When Is The Right Time To Incorporate Your Tech Startup?
If your new business involves intellectual property, the best you can do is to consider incorporating immediately. Failing to incorporate before developing…
Surely, you’ll agree with me that one of the biggest challenges of being a business owner is having to make tough administrative decisions. Most times, business opportunities often surface, disguised as decisions. As such, for you to experience growth in your tech startup, you need to get yourself familiar with making key decisions.
As a business owner, one of the key administrative decisions you have to make is deciding exactly when to incorporate your tech startup. If you fail to incorporate at the right time, your business will most likely face a couple of challenges, such as high taxes and lack of talent. In the rest of this guide, you’ll find everything you need to know about how to decide exactly when to incorporate your tech startup.
Why should you incorporate your tech startup?
Before going ahead to talk about when and how to incorporate your startup, let me start by talking about why you need to incorporate your business early enough.
1. Stand a chance to receive financial support
As a business owner, you’ll certainly agree with me that “capital” is one of the key factors to drive a business to success. Businesses fail a lot of times. According to Fundera, 82% of small businesses that failed were due to cash flow issues.
By incorporating your business early enough, one of the benefits is you’ll be able to attract more investors to your tech startup. It’s pretty simple; these investors understand that your business (as a corporation) will properly issue them equity.
2. Protect against personal liability
Most people often incorporate their businesses for liability protection. This also applies to every tech startup. By incorporating your startup, the “veil of incorporation” will protect you and the shareholders from personal liabilities. What this means is that you and your shareholders won’t be liable for the startup’s debt. Just make sure you don’t sign any personal guarantee for the business.
3. Getting stocks at a nominal price
As a tech startup owner, I’m sure you’ll agree with me that stocks make up a valuable part of your business. Well, one way to increase your chances of buying stocks at a nominal price is by incorporating your startup early enough. Yes, depending on how early you incorporated your business, you may be able to buy at $.0001 per stock, for example. This is pretty much possible because, at the time, the value attached to your startup stocks isn’t yet certain.
4. Tax benefits
Another reason you need to incorporate your small tech business as early as possible is because of tax benefits. Generally, early incorporation will most certainly prevent you from adverse tax consequences.
When should you incorporate it?
The simple and direct answer to this question is “early enough.” So, what exactly does that mean?
The timing matters when incorporating your tech startup. To ensure you’re not incorporating too early or too late, there are a couple of factors that you need to keep in mind.
● Does the startup have multiple founders?
One factor that determines exactly when you need to incorporate your startup is the “number of founders.” Most times, startups with multiple founders often face misunderstandings and disagreements. Here’s where the need to distribute ownership comes into the scene. The earlier you incorporate your business, the better you get to avoid these founders’ issues.
● Are you looking to employ talents
The importance of employing top talents for your business can never be overstressed. According to experts, well-executed talent management can always contribute to the medium or long-term growth of your tech startup.
No doubt, there are a couple of ways you can attract top talents to your tech startup. However, the most effective method is by offering them stock options as an incentive, especially if you don’t have enough money to attract them. But how exactly is it possible to offer stock options without incorporating your business? Here’s where the need to incorporate your tech startup as early as possible before recruiting talents comes into the scene.
● Does your startup involve any intellectual property?
If your new business involves intellectual property, the best you can do is to consider incorporating immediately. Failing to incorporate before developing any intellectual property could result in ownership questions. In this case, the product belongs to the person that developed it. Unfortunately, this could result in disputes if the person decides to leave your startup.
● Incorporate your startup before entering contracts
As a new business owner, you’ll need to enter various contracts as time goes on. For instance, you need to enter contracts for office equipment, services, vehicle leases, and a few others. Before you start entering these contracts, ensure to incorporate your tech startup. That’s so because any contract you entered before incorporating your business is personal. In this case, there’s no protection for you against personal liability.
● Incorporate your tech startup if you need to raise capital
As earlier mentioned, capital is one of the key driving factors for a successful startup. If you want to raise capital from investors (venture capitalists or angel investors), you need to incorporate your startup. Most times, these investors will only attend to your financial needs if your business is a corporation.
Furthermore, any loans you get without first incorporating your startup are personal loans. Unfortunately, it’s hard to get a personal loan from investors or even banks.
Here’s when you should avoid incorporating your startup
As you already know, incorporating your tech startup early enough has a lot of benefits. However, you need to understand that you might not need to incorporate your business if you’re still unclear about your business idea. For instance, if you’re uncertain about proceeding with your business idea, just avoid incorporating it until you’re sure.
Conclusion
Incorporating your tech startup business comes with tons of benefits. You should consider incorporating your business if you need to hire top talents and offer them stock options. Besides, it also pays to incorporate your tech business as early as possible, if you need to apply for capital or your business has a lot to do with intellectual property.
