Timing is important. Incorporating too soon may result in paying unnecessary fees/taxes and filing reports which can take up time and money. Incorporating too late may open the door to unlimited liability. Fortunately, certain factors may help in determining when to incorporate.
Multiple Founders
As harmonious as any beginning may be, founders may inevitably reach a disagreement regarding the operation of a business, or worse yet, disagree about the initial investment promises made at the time of a business' founding. To best avoid any disagreement or the potential dissolution of a business due to a disagreement between founders, incorporation may be a wise decision.
With incorporation, founders are limited to the number of shares purchased and so any investment into a corporation is determined through the number of shares owned by the founder. Also, founders can transfer their shares without risking the dissolution of the business.Also, if property, particularly intellectual property, is involved in a business with multiple founders, it may be important to incorporate the business to ensure the rights of that property to the business and not to an individual founder.
Contract Agreements with 3rd Parties and Employees
Before making any agreement with a third-party, a business may want to consider to whom the business wants liability to the third-party. Prior to incorporation, liability flows to the owner(s) / partners for any agreement between the business and a third-party. This liability continues even if the business is subsequently incorporated. It does not matter when a disagreement occurred, but rather when the agreement was first made between the business and the third-party.
For example, if an unincorporated business agrees to purchase some materials from a third-party, the owner(s) / partners of the unincorporated business are liable for that purchase agreement. Even if the business is incorporated at a later time, the owner(s) / partners remain liable to that purchase agreement. The same holds true for any employee hired prior to incorporation. For any employee hired prior to incorporation, liability falls upon the owner(s) / partners, but for any employee hired after incorporation, liability falls upon the business.
Before hiring anyone for a newly founded business, the owner(s) / partners should consider who should be liable to that employee, the owner(s) / partners or the business? Third-parties also include customers. Although a business may have some good products / services it wants to sell, if sold prior to incorporation, liability flows directly to the owner(s) / partners. There are other considerations for determining when to incorporate, but the general rule for most businesses is once an idea is more than an idea, then a business should start thinking about incorporating.
