When you begin your startup, the temptation can be to make everything pertaining to your business as official as possible. One of the areas that separates the kids from the grown-ups is whether or not your business is “Incorporated”.
Below are a few pros and cons that come with officially making your business incorporated, as well as the best time to make the switch.
What does it mean to be “Incorporated?”
To have your business become incorporated means to have your business become legally recognized in the eyes of the state as a completely separate entity from the founders or administration. Although this sounds somewhat dismal, it actually is a great help to you in times that your company may run into some legal hot water, as well as make it easier for your business to grow.
In the off chance that your business is under fire from some legal malpractices or questionable activity, your business is what will be on trial and charged, and not you as the owner or operator.
It also makes sharing and transferring shares very easy for your company, making the process of collecting capital funds that much easier. A very nice perk of incorporation.
To get started on the paperwork for incorporating your business, you need to write a business plan. The mission of the business must be declared, the roles of the administration and shareholders are written out in detail, and meetings when the stockholders and board members will gather must be scheduled.
The downside of being incorporated is that the business is now responsible for hefty annual fees and taxes, and now must provide meticulous details on how the business conducts itself throughout its daily operations and use of funds.
When is the best time to incorporate my startup?
Holding off is best for startups because the hardest part of a new venture is securing a stable line of profit and capital, and to pay those mandatory taxes and fees, for a not yet successful startup just to say that it is “Incorporated”, is just not worth it.
There are pros to remaining unincorporated. Unlike an incorporated business, you can personally fund your startup yourself, and even spend earned cash anyway you see fit without legally having to write up a report on how much you spent, what you bought, and if the funds were used for the betterment of the company or not. The cash is free to move easily in and out of the unincorporated startup, which is the exact opposite of one that is incorporated.
Short answer? Hold off as long as you can before you make the leap to incorporation. Take your time when it comes to launching your startup into a world of regulatory fees and taxations. For a business that is doing well enough to secure a dependable line of profit, and is looking to become publicly tradeable to expand its capital funding, then incorporation can be a wise decision. For the startups that are still struggling to secure funds to remain sustainable however, know that there is no rush. Focus on becoming profitable and completely self-sustainable first, and once income and profits are secure and dependable, then and only then start thinking about the possibility of incorporating your business.
