When it comes to building a business from scratch and being successful in it, you need to understand and address several different issues, such as intellectual property protection, legal, and finance. Starting up a business from scratch is one thing; protecting it from anyhow people is another. One of the many ways to protect your startup business is by incorporating it.
“Incorporating a business” is a legal process people use to convert their startups to a formally recognized company or corporate entity. Though it is usually complex to perform, this legal approach offers tons of excellent benefits for entrepreneurs. But here’s a burning question; when is the right time to incorporate a startup business?
The best time to incorporate your startup is at the early stage of building your business. This way, you’ll be able to address or prevent the deadly co-founder’s fights – this often happens to many founders. Limited liability is another benefit attached to getting your startup incorporated early.
What exactly does it mean to incorporate a startup? How does incorporation work, and what benefits does it have to offer? When should a startup business be incorporated? What are the key reasons why you should include your startup business? These and more are the frequently asked questions that you’ll find answers to as you read through the rest of this article.
What Does It Mean To “Incorporate A Startup Business?”
In business administration, incorporating a startup is a legal process of forming a company. You can also say that it’s a process of converting your sole proprietorship or general partnership into a corporate entity, which is recognized by your state of incorporation.
By incorporating your startup, it means you’re making a legal structure of the business. If this happens, it’ll also mean that the startup has been set apart from the people that founded it. That was why I mentioned earlier that incorporating your business will help you eliminate deadly co-founder’s fight.
When Is Not The Best Time To Incorporate Your Startup?
Before going ahead to talk about the best time to incorporate your startup, here’s a quick question; when is not the right time to incorporate the business?
If you have a business idea, and you only see it as an idea and nothing more, you don’t need to get incorporation at the time. No doubt, creating a startup always starts with having a business idea. However, you need to understand that there’s more to it than just doing that.
If you’re unwilling to invest your time, do a lot of market research, meet with investors for funds, understand your target audiences, and many more, then incorporating will only be a waste of time.
When Should You Incorporate Your Startup?
When it comes to the “topic of incorporation,” one of the frequently asked questions is; when is the right time to incorporate a startup? I have come across the question many times, which is why it’s essential to address it.
To answer that, I’ll say the best time to incorporate your startup is at the early stage of the business.
You can consider incorporating the business as soon as you’re ready to materialize your business idea. Of course, this is the stage where you put the concept on paper and determine whether the business is feasible. By molding your business idea, you’ll need to research the market, understand your target audience, invest a lot of your time, look for investors to fund the business, and have a small test market.
The process of incorporating your business involves a lot of steps. It would help if you reached agreements with your shareholders, created bylaws, and filled other corporate documents. By incorporating at the early stage of your business, all these steps will lay the foundations upon which your startup will thrive and become successful.
How Does Incorporation Work?
So, how exactly does incorporation work?
Incorporating a startup business isn’t a quick or easy process; it involves a lot of things. That said, let’s have a look at some of the steps involved in the process below:
- Start by choosing a name for your startup
There’s no way you can incorporate your startup without choosing a name for the business. The question is, do you have a unique business name. Having just anyhow name is not allowed, as it could match with another registered corporation in your state.
Having two different corporations bearing the same name in your area will undoubtedly confuse potential customers. This is why the corporate filing office on your site won’t allow you to use an existing name for your business.
Furthermore, the type of name you’re looking to choose for your startup matters a lot. Yes, it has to suit your business goals and reflect the kind of people you’re looking to reach.
- Determine where you want to incorporate
Apart from choosing a unique business name, another step involved in Incorporating your startup is determining exactly where you want to incorporate. This consists in selecting an appropriate state that you wish to include.
To me, the best place to incorporate your startup is your state, as the process is usually inexpensive compared to other sites. Better still, get familiar with the law of the state before deciding to incorporate your business.
- Choose the best type of business for your startup
To incorporate your startup, you’ll need to choose the best business type that suits the business you’re doing. For this, you may need to contact a legal practitioner. All you need is to have the right person decide the best business type that suits your startup and the goals you’re looking to achieve.
There are three main types of business that you can choose from. They include; Limited Liability Companies (LLCs), C Corporations, and S Corporations. If you’re going to be deciding on your own, it’s essential to understand how each business type works.
- Determine the directors of the corporation
Another thing about incorporating your business is that it requires you to determine who the corporation will be. Apart from that, you’ll also have to decide who the members of the corporate entity will be.
- Take licensing laws seriously
If your startup business is the type that requires you to get a license before starting up your company, this is the best time to do that. Make sure you reach out to the business licensing authorities of your state and understand the necessary paperwork that you need to fill. Since it’s licensing law, I’ll advise you to go with your lawyer and have him go over the papers before going ahead to fill any of them in your company’s name.
