When to Incorporate

Before filing an LLC with the state it is important to know what management structure the company will have. Most states will require the management structure as part of the filing process.

When to Incorporate

There are many reason to incorporate a business: asset protection, tax benefits, raising capital and much more. However, deciding the right time to incorporate a business can be much trickier. Filing a corporation too early can create unnecessary cost and reporting requirements for the business and filing too late can open up liability obligations for business owners. There are a few things to consider to determine when to incorporate a bus

Asset Protection

For many business owners the question of when to incorporate never enters their mind. Incorporation is a necessity to protect their personal assets. Business owners that owns homes or a portfolio of assets want to make sure those assets are protected. By incorporating their business they are limiting their liability to their business investment and keeping their personal assets separate. In a sole proprietorship and partnership the owners and partners are held infinitely liable for business debts/liabilities should the business not be able to satisfy them. The question of when to incorporate can simply be, “Do I have assets I want to protect?” If so, business owners might want to incorporate to protect their personal assets.

Multiple Shareholders/Owners

When there are multiple parties involved in a business it might be wise to incorporate and streamline the process incase things go sour between the business owners. Although this is never fun to think about it is something that business owners must discuss in case this situation arises. With a corporation the owners purchase a set amount of stock at a set price which determines their ownership percentage. The liability of the owners is limited to their investment. This ensures there is no discrepancy among business owners with who owns what percentage of the company. With a corporation the owners can easily transfer their interest in the business should they ever decided to leave the company and not risk immediate dissolution. Corporations also have bylaws that are the rules and regulations of how the company is governed. The bylaws should also have language that discusses what happens when partners decide to leave or transfer their ownership. In short, incorporating could help prevent a nasty breakup between partners.

Hiring Employees and Entering Contracts

If a business is going to hire employees, Incorporating might be a good idea depending on the situation. Before hiring employees the business owners should decide who they want to be liable to the employee, the business or one of the owners. In most cases, asset protection comes up and the owners need to decide if they are comfortable being liable for the business. The same can be said for vendors and customers. If a corporation sells a customer goods/services the business is liable to the customer, however, if a sole proprietor or partnership is the business then the owners are liable to the customer. For vendors and partners the agreement made is either with the business or the owners.

Deciding when to incorporate is an exciting to think about and there are many other things to consider besides the above. Make sure to carefully weigh your options and try to find the ideal time to incorporate in order to excess fees and paperwork and not open up the owners to liability.

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