As soon as possible. If you are starting up a small business and plan to incorporate sooner or later, than it should be sooner. There are some pitfalls that you must watch out for if you do not incorporate early.
If there is more than one founder, you should definitely incorporate early. Partnerships are generally informal arrangements and this can harbor many misconceptions and therefore, disagreements. Incorporating the business will introduce formality, definitive roles and rights.
If there is any intellectual property created then it should be assigned to the corporation. IP assignment clauses should always be a part of incorporation documents in some form or another. Let us say two founders create some IP but never form a corporation or never assigned the IP rights to the corporation. If one partner/shareholder decides to leave, the corporation may be stuck without the right to use that IP of the founder.
If you plan to offer stock options as incentives to anyone, you are better off having a formed corporation to do so.
Liability. Corporations help protect your personal property in those situations where your whole net worth might be liable for a wrong that you committed, even accidentally.
Funding/further investments. It is much easier to obtain funding if in corporate form and ready to go. Investors are wary to invest in sole proprietorship’s and other forms of business. They are familiar with corporations and can easily do business with corporations.
Thanks fo the advice. I own a very small company that began as a general partnership, (about 5 employees) strong and really no need for anymore employees based on our field. Do this advice still apply to us even though we are small and plan to stay fairly small?
Jason S.
Owner – 360virtualvisions
Yes of course. I can't of course advise you specifically on whether you should, or should not incorporate. That is a much longer discussion that involves your particular risks, plans, goals etc. of your business. And of course a lawyer-client relationship.
But it's not just about the size of the company, it's really about the potential risks. Having just one employee who can sue you, is one risk.
Thank you Joseph for the advice. I will do some more research and look at all of the things listed above and see if this will be beneficial for our company. I will keep your number in my files and give you a call if and when I decide to go ahead with it or need some more advice.
- Jason
Owner – <a href="http://www.360virtualvisions.com"> 360 Virtual Visions </a>