- Name your local registered agent
Your local registered agent is the company that accepts service of process and official mails on behalf of your company. To incorporate your startup, you need to name the local register agent, and the agent will act as your business’s official contact with your state.
In case you don’t know – before you go ahead and name your registered agent, there are specific requirements that you need to meet.
For example, the agent has to be a resident of the state. If you’re going to be choosing an agent outside your state, it has to be a qualified one. That’s not all; it’s also important that your registered agent has a physical location and be readily available, especially during business hours.
- Prepare and file the Articles of Incorporation
Drafting the Articles of Incorporation is another requirement that you must meet to incorporate your startup successfully.
The Articles of Incorporation is a document that must contain your business name, information regarding your registered agent, location, business type, details of your shares, as well as every member of your corporation.
- Create your company’s bylaws
Lastly, it would help if you created bylaws for your corporation. If you don’t know, your company’s bylaws are the first thing you and the board of directors need to establish for your startup, and they should contain the rules and regulations that govern how your company will run.
Why Should You Incorporate Your Startup?
Since you’re reading this post, you might also be interested in knowing the importance of incorporating your startup.
Earlier in this post, I mentioned that incorporating your startup will help you eliminate the deadly co-founder’s fights. Yes, that’s the truth! However, you need to know that there’s more to incorporating your startup business than just that. That said, you can check below to see a couple of reasons why you need to include your startup.
- Avoid fights between co-founders
One of the many issues that many startup founders often face is the problem of equity or the value of your company’s shares.
Here’s an excellent example of what I’m trying to say; imagine spending four years building your startup successfully. After that, one of your investors came around to claim about 30% of the whole share, which is not supposed to be so. Without incorporating your business, this issue will always come up.
By incorporating your business early enough, you’ll be able to avoid fights between your shareholders. That’s because incorporation will allow you to reach agreements with your shareholders regarding equity split. This way, you’ll be able to eliminate fights with your co-founders.
Another reason why you need to incorporate your startup early enough is to receive Personal Liability Protection.
Here’s the thing; if you haven’t yet incorporated your startup, it means you’re currently operating and entering into contracts in person. If you’re also taking loans for the business, you’re doing that as an individual, which is not a good thing to do.
Here’s why it’s wrong to have everything done as an individual; if things go wrong, you’ll personally be liable for your company’s actions and commitments. This brings us to the question of how incorporating your startup help to address this issue?
It’s pretty simple; by incorporating your business, you’ll create a separate legal entity for your startup. With that, if things go wrong, you and other co-founders won’t personally be liable for the startup’s debt and other commitments.
- Attracting top talents to your business
One of the best ways, arguably, to attract top talents (at an affordable rate) to your startup is by offering stock options to them as an incentive. However, you’ll surely agree with me that this move isn’t possible without incorporating your startup business.
If you don’t know, startup founders need to buy stock in their companies at fair market value. If you incorporate early enough, you’ll be able to stock at a nominal price. Waiting for people to start using your products or services will increase your market value above the nominal fee. At this time, you’ll have to pay more.
So, the bottom line is; when you incorporate your startup early enough, you get to buy your company’s stock at a nominal price. And by offering the stock options to the top talent, you can get them to work harder and build the company with you until it becomes successful.
Wrapping up
When is the right time to incorporate your startup? As mentioned so far, the best time is when you’re finally ready to materialize your business idea.
Furthermore, incorporating your startup comes with tons of excellent benefits for you and other shareholders of the company. First, it’ll enable all of you to be protected from personal liability due to the company’s commitment – an example is startup loans. Apart from that, incorporating your business will allow you to raise capital quickly from the sales of shares and securities.
However, you need to understand that there are a few setbacks to incorporating your startup. Doing that means you and other stakeholders will have annual meetings. That’s not all; you’ll also need bylaws, which you and the company’s director will use in running the business. You’ll also need to fill out some documents periodically and pay annual fees to the appropriate organization.
Sources:
https://en.wikipedia.org/wiki/Startup_company
https://www.investopedia.com/terms/s/startup.asp
https://www.forbes.com/sites/allbusiness/2018/07/15/35-step-guide-entrepreneurs-starting-a-business/
Glossary
A sole proprietor is someone who owns an unincorporated business by themselves and who is self-employed; they are therefore both the employer of any employees and the owner of the enterprise, which makes them both employee and employer.
