of contribution. When startup incorporation is used alongside founder agreements, it makes the situation transparent on the onset.
Stage 4: Seeking Funding or Investment
Whether interested in venture capital, angel financiers, and even bigger loans on a bank basis, incorporation is no longer optional, but a very necessary thing. The majority of investors will not even think about collaborating with entities that do not have a legal form.
At this stage, investors are generally hoping to find a corporation (typically a C-Corp in the U.S.) so that equity shares and subsequent financing can be issued. Failing to be incorporated may bring unnecessary time waste, or may leave them to other investments.
Stage 5: Hiring Employees or Expanding Operations
Once your company begins recruiting employees, you become more vulnerable to liability- whether in the workplace (disputes), payroll, or benefits. The incorporation acts through legal and taxation structures in dealing with employees.
It also indicates that your startup business is stable and serious, and this can help you land more talent. Nobody is willing to work in a company that they feel is temporary or casual.
Stage 6: Revenue Growth and Customer Contracts
When your business is showing steady revenue and forming customer or vendor contracts, adding incorporation is even more important. By formalizing your structure, you will be secure in terms of personal liability in case of a contract miscarriage or the claim of a customer against the company.
At this point, a large number of entrepreneurs begin to ask about tax benefits that can be acquired by incorporating. The selection of the type of entity, LLC, S-Corp, or C-Corp, may have a great implication on profitability.
Finding the Right Moment
Incorporation does not have one universal timeline. Some of the founders will use incorporation during the idea phase to create clarity and professionalism, whereas others will use it when they just have a customer base or investors. It is a good rule to ask yourself:
- Do I have co-founders or investors?
- Am I involved in contracts, or am I recruiting employees?
- Should I get personal asset liability protection?
- Does my customer, client, or partner network value credibility?
When you answer in the affirmative to any of these, then it is high time to consider restructuring and make incorporation a serious consideration. In the case of most startups, this decision occurs when they go past the stage of casual investigation and into the phase of active development.
Balancing Costs and Benefits
What should also be mentioned is that incorporation is associated with additional costs and duties in the long term: you must provide yearly reports, maintain documents, and may need to pay more taxes, depending on the structure. The benefits of liability protection, access to funding, and growth potential should be evaluated by entrepreneurs against these costs.
This is where professional advice is of assistance. An accountant, a lawyer, or a business advisor can examine your case and give the most appropriate time and form of entity. Getting advice ensures that you are not rushing ahead quickly into incorporation and missing the boat, or that you are not procrastinating to the point of waiting until it is too late to incorporate.
