When to Incorporate
Even though it is not much money, incorporation costs money. So, when should you incorporate? It does not need to be the first thing you do. But, you should certainly incorporate before you enter into any contractual agreements with third parties or, if there is more than one of you, when you start building up some value in terms of intellectual property or other assets.
When you enter into a contract with another person or company, you are likely to want that contract to be between your company and the other person. If this is not the case, it is likely that you will have personal liability under the contract. Personal liability is almost always a bad idea. Before you sign a lease, a license, or incur obligations to consultants, accountants, attorneys or enter into any other agreement, incorporate and have the company sign the contract or incur the obligation. When you start to build up assets, such as IP, you may want to make sure the assets are owned by the company. This is particularly true if there is more than one founder. For example, if Harry writes a lot of code, the company can’t own the code until (a) it exists and (b) Harry transfers the IP to the company. It may not matter much if Harry is the sole entrepreneur, but if he has a co-founder, that person is likely to be toiling away with the assumption that both she and Harry are contributing value to the enterprise. In that case, it is time to create a company, move the IP into the company and have everyone work on behalf of the company.
Look at it this way: when you have something of value and you are ready to deal with third parites such as co-founders, investors, customers, suppliers etc. then you need to have your corporation. By the way, you may not want a corporation -- you may want a limited liability company, a limited partnership or some more obscure form of entity. How to incorporate will be the subject of another post.
No comments yet
Start the discussion by using the form below