How Far Along Should I Incorporate My Business?
Incorporation is just one of the many moving pieces you’ll have to keep up with when starting and running a business. It sounds simple enough, but depending on where you are, there’s no shortage of fees and bureaucracy involved. As a result, knowing when to incorporate your startup is by no means a trivial decision.
The truth is that the process of incorporation can be somewhat confusing. As long as you have the bare bones of a well-run company, incorporating (or deciding when to incorporate) shouldn’t be such a tall order. Still, it’s always good to use planning tools to track progress and growth.
Starting a Company – The Basics
A lot can be said about the nits and grits of starting a business. But beyond the ideation phase, here is the bare minimum list you’ll need:
1. Business Plan
Having a business plan is only natural. It gives you a clear roadmap of the business you intend to run. A business plan for a startup incorporation may include:
- Your product or service
- Marketing plan
- Market research
- Financial strategy
Of course the actual plans can vary, but these are some of the details you may want to include. And make a point of reviewing your plan often to tweak it in line with your prevailing conditions.
2. Legal Knowledge
Incorporated businesses are governed by the laws of the jurisdiction in which they operate. And it will do you good to know the regulations that govern your type of business.
The last thing you want for your startup is getting hit by a lawsuit at a time when every coin matters. Have time (and money) to talk to an attorney about the legalities of your business.
3. Financial Stability
It is unlikely that you’ll start turning a profit from the word go. Your business can take as many 6 months or more before it reaches a self-sustaining level.
How will you survive for this time? How are you going to fund your operations? It’s important to consider the cost of incorporating a business; you need to have a considerable pool of capital to draw from.
4. Operating License
You need the approval of authorities to set up your operations. That means you need to register your business.
That way, you get a license/permit and any other relevant documents.
Speaking of starting an incorporated business, it is very likely that you begin as a sole proprietor.
But you don’t always have to stay with this model forever. You may have to switch over to a Limited Liability Company by incorporating your venture. Before looking at when to make this change, it is important that you understand the difference between these two.
LLC vs. INC: Understanding the Difference Between an LLC and a Sole Proprietor
An LLC refers to a company whose owner is legally recognized as being separate from the business. The most notable upside of an LLC is the protection of the owner from any liabilities that ensue from the business. So even if the said venture cannot pay off debt, creditors are legally barred from going after the personal assets of the owner.
A sole proprietor, on the other hand, is completely tied to the business. For a larger part, forming one doesn’t require a lot of paperwork aside from acquiring a permit. And that makes it easier to start.
But unlike an LLC, you risk having your assets auctioned to settle business debts.
With that aside, when should you jump over to the incorporated side?
When to Incorporate Your Business
The ideal time to incorporate your business is as early as you can. If you haven’t started operations yet, incorporation should be your first step.
As a general rule, you should start planning for incorporation as soon as you figure your business is at the potential of being sued. So get incorporated when:
- You are on the verge of hiring
- You reach a point where you need a loan for your business
- You get one or more partners.
Though the process varies depending on your state, it is pretty easy.
You can reach out to your state office charged with registering corporations and ask for the necessary particulars. Bringing on an attorney is important as you’ll be sure of being filled in properly as far as the law is concerned.
Why You Should Incorporate Your Business
As you’ve seen from above, limited liability is the biggest advantage of incorporation. But it isn’t the only one.
Here are some more.
1. Tax Advantages
Business taxes tend to be low as compared to personal tax rates. So if your company is incorporated, you can take advantage of this to save a few dollars in taxes.
For instance, you can decide to take a salary from the business at a later date when the personal tax rates are a bit lower – that’s if you have no immediate use of the money.
Alternatively, you can opt to replace the salary with dividends as they tend to be taxed at a lower rate.
2. Potential to Land More Business
That Ltd., Corp., and Inc. at the end of your company name rouses a certain kind of trust in potential clients. They perceive incorporated businesses as serious even if they are small businesses or startups, and therefore they expect you’ll live up to their expectations and promises. And that means more deals for you.
Besides, some companies will only transact with incorporated ones. The suffixes could be the only thing locking you out of major business.
3. Easy-to-Raise Funds
With an incorporated entity, you have access to multiple financing options – which you wouldn’t otherwise as a sole proprietor.
First off, lenders are more likely to consider your request if you are an incorporated business than when you are a sole proprietor. A sole proprietorship is viewed as riskier, and even a personal incorporation would be better.
Secondly, you can try to win over venture capitalists with shares in exchange for funds. These investors will hear none of your requests if you are running a sole proprietorship model. Furthermore, it’s only in the case of LLC that you can offer equity since its business assets are clearly defined.
Perpetuity means that an incorporated business is not dependent on its owner or shareholders for operation. Such an entity can still be in operation even when any or both of the above leave.
It’s also easy to sell such a business.
Incorporation is something you’re inevitably going to have to think about as a new business owner – if you haven’t already.
Just because you started as a sole proprietor doesn’t mean you should keep at it. It’s a huge risk, since you’re putting your personal assets on the line in case of a lawsuit. This is why incorporation is the only option when you’re generating any kind of real revenues.
Hopefully this article shed some light into your incorporation needs – good luck!