How to decide when to incorporate your business
Congratulations on starting your journey as a founder! One of the most important steps you’ll take as a founder is creating a legal entity for your business. This process is known as incorporation.
Incorporating in the US comes with a number of benefits including liability protection, brand credibility, and access to funding. It can be tough to identify the right time to incorporate — especially if it’s your first time building a startup from the ground up.
In this blog post, we’ll explore key indicators such as customer interest, a solid customer base, income potential, and consistent revenue growth. These factors can help you determine the right time to move forward with incorporation. When you’re ready, we’re here to incorporate your LLC or C-corp in Wyoming, Delaware, or another US state.
Key benefits
Incorporating might seem like a far-off milestone in the early stages, but the need could come up sooner than you think. Setting up a formal legal structure protects both founders and the business. Let’s take a look at the most important benefits of incorporation.
Incorporation protects your personal assets
It’s essential to separate personal assets and limit liability to protect yourself against legal and financial risks. Liability points to the legal responsibility and obligations of a business.
Imagine you and your friend launch a small software startup together. You’re excited and focused on building your product, so you skip the step of incorporating. Things go well initially, but after a while, the startup hits a rough patch. The expenses pile up, and you’re unable to keep up with payments to suppliers and contractors.
Without incorporation, your personal assets, like your savings account and even your car, could be on the line to settle these debts. Since the startup isn’t considered a separate legal entity, your personal finances are intertwined with the business’s financial struggles. This means if the startup can’t pay its debts, your personal stuff might end up as collateral.
Incorporation enables you to issue shares
Investors want to invest in businesses they believe in. They need to see an appropriate level of professionalism, stability, and responsibility. When a startup incorporates, it shows potential investors that the founders are serious about building a legitimate, enduring business.
From a legal perspective, you need a C-corp in order to issue shares to investors, employees, and other stakeholders. As mentioned above, most investors prefer Delaware C-corps due to the state’s strong legal framework.
Incorporation streamlines internal operations
When you incorporate, your team will align on a state, business structure, official name, and other details. This ensures that everyone is on the same page with respect to these fundamental points.
Incorporation also enables other operational improvements such as a dedicated business bank account. If you incorporate with Firstbase, we can help you get a business bank account even before you receive your EIN.
Furthermore, you’ll have a chance to create an operating agreement or bylaws that define your internal processes. All of these factors will improve the company’s transparency and minimize the risk of conflict or misunderstandings.
Incorporation can help with your taxes
Managing your company’s books will become much simpler once you create a formal business structure and set up dedicated accounts. That means less accounting stress for you and more time spent moving the startup forward.
Incorporation may also help reduce your tax burden. While C-corps are responsible for federal corporate tax, note that this tax only applies to profits rather than all revenue.
Your company’s tax obligations will depend on the state and business structure you choose — click here for more details on the differences between LLCs and C-corps.
Green flags for incorporation
Here are some signs your company might be ready to incorporate:
Your revenue is constantly growing: More money can sometimes mean more problems. Incorporating can help solve common issues associated with growing your business, like handling employees, getting investors, and more.
You’re looking for funding: Incorporating a C-corp enables you to issue shares to investors, employees, and other stakeholders. Note that investors generally prefer Delaware C-corps over companies incorporated in other states.
You’re worried about liability: Without a legal entity, it can be difficult to draw a line between your personal assets and those of the business. Incorporation creates a clear separation and helps ensure you won’t be held personally liable for the company’s obligations. Naturally, this liability grows with the scale of your company.
You’re coming into more contracts: You don’t need a legal entity to sign contracts, but incorporation will make you appear more trustworthy to the other party. Think about it — how confident would you be signing a business contract with someone who hasn’t incorporated their company?
Unlock your startup’s potential
No matter what you want to achieve with your startup, incorporation is a key step toward that target. Incorporating will help you minimize liability, attract investors, gain credibility with consumers, and generally move your startup in the right direction.
While incorporation can be a complex process, we make it easy for both LLCs and C-corps. Ready to get started? Click here to incorporate your business with Firstbase today.