Incorporating provides companies protection against various risks that come with entrepreneurship, such as personal liability and intellectual property. However, it is crucial to ensure the proper timing of when to incorporate your business. After all, this process comes with fees.
Understanding What It Is
A corporation can be organized by registering with the respective state. This application will require the incorporator to put on record the following facts:
- Company name
- The purpose of the business
- Names and addresses of the company’s incorporators
- Amount and types of capital stock that the corporation will be authorized to issue
- The rights and privileges of shareholders of each class of stock
Why Do It
Running a corporation comes with responsibilities. The structure requires formalities that other entities do not have. For instance, there are stricter record-keeping and administrative requirements. There may also be an additional tax burden. That is why many business owners think twice about incorporating a business.
But among the most common reasons why companies incorporate during the early stages of their operations is to limit the legal liability of owners when it comes to the company’s actions. That is possible because a corporation is treated as a separate entity. Other reasons that make this structure appealing include the following:
- The life of a corporation does not depend on its owners. It can continue to exist until it goes bankrupt, accomplishes its business objectives, or merges with another entity.
- It is easy to transfer ownership interest. Shareholders can sell, transfer, or give away their shares.
- It is easier to attract investors into a corporation compared to other legal entities because of the transferability of shares.
When Is The Right Time?
Early incorporation is a good consideration for most startups. That is because it is easier to officially deal with the splitting of profits and losses among shareholders and settle concerns regarding sweat equity.
The following signs can help you determine if it is best to incorporate your business during the early stages of running it:
- The company wants to establish co-founder relationships. A lot of promising business ventures fail because of co-founder issues. There may be some issues with the splitting of equity or disagreements in some aspects of the business. Incorporating early can help prevent such problems by ensuring that all shareholders see eye to eye from the start.
- The business entity promises sweat equity. Many startups have limited finances, so it may be hard to pay employees the rate suitable for their job description. However, some companies that believe having their team members on board will allow them to be rewarded in the future choose to promise sweat equity.To put it simply, sweat equity refers to non-financial contributions to a project or business venture. Usually, it comes in the form of labor, time, or mental effort. For startups with limited funding, the owners and employees may agree to receive salaries below their market values. However, they will have a stake in the company. In that case, incorporating is beneficial because it will help enforce the company’s promises of future shares.
- The organization needs to protect intellectual property. Companies that need to protect certain intellectual property that sets them apart from competitors will benefit from incorporation. It is also a good idea if the company has more than one founder. For example, if a company has failed to incorporate, there is a risk of losing the intellectual property for the business to a partner who decides to leave and create a competing venture.
- The company has third-party funding. It may be necessary to incorporate a company as soon as possible to be able to take advantage of funds from investors. Additionally, running a registered corporation can help attract new investors.
- The owners want personal liability protection. As stated earlier, a corporation offers limited liability protection for the personal assets of the owners. That means personal properties will not be affected even if the company incurs debts or in the event of a lawsuit.
There are also startups that choose to go through the process of incorporation even before their business operations commence. Doing this can help in highlighting the obligations and expectations of founders right away to avoid any disagreements and disputes. If the company has a clear vision of its own future and has the ability to handle the cost of running a corporation, then incorporating before the launch of the business may be a good consideration.
For some companies, it may not be best to incorporate them at the moment. However, that does not mean it will not be a possibility in the future. The following signs can help companies reassess the timing of incorporating:
- The company has a profit exceeding $100,000.
- The business entity is ready to hire employees.
- The organization plans on taking out a loan.
- Customers, manufacturers, and distributors are concerned about the company not being incorporated.
Once a company owner realizes that it is time to incorporate the business, the next step is to properly register it with the state. In most cases, that includes the submission of formal paperwork to a state agency and payment of a filing fee. The process varies according to the state where the company operates. Depending on the business activities and location, there may be additional requirements and obligations.
Handling the multistep process that the state has set will help companies ensure compliance and prevent any legal issues. Additionally, it will formalize and legalize the business activities of the corporation.
However, some companies may find the whole ordeal daunting. It may also be hard for them to set aside time to learn the required tasks and complete them. In such cases, the best option is to hire a seasoned third-party organization like DoMyLLC. Our team of experts can handle the preparation and filing of formal paperwork. We also offer personalized solutions to tailor our services based on the needs of our clients. Contact us today to request more information about what we can do for you.
Business Filing Section