Why Incorporate
Incorporation may seem so obvious that it hardly bears mention. Nevertheless, at the risk of being boring, you want to incorporate because: (1) if you do it right as a general proposition, you get protection from personal liability for the obligations of the business, (2) the company (or LLC or limited partnership) is a vehicle that can be financed, and (3) it greatly facilitates many mechanical aspects of the business, such as hiring people, holding assets such as IP but other assets as well.
With respect to personal liability, as everyone knows, companies get sued for many reasons, often contractual disputes or employment related disputes. Companies are separate legal persons (different from their owners), and companies are legal actors. So, companies (as distinct from their owners) enter into contracts, and companies are obligated to perform those contracts. If the counterparty to a contract is disappointed for some reason, recourse is to the company that entered into the contract, not the owner of the company. Now, this is not the case if you don't respect the legal entitiy by doning things like keeping appropriate books and records, not commingling funds with your personal account, signing documents personally (rather than on behalf of the company -- this has to do with how signature lines appear on documents) and the like. Also, there are certain kinds of claims (including torts) where the individual actor (in addition to the corporate actor) will have liability. Nevertheless, by incorporating you protect yourself from many potential sources of liability.l
Financing is really a subset of dealings with third parties, but it merits its own mention. Perhaps it is sufficient to say that no VC will write you personally a check for $XX. These investors expect to sit on boards, own an known percentage of a company etc. This is all achieved by investing in a corporation (or LLC or limited partnership).
A separate question is when to incorporate. This will be the subject of another post.
Comments (1)
Read through and enter the discussion by using the form at the endHealy Jones - February 11, 2009 7:08 PM
You will clearly need to incorporate if you are going to raise venture funding! Usually you'll need to be a c-corp, although I have heard of the random VC firm that has a way to invest in an s-corp.