A Delaware corporation is a business entity with the presumption that it is either up for sale or looking to be acquired. This is because of Delaware’s position as an attractive state to incorporate, making its public records searchable and easily accessible.
Venture Capital is when entrepreneurs and their businesses want to raise money (venture capital funding) outside of going public on the stock market.
C corporation is generally used by companies expected to remain separate from the individual and not as a livelihood for the individual. A comprehensive explanation would be anything in which an independent contractor receives a fee or commission for their services. This can include being paid by the hour, day, week, task, or project.
A business entity is a form of doing business; they include an individual, corporation, partnership, and limited liability company.
A Limited liability company, or LLC, is a corporate structure made up of an agreement between individuals called members. Members can have varying degrees of control over the organization’s operations. The types of limited liability companies range from single-member LLCs to multi-member LLCs owned by various legal entities like corporations, cooperatives, non-profit associations, and trusts.
A benefit corporation is a limited liability corporation that has been certified under benefit corp legislation as one which pursues ideals other than maximizing profit. Those ideals are typically given in the articles of incorporation, are often stated in broad and non-specific terms, and can include “creating a sustainable environment” or “creating social values.”
A startup corporation is typically less than a year old and has a founder with an idea looking to build it into some profitable venture.
An operating agreement is a legal document that dictates how the individual partners will operate their new business. This document spells out (in an organized way) the roles of each person in terms of what they can. It cannot do, along with provisions that protect, limit, or allow for liability if one partner causes bulk damages to the company. Once this agreement is signed by everyone involved, it becomes legally binding – making it difficult for anyone to decide not to comply when things get heated amongst themselves.
Preferred shares are a type of equity security. A shareholder may convert their preference shares into ordinary shares if certain conditions are met, as outlined in the company’s constitution. Preferred shares rank higher than expected and non-preferred shares, which is good because it means that they’re entitled to a fixed rate of dividend payments before any dividends go to the other shareholders.
Founder shares are the stake in the company that is given to an individual who has founded the startup.
An incorporation process is just a simple form for collecting information about the buyer and seller before filing the paperwork for the incorporated company.
The Delaware law requires that employers who have employees provide them with health and life insurance. Employers are required to consider whether they offer sufficient work hours, including those required by Delaware law.
Common stock is the type of company stock that gives owners (shareholders) an ownership share in the corporation. In return, common stockholders have no control over how or when dividends will be distributed to them and usually receive no information on what transactions are occurring inside the organization.
The franchise tax is a type of tax imposed by some taxing authorities on new or expanding franchises. The franchise fee or the additional cost one covers when investing in their franchise can be paid through taxes, and data shows this fee ranges from 1 to 5% of the company’s total investment.
The company income tax is a type of taxation that applies to corporations, their shareholders, and political subdivisions.
Double taxation most commonly refers to the issue of corporate income being taxed at a company level and then again at an individual level when dividends are paid.
S corporations are entities (usually small businesses) that have met specific criteria to be treated as a corporation under federal law and the tax code. The most significant difference between S corporations and other corporations is eligibility requirements; only those with 100 or a single shareholder can be an S corporation. The owners of such companies must meet several other factors. One responsibility unique to S corporations is taking care not to allow anyone owner’s shares of ownership in the company to exceed 50 percent of total ownership, which would turn their company into an “S-class” corporation.
A business structure is how a company’s operations are organized, often including its legal system and responsibility for corporate governance.
A business filing fee is a payment of the government’s administrative cost for processing a new business.
Corporate law is the branch of law that governs businesses and corporations. It prevents people from signing contracts that offer overly harsh terms, protects shareholders against mismanagement by corporate directors or officers, and allows for bankruptcy procedures when businesses cannot pay their debts.
B Corp is a certification granted to companies that have met high social and environmental performance standards, accountability, and transparency.
Personal assets are things like your home, car, bank account savings, and they are anything that you own.
A startup lawyer is a legal professional who works for a startup or small business. The need for startup lawyers arises because these businesses do not have the same economic stability that larger companies will often have, and they may be more risk-prone to achieve rapid growth.
A tech startup entrepreneur is a person who starts a company that has significantly high growth potential and capitalizes on new technology with the intent to become financially successful.
An investor law firm provides guidance (both in the courtroom and out of courtrooms) to help with investment disputes. Lawyers at these firms may also represent clients on mergers and acquisitions, corporate governance, private equity transactions, public offerings, venture capital transactions, joint ventures, and bankruptcy proceedings.
Startup incorporation can vary from state to state. But it typically includes filing initial paperwork, issuing shares to founders, or other investors, organizing bylaws and shareholder agreements, and more.
