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8 Reasons To Incorporate Your New Company Early

Posted on the 01 February 2016 by Martin Zwilling @StartupPro
  1. Isolate your new startup business from your personal accounts. By default, these domains are totally intermingled, which will lead you to manage both poorly. It’s very easy and inexpensive to set up online a Limited Liability Company (LLC) for the startup, which will allow you to track business costs, cash and taxes correctly -- no matter what happens.
  2. Liability for initial setbacks or lawsuits needs to business versus personal. If there is no legal business entity, early vendor or partner failures will jeopardize existing personal assets and any future personal income streams. The business entity has to be in place before a problem appears and is not recoverable by starting the business later.
  3. Focus on structuring the business brings priority to building a plan early. Building a business plan is a discipline every entrepreneur needs to learn early, required or not. Founders generally need more focus on the market sizing, volume projections, cost details and margin expectations to balance the optimism of their passion for the idea.
  4. Define a business entity early to manage taxes and intellectual property. An LLC will work just fine for this, but if you know enough to anticipate more than 100 investors or special classes of stock, I recommend incorporating as a Delaware or Nevada C-Corp or S-Corp. Tax status can be assigned separately to match your preferences.
  5. Founder’s stock may be taxed at time of incorporation. If you wait to incorporate the business until you have a product and customers, which normally has no taxable value until liquidity, it will be taxed at issuance at the current value. This could well mean a large tax bill due from you at the worst possible moment in your business rollout.
  6. New intellectual property should always be assigned to a business. Patents issued to you before you incorporate the business will not be considered part of the business valuation by investors. Until you have a business, you shouldn’t get a web domain name or social media accounts, since these all should match and are hard to change later.
  7. Co-founder and equity negotiations work best if you own all the equity. If several co-founders are involved before any company is set up, all will assume they get an equal share later, no matter how little they contribute. Negotiation and equity ownership needs to happen when they join you, and you need the leverage of being the business owner.
  8. You need a business entity to attract any investor or bank support. In my experience, any startup without a formal business entity defined will be viewed as a hobby, and would never interest investors or potential partners. Also, trends change rapidly these days, so you need to be ready move quickly from idea to a business.

Subchapter S corporationsC-corporation
BizFilingsSCORESmall Business Development Center (SBDC)

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