A business goes through many cycles and steps on its way to the top of the mountain. Any entrepreneur knows the changing tides of their business. Knowing when to step in a certain direction with your business is filled with stress and worry. Being unsure of when to pursue a certain goal is sometimes tricky if you’re going at it without knowing exactly if you’re doing the right thing or not. One such step of a business is the timing of moving your business from just a ‘business’ into an Inc.
Rescue a CEO and CEO Blog Nation asked entrepreneurs for their tips and advice on when to incorporate your business.
Determining the best steps
Timing is so important in business. This includes the question of when to incorporate. The right moment to incorporate is the same day after you determine your exit strategy, and therefore is before the first day you commence activities. The need to incorporate, even if you are a mom & pop organization should be self evident. More importantly is how you incorporate. Once you know how you intend to remove yourself from the business (exit strategy), either operationally or entirely, you need to consider a number of things that impact on how to incorporate. These include (1) how to make the business easily able to be acquired by the right company, or structured for IPO (Initial Public Offering), (2) how to protect IP (intellectual property) and create separation between IP and operations, (3) how to minimise your tax liability legally whilst still fulfilling your tax obligations, and (4) how to protect the beneficial owners of the company financially and otherwise. Once you determine these you can decide (ideally with the help of a qualified professional) how and where to incorporate. The when, that’s simple.
Thanks to Paul Lange, CleverX Business Incubators
Incorporate right away
You should incorporate your business right away. When you create a company, it has a huge psychological impact and changes you dramatically. Incorporating your company helps to focus your efforts and shape your goals. You’re no longer referencing an idea, you’re referencing an entity with a name. Not to mention that legally, incorporation offers you much-needed protection. It is a basic, “Business 101” task and should be an automatic first step.
Thanks to Elle Kaplan, Lexion Capital Management
Consider how your business operates
There is no hard rule on when one should incorporate their business. Generally, if your business, by its very nature, exposes you to lots of liability, you should not operate it unincorporated. For example, if you give financial advice where your clients could lose lots of money in the stock market, or if you operate a restaurant where anyone could break their leg on the way to the bathroom, you should not risk your personal assets by operating as a sole proprietor. If, however, your business is giving knitting lessons on You-Tube – your risk of liability is quite low, and you can save the money it costs to run a corporation or an LLC.
Thanks to Marina Modlin, Modlin Legal Services, Inc.
Finding which size fits your company
One reason I incorporated was protect my income from higher Medicare taxation. If a business owner’s personal taxable income exceeds $113,700 any amount over that continues to be taxed by Medicare. A corporation can allow for the owner to legally avoid paying that additional tax. With rising health care costs, a corporation can allow the business owner to pay for health insurance premiums with pre-tax dollars. With proper planning out-of-pocket medical expenses can be paid with pre-tax dollars, you just need a medical reimbursement plan. This plan avoids the limitations imposed by reporting these out-of-pocket medical expenses on your personal return. A corporation can also limit your liability and protect your personal assets from being subject to lawsuits or seizure by creditors (as long as you didn’t personal guarantee the loans). A corporation will also lower the risk of an IRS audit versus being a sole-proprietor. A corporation makes it “easier” to raise capital by selling stock (beware of security laws) or transferring the corporation to family members or partners. A sole proprietor lacks these advantages. Of course, “incorporating” is not a one size fits all simply because there are two types of corporations allowed, an S-Corp and a C-Corp, each with their advantages. And then there is the ever present LLC with many features of a “corporation.”
Thanks to Jeffrey A. Field, Field Law, pc
Once it becomes clear a business needs to protect personal assets
I have a large percentage of my clients who are self employed. Once it becomes apparent that we need to shield liability and protect personal assets is when it is time to incorporate. For example, client of mine, a plumber, started as sole proprietor 5 years ago. Now has 6 employees. I told him what happens if a client or disgruntled employee sues you, all of his personal assets and home is at risk. Incorporating protects those. We also got him a line of credit, as a sole proprietor he is on the hook. Now we have it under the corporation protecting him if he ever has to file bankruptcy.
Thanks to Jeffrey Cutter, Cutter Financial Group, LLC
When you have a name, mission, and a vision for your business
The best time to incorporate is when you have a name, a mission, and most importantly – a vision – for your business. A vision because you have to have some sense of where you want the business to go, in order to properly choose a name for your business. The name you choose should be thought of carefully, no rush needed, especially because it could cost between $50-125 to incorporate under a new name, more in some states. You should also consult with your CPA and attorney before you incorporate, if you have these professionals on your team (if you don’t already, get them).
