Business Structure: When Should I Incorporate My Startup?
We are in an era where business owners are no longer interested in just bearing the title “CEO.” They want to be fully involved in the business and that also means controlling most of the business activities.
However, there comes a time when you need to “slow down,” give it a few thoughts and get on the corporate world. When that comes, you would ask the question, “when should I incorporate my startup?”
If we are to advise, we would say to incorporate the “young” business during its “teething stage” – between the first 3 and 5 months. But that isn’t always the case. We have had startup owners running the business for 2 years without getting incorporated.
Depending on the idea upon which the business is based, this might not be a problem. But if you are tired of “playing small,” want to start doing business on a broader scale and want that legitimate recognition, it is time to get incorporated.
What Does Incorporation Mean?
Incorporating a startup means registering it with the authorities and that certifies that the business is now open for the public to officially deal with it.
Getting incorporated is also a good way to diversify risks, in the sense that the liability of the owner(s) doesn’t affect the business. Likewise, the business’ liability doesn’t have a negative impact on the owner(s).
How to Know that Your Startup Needs Incorporation
For some new business owners, the timing of getting the startup incorporated might be “wrong.” They are looking to break even after spending huge sums of money to start the business. These business owners are also looking to expand the business and with little marketing costs, that wouldn’t be possible.
Thus, in the short-term, incorporating a startup might not be worth it. But if you zoom out and look at the “bigger picture,” getting incorporated is a means to grow the brand even further.
Here are some of the clear signs to tell you that your startup needs to get incorporated:
1. Incorporation Helps Early-Stage Investors and Founders have Clear Expectations
Sometimes, using a “gentleman’s understanding” to run a startup is not the ideal way to go about it. One of the parties may come up tomorrow to sue the business on purported claims of “breach of contract.”
Therefore, incorporating the business on time helps to “set things on stone” so that every key member has a clear expectation of what to expect and do to make the startup thrive.
For example, with the incorporation in place, the founders, early-stage investors and even the employees will have a mutual agreement or understanding on the following:
- The vesting conditions
- The ideal to distribute ownership of the business (it is usually by sharing stocks).
With that in place, your startup will “carry everyone along” and all the key members (cum owners) will play their respective parts to help the business succeed.
2. Incorporating before any Contracts is Better
The best time to incorporate a startup is before the business signs its first contracts. In a bid to get new customers and break even, your startup might just make silly business mistakes.
It is better to get the incorporation on time, because you may make bad decisions when signing the first set of contracts. From getting limited protection to facing personal liability, not getting the incorporation can be disadvantageous.
But when you have gotten the brand incorporated, you will benefit from the following:
- The startup will make better contract decisions.
- The contracts will be fully backed by the business, meaning that if anything goes wrong, the business will bear the liability, and not you, the founder.
- The target prospects will trust the business the more, because it is now recognized by law.
3. Incorporate the Startup when You are Transitioning from Sole-Proprietorship to Partnership
One of the best times to incorporate your startup is when you want to give it a business structure. It will interest you to know that by law, every business is required to have a business structure before it can take in any revenue from sales. You can consult your lawyer for advice on what applies in your location.
If you are looking to bring in a new partner or make someone a co-founder, it is a good time to get incorporated.
The advantages to making this consideration include:
- The business wouldn’t be liable for any liability caused by the partner or even you – the founder. Instead, both you and the business partner will bear the responsibilities, provided it is a personal liability.
- Getting startup incorporation also helps to earmark responsibilities and assets to the founders or owners.
- How to Know if You’re Meant to be an Entrepreneur
- Grow your Business as a Starter by Avoiding These 9 Mistakes
- How to Respond to Objection in Business
4. Incorporation Keeps the Startup’s IP Chain Straightened
The last thing you want to do is to get your startup losing most of the Intellectual Properties (IPs) – and it is pretty easy to do that. When you failed to allocate these IPs to the startup on time, it turns to a “personal property” and most times, you wouldn’t be able to use the company to fight for its protection.
Here is how it works:
The IP is Idea Turned to Reality
For the meantime, what you have at the time of launching the startup is an idea and like most ideas, it doesn’t get to materialize until something is done in that regard.
You’ve taken the first step of launching the startup. Congratulations on that! The next step is to get incorporated to protect the IP so that the business can lay claims to those properties.
The Intellectual Properties (IPs) we are talking about include but are not limited to:
- Trade secrets
IPs help Validate the Startup’s Valuation
You have seen companies listed as “unicorns” and “million-dollar businesses” and you are wondering what makes them so?
The Intellectual Property (IP) of such companies also contribute to that valuation. When a company has more IPs and these IPs are exclusive, people (including prospective investors) tend to value it the more.
So, if you are looking to build a “billion-dollar business,” it is better to start today to get your IP’s security by incorporating the startup.
Conclusion: Incorporating a Startup has Huge Advantages
From increasing the startup’s credibility, helping the business build credit and getting more partners on board; incorporation has lots of advantages for small businesses.
However, it may not be a good idea to rush into incorporating the business. You may need it at the moment if you are unsure of the business idea blossoming into a big venture. In that case, you want to run it as a sole proprietorship until you are sure.