When Should You Incorporate?

16 August 2011 Start-Up


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“The beginning is the most important part of the work.” -Plato, The Republic

mngirl3 asked a great question that got me thinking, when should a person seriously consider incorporating their idea into a business?

In today’s hyper entrepreneurial environment, which has been highlighted by the Kauffman Foundation, it appears that everyone with an idea is literally starting a business, but is incorporating necessary?  That depends. After reading several articles and post on incorporating, here are a few points to keep in mind:

Point 1. Purpose

Why do you want to incorporate?  As Simon Sinek says, Start with Why. “Just because” and/or “all the cool kids are doing it,” are NOT good reasons for incorporating your idea. When incorporating one of the best ways to keep the IRS from classifying your business as a hobby is to have a written business plan and projections. But, some ideas are hobby’s at best and will never be expanded beyond that.

Point 2. Partners

Will you do this alone or will you have a partner? If it’s just you and that’s all it will ever be, again maybe incorporating could be a bit pre-mature. There are corporations that have one person (Single Member LLC with an election as a S or C corp) but this is advantageous only when you are concerned with Point 4. When your idea resulted from brainstorming with others and they will play a role in bringing the idea to reality (Co-Founders), it is extremely important to determine how equity is split. I strongly recommend this be done prior to bringing in revenue.

Point 3. Investors

Do you need outside funds to help get your idea going? Many times our ideas require funding to get started. It is tough to get funding if you are not incorporated. The first funding normally comes from friends, family, and fools (smile). Once you move beyond that (toward sophisticated investors) and begin to leverage other people’s money (OPM) you should incorporate because you will need to issue shares of stock.

Point 4. Liability

Does your idea have the ability to cause lawsuits? Legal protection is one of the benefits of incorporating. It allows you to be separated from the corporation, in the event something happens that causes legal liability. If done properly, the company shoulders the responsibility alone and you are shielded. If done incorrectly, you will still be liable.

When you begin to combine these and other points together, the picture becomes clear that incorporation is the route to take. Although, there are hidden benefits to being a sole-proprietor and that alone might be a perfect place for you to be. But as I mentioned before in Point 2, once you decide to have business partners – incorporating is the way to go. I hope this was beneficial and provides you a thought process for your situation. Under no circumstance should this information be used to make decision from. Please consult professional legal and accounting advice. If you have questions, please comment below and do not be afraid to reach out to me on Twitter @TBFMentor, I am also on Skype with the same name.

Note: You can see all corporate and individual tax rates for all countries here.

Fun Fact:

The entrepreneurship index was highest among the least-educated group, moving from 0.49 percent in 2009 to 0.59 percent in 2010, suggesting an increased number of people entering entrepreneurship out of necessity. The largest decrease in entrepreneurial activity occurred for high school graduates (education level).

Created By:

Paul McNeal is a Business Coach and Mentor with Teen Business Forum. To learn more check out about.me/paulmcneal.

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