Thanks to Chike Uzoka, Valentine Global, LLC
Ask yourself what the risks are
I don’t necessarily believe you need to form a LLC or a corporation right off the bat if you are trying to start a business, even though I’m an attorney and I realize it’s heretical for an attorney to say that. The reality is if everyone had to spend a couple hundred or thousand bucks to formalize a LLC or an s-corp before they started dabbling around with business, no one would do it. Each business owner has to ask him or herself what the risks are. If you don’t have a lot of assets to protect, and you are doing a type or manner of business which is unlikely to incur a lot of liability, then the benefits probably don’t outweigh the costs.
Thanks to John Corcoran, Smart Business Revolution
Before you collect a single dime
When should you incorporate your business? My answer is before you collect one single dime!! Having graduated law school and passed a few bar exams before becoming a full-time entrepreneur, I am well aware, and quite frankly, terrified of the potential liability of supplying goods and services to the public. While I was well aware of budget and discounted services providing “boiler plate” incorporation services when I founded my business, and despite the fact that I, myself, was a licensed attorney in two states, I did not walk, but ran to see the most expensive, most experienced, smartest professional business practice attorney that I could find to do my incorporation (which in my case was chosen to be an LLC). In this litigious society, where “foot long” sandwiches are measured against rulers for length and potential rewards, being able to sleep at night knowing that my family, home, and assets were protected from all types of lawsuits to be directed against my firm was the driving force to make me dot every “I” and cross every “T” to leave no stone unturned to avoid potential liability. I’m not a neurosurgeon, I’m not operating a chain saw, I’m a wedding and party florist, but no matter what your business, if it reaches the public, liability can be an issue. Making sure that my own corporate veil is impenetrable is truly priceless.. The sooner it is done, the safer the entrepreneur and his/her assets will be.
Thanks to Lynn Jawitz, Florisan Wedding and Event Design
Only when you have a viable business
Incorporate only when you have a viable business, meaning when you have a product or service that already solves problems for people or satisfies some type of need. Don’t incorporate if you’re still testing the market or still in the process of figuring our how to accommodate consumer needs. With no revenues and no customer base, postponing your incorporation process will not impact your business life much. However, once your business starts to rapidly grow, you acquire customers and you see a real prospect of revenues, incorporation will then be the prudent route to take.
Thanks to Michael Pesochinsky, GovernmentBargains
Weigh out the pro’s and con’s
A business owner should incorporate for one of two reasons or both: 1) To protect himself/herself and his/her assets from legal liability or 2) for tax reasons There are many corporate entities to choose from. A business owner should have a detailed conversations with both their business attorney and tax adviser before even attempting to make a choice. There will be pro’s and con’s in both those categories and they should be weighed together along with looking at the long term path and life of the business before making a final decision. A mistake in this area can be costly both legally and in taxes.
Thanks to Roxann Abrams, Roxann Abrams Inc
If committed, incorporate
Are you committed or just a biz hobby-ist? If committed, incorporate. It’s easy to do. Ask a friend or two for a recommendation for a responsive and reasonably priced business lawyer. Or find one through a BNI or networking group. Usually an S Corp or LLC is a good structure. Meet with your accountant to strategize tax implications and how to put money in and take it out. Also, sign on for a payroll service like ADP or Paychex. Get a business license. Get legal right away and protect yourself. Bonus is that this approach reinforces your entrepreneurial energy. You’re not dabbling. You are IN.
Thanks to Ellen Rohr, Bare Bones
The sooner the better
The sooner you incorporate, the better. You should incorporate as soon as you’re confident in your business’s long-term success, as incorporation provides a ton of legal support, added privacy and financial safety. By incorporating, you will keep your business a separate entity from your personal life. For businesses that offer products or services with legal risks, it’s even more important to incorporate as soon as possible to protect your personal life from liabilities and potential lawsuits. There are many benefits to incorporation other than legal protection. Incorporation will also open your business up investors, which can aid in speeding up the growth of your company.
Thanks to Ian Aronovich, GovernmentAuctions
As soon as you invoice for or collect payments
When should you incorporate? Immediately! As soon as you are going to invoice for or collect payments for a service you are providing, you need to be incorporated, here’s why: – Start a business history as soon as possible. When you apply for loans or look for investors, they will look at your business history. Even if you have been providing your service for 10 years, until you have an official incorporation, business ID, etc, it means nothing. – Don’t underestimate the power of suggestion. Once you incorporate, you are making a statement to yourself, your clients, your colleagues, that you mean business…literally. It is a step towards growth, which is ultimately a step towards success.
Thanks to Jennifer Daly, Kinespirit