Determining when to incorporate your business is a question that I often get from my business clients, especially those who are in the initial startup phase. While there is no definite answer, here are a few guidelines that can be used when deciding if it is the right time to incorporate. Several reasons for incorporation are:
- Launching a service or product that could potentially present liability issues. One of the many reasons to incorporate is to protect yourself as a founder, or shareholders, from personal liability. If your business is offering a service or a product, you should generally incorporate before launching the service/product due to potential liability issues that may result. The risk increases as the number of customers and users increase, which is why it is a good idea to incorporate to protect you personally should liability arise.
- Multiple founders. When there is more than one founder to a business, it is always a good idea to incorporate. The likelihood of an argument increases as the number of founders and opinions increases.
- Intellectual Property Involved. If there is any IP created and there is more than one founder, the business should incorporate. This is because if one founder leaves and the IP has not been assigned to the other founder or an entity, the former founder may have problems down the road when wanting to use the created IP. In this particular case, it is important that businesses have an attorney draft their incorporation documents, as the online/form documents typically do not contain IP assignment provisions.
- Funding. If the business decides to procure third party investors, there needs to be an entity to accept the funding.
While the above mentioned examples are just a few of the many reasons to incorporate your business, it is important to remember that incorporating is a serious step that results additional cost and ongoing tax filings.
If you are considering incorporating your business but have questions as to how to proceed, please contact my office.