Most entrepreneurs are too focused on perfecting their final service or product that they overlook one of the most important things when setting up a business – incorporating your company. There are a lot of processes involved when registering your business. It can give you a lot of headaches, especially if you don’t do it right away.
Startups risk losing ownership of their innovative idea that they’ve worked so hard for. If you focus too much on your end product or service. You might overlook the other processes involved like documents, legal requirements, and taxes. It could put your whole timetable into a delay which can put off some investors.
Registering your business is unavoidable anyway so why not do it now instead of when everything’s going to be busier?
So the big question is, how early should you incorporate a startup business?
Let’s see first what you should take into account when setting up your startup for success.
When Should You Register Your Startup?
Most of the advice that you’ve come across probably told you to incorporate early. But how early should that be? And when exactly?
The simplest answer to that is: as soon as you can.
But don’t jump in right away. You’re going to need to register as early as possible if you have the following:
● A partner or a potential partner
● An investor
● An asset
● A grant
● A potential liability
● An intellectual property
● A customer
● A bank account requirement
In a startup environment, these things can happen quickly. You may spend months making a pitch deck but once someone finally takes a chance on your idea, whether it’s a grant, an investor, or a potential partner, everything needed will be done in a matter of weeks, days even, for some.
And since incorporating takes a lot of legalities, you should be prepared for whatever comes your way.
Why Should You Register Early?
So even if you haven’t launched yet, it’s still best to be incorporated. If the reasons above still aren’t enough to convince you, we’ll discuss more reasons why it should benefit you in the long run. Here are 4 reasons why you should incorporate your startup early:
1. Investors Will Gravitate Towards Startups That Are Already Incorporated
Angel investors, venture capitalists, and other types of investors will first ask if you are already incorporated. They’re most interested in their return of investment when they take a risk on you. On top of that, investors prefer to give their funds through a separate bank account. The funds should not intermingle with your personal finances for tax and legal reasons. If you also proposed for a grant, this could probably happen to you as well.
To make a bank account for your startup, you will need to have it incorporated before you can proceed to receive the funds and maintain the financial statements of the startup. An incorporated startup is a less risky startup with lower liability.
2. It Makes You More Credible
If you’re registered, you’ll look more credible. Using a formal name or having an “Inc.” or “Corp.” added to your business name makes it look more professional. You’ll find that there will be an increase in the number of investors and potential partners at your early stages.
3. You’ll Have Complete Control Of Your Startup’s Intellectual Property
Intellectual Property is very sensitive data. A few mistakes are all it takes and someone can take it away from you, putting all you and your team’s hard work down the drain. Your IP includes not only the company’s patents but also trademarks, copyrights, and the most important of all -- your trade secrets.
It’s your most valuable asset. Even partners, acquirers, investors, and other team members will find this the most valuable component of your company. It’s your essence. It’s how your company is valued.
If your team develops your IP before you incorporate it and fail to assign it to the corporation, then the corporation may not end up owning it in full. This results in a break in the chain of the title. And while it may look harmless, it can badly affect your business in the future. Most of the investors, acquisitions and potential partners might not go through the deal because of this. Once they find in their due diligence report that there’s a problem with IP, they might opt out of the deal, or give you an offer that’s lower than you expected.
4. It’s Your Best Protection
At the early stages of the venture, the team tends to make agreements with other investors, co- founders, employees, developers, and independent contractors. If you’re incorporated, the company will be the one to take these risks. Otherwise, it will be you who’ll be facing all of these risks.
Moreover, it will be more attractive to investors when you have fewer risks. If you have a corporation, officers and directors will be provided with indemnification from claims done by third parties. Plus the personal finances of the corporate director or corporate officer will not be affected, should something like that ever happen.
You’ll be able to freely transfer shares, adhering to the law and any restrictions imposed during your stock purchase agreement. You can also protect the corporation from transfers done by other shareholders.
Having your business incorporated also means that if anything should happen to you, the business could still go on without any disruption. Although this will depend on the arrangements you have with your lawyer. Some corporations allow the repurchase of the deceased founder’s shares.
Smart Startup Success
These are just a few of the things to keep in mind when you incorporate a startup early. It may be a big leap for some startups, but it’s very important, especially if you’re looking for investors.
