You’ve launched a startup. You’ve amassed a skilled team. You’ve created a strategy to take your emerging business where it needs to be. But you haven’t incorporated your startup yet.
Perhaps you feel your business is still too small, particularly if you (like more than half of others) operate from home. Or perhaps you have no idea what choosing to incorporate actually entails.
Whatever the case may be for holding off, though, it is something that many businesses should choose. There are many advantages from incorporation, from limited liability and enabling investors to prevent issues with cofounders down the line.
The good news is that incorporation is surprisingly simple, and it isn’t nearly as complex as it might appear. While there is more formality to starting a corporation over a sole proprietorship or a limited liability company, it isn’t something reserved just for Fortune 500 businesses with massive global operations. Anyone can do it, especially with services such as LegalZoom or Northwest Registered Agent.
Here are five key reasons to incorporate your startup as early as you can.
Running a startup is no easy feat, and the rewards may not be as immediate as you hope for. In fact, 30 percent of small business owners earn no salary.
On top of this, 19 percent invest more than 60 hours into their business each week, and nearly 90 percent work weekends on a regular basis.
This can leave founders exhausted, disillusioned, and frustrated — possibly with each other. That’s why it’s best to create a mutually-agreeable equity split early on and to prevent clashes over ownership down the line.
Incorporating early will make ownership shares concrete, which can prove an advantage if one co-founder wishes to sell their share within the first year or two. Businesses that incorporate are more resilient when founders leave or situations change
Countless new businesses depend on financial support to grow and achieve success — money problems are to blame for 82 percent of failed businesses.
It’s generally easier for incorporated businesses to attract investors over other types for a number of reasons. One is the limited liability, which protects them from losing any more than their personal investment should the company fail.
Another reason is the simplicity of transferring shares, which increases the potential future value of an investment.
Investors almost always want a business that is incorporated, not just acting as a limited liability company.
An incorporated business is recognized as a legal entity, and its owners are protected from personal liability for corporate debts that the corporation may accrue.
So if your startup is sued and ordered to make a payment, your personal assets are (generally) at no risk. Bankruptcy, for example, applies to the corporation and not yourself.
Incorporating your startup as early as possible can relieve some of the emotional strain and anxiety founders may experience in the early years of running a business.
“Time is the friend of the wonderful company,” Warren Buffet (business magnate and investor) once said, “the enemy of the mediocre.”
A corporation can have a limitless lifespan. It doesn’t hinge on whether one or more stockholders are alive: it can keep running for generations under the right circumstances.
Less morbidly, an owner can choose to sell their share in the incorporated business early on for any number of reasons. They don’t need to remain attached to the corporation for it to carry on long into the future.
Shareholders can transfer their share of ownership in a corporation more simply than with other business types. This is because individuals’ ownership is represented by the shares they currently hold.
A shareholder can sign over shares to someone else easily, whether to a co-founder, relative, or another shareholder. This creates a greater sense of flexibility: individuals are only tied to a corporation for as long as they want to be.
We’ve explored a few potential benefits of choosing to incorporate a startup as early as possible. But how can business-owners actually go about it?
Learning how to incorporate is essential to make sure you complete the process properly and choose the right direction for your startup. It isn’t a crazy long process that requires an MBA, but it does take a little knowledge and time. But the time is well worth it.
Research the process carefully and empower yourself with all the insights you need to transform your small business into a growing, flourishing corporation with the capacity to stand the test of time. The vast majority of businesses that move beyond solopreneur are corporations. So unless staying small is part of the plan, incorporation should be on your immediate to-do list.