The day you incorporate your startup is an exciting one. It represents the transition from an idea in your head to a manifestation of something — an entity — in the real world. Its creation is something to celebrate.
However, understanding exactly when it’s time to incorporate is important — doing it too early, or too late can cause a lot of headache.
I know this because I legally created my first business too early — before we earned revenue, hired interns, or really created anything of value. Because of this mistake I had to pay state taxes for an extra year, hire an accountant for an extra tax season, and sift through hours of confusing documents.
If you’re thinking about incorporating, but don’t know if it’s the right thing to do quite yet, then read on.
There are key events that require you to have an entity, and until those events occur it may not make sense to incorporate.
When you start moving money for business purposes, it’s usually a good sign that you need to incorporate. You could be moving money because you’re earning revenues from your first customers, purchasing materials for a prototype, raising venture capital, or receiving / spending funds for something else.
Whatever the reason, it’s likely that the money you’re moving requires a business bank account, and to open a bank account you need an EIN from the IRS — something only an entity can obtain. Of course, many founders pay for personal expenses from their own bank account, especially early on. But, once money starts moving into or out of your business consistently, ensuring there is a clear separation of financials with a business bank account is going to make filing taxes, reconciling books and keeping track of your general funds much simpler.
An entity creates a layer of protection between you, as a founder, and the customers you interact with. As risk associated with your business increases, that protective layer becomes more and more valuable.
For example, perhaps when you first launched your product you were not storing any customer information. But, as you continued to respond to user feedback you realized storing some sensitive information like name and phone number could actually create a much better user experience. Storing that new data is an indication of increased risk, and could signal that it’s a good time to incorporate.
Different founders have different risk profiles. However, speaking in generalities, if you feel like a customer could, in the worst case scenario, take legal action against you for a business misstep associated with your offering, then it’s probably a good time to incorporate. This will, in most cases, protect your personal assets as well.
Incorporating is exciting, and a standard process for any founder starting a business. The trick is understanding when the right time to incorporate is: too early, and you may pay fees and waste time completing documents you don’t need to; too late, and you may expose yourself to unnecessary risk.
If you think it’s time to incorporate and need a business address you can use Stable! We provide virtual address + mailrooms for startups. Check out our offerings below.