Founders launching a start up or new business often ask, “Should I incorporate?” My answer is always first to ask both your lawyer and accountant to get their professional advice. I advise asking both because they often have different points of view as they consider your particular situation. Lawyers consider your potential business and personal risks and liabilities, accountants consider your potential business and personal tax liabilities. Together they will provide enough information for YOU to make the ultimate decision not only whether to incorporate but which business structure will best suit your needs.
As a professional bookkeeper for over 10 years, my experience lends the following insights into whether to incorporate. There are two main reasons to incorporate – to protect your personal assets and to facilitate multiple person/entity ownership. To incorporate means to form a legal business entity that is separate from you personally. In business, usually this means setting up a C or S Corporation or a Limited Liability Company. Incorporation can help protect your personal assets from future business liabilities. For example, if you have a disgruntled employee or customer who tries to sue the company s/he can only go after the business assets and not your personal assets. If you do not own a home or have any other significant assets you may be able to operate as a sole proprietor without significant risk. Next, consider your business model and exit strategy. If you intend to seek multiple outside investors, grow the business and sell it then you will need to incorporate. The corporate structure facilitates multiple person/entity ownership and change of ownership. If you are forming a professional consulting firm for example and intend to be the sole owner you may not need to incorporate.
The main reason NOT to incorporate is the cost. The cost to incorporate includes the legal fees incurred to set up the corporation as well as the annual fees to maintain it. If you plan to incorporate I recommend hiring a professional (your lawyer or accountant) to complete and file the appropriate paperwork on your behalf. You can do it yourself however the potential cost of doing it incorrectly can be far greater than hiring a professional to assume that liability. I especially recommend hiring a lawyer if you are setting up a partnership of any kind. You will want to have a very thorough written agreement before entering into any sort of partnership. Incorporation set up costs can be anywhere between $300-$1500 dollars. If you don’t have a lawyer or accountant, seek a referral from your professional network. The annual fee to maintain a corporation varies by state. If you set up your corporation in Delaware but operate in the State of California for example, you are liable for the DE annual fee of about $350 as well as the CA annual fee of $800.
If you are in the early stages of your business, have no employees, little or no revenue and/or no investors or partners then you can likely put off the decision to incorporate and save yourself the money and brain space. Operate as a sole proprietorship until you hit one of the following drivers to incorporate:
- Add a partner or investor
- Hire first employee
- Change in personal assets – get married or purchase a home
My advice during all stages of your business growth is to focus on building your business first– and by that I mean revenue- not on administering it.