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Although the official formation of a business is relatively simple, the decision to transition the business into a limited liability company (LLC) or corporation is considerably more complicated. It typically comes with a large number of factors to consider and is often difficult to fully apprise without the help of a dedicated startup attorney.
“Incorporation” typically refers to turning your business into either a corporation or an LLC. These designations allow your business to be its own entity in terms of liability, independent of your own personal liability. If your business is incorporated, you are not liable for any financial debts or losses that your business may encounter.
Incorporating is the next step in starting a business. If the nature of your business is to profit from your ideas, incorporating is not a matter of “if,” but rather a matter of “when.”
Typically, it is recommended that business owners only incorporate once they generate an acceptable amount of revenue. However, this amount can vary from industry to industry and from owner to owner. Therefore, it’s highly recommended to consult with a startup attorney who has insight in the realistic expectations of your startup before determining when to file for LLC or corporation.
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Deciding to incorporate comes with another question: what type of entity should my company be? Businesses have three options for incorporation: an LLC, a C-Corporation, or an S-Corporation.
Read More: S Corp vs LLC vs C Corp
A limited liability company (LLC) is generally the easiest entity to set up. Although not officially a corporation, an LLC still provides similar liability protections, allowing you to shield yourself from any business liability. An LLC also provides greater flexibility when it comes to business taxation – but this flexibility may also be a drawback to any startups looking to grow via outside investment. Many venture capitalists tend to pass on investing in LLCs due to potential issues with taxation.
A C-Corporation is your traditional corporation. Upon formation, you are required to assign board members, determine shareholders and stock options, and hold meetings with these two groups of people. However, the nature of this corporation comes with increased regulatory oversight, along with the potential for double taxation.
An S-Corporation may be an option for smaller businesses. It is similar to a C-Corp, with a major difference in taxation. S-Corporations are subject to pass-through taxation, in which your business income tax can be reported (and paid) via your personal tax returns. This gives you the advantage of avoiding double taxation. However, S-Corporations are restrained by limited growth, with the ability to only have 100 or fewer shareholders.
Which business entity you choose depends heavily on the goals and expectations of your startup business. Consulting a startup lawyer may be the best way to get a full grasp on the best route for your company.
Along with incorporation, there may be other important things to consider when forming your business:
Assigning Shareholders. Once your business is a corporation, assigning shareholders is a required next step that may require the assistance of an experience startup attorney. This includes actions such as:
Protecting Any Intellectual Property. If your startup is built on ideas and products that are unique, original inventions, it is highly recommended to protect their rights by registering for patents, trademarks, or copyrights. These official designations prevent other individuals or businesses from profiting from your original ideas, with grounds for legal action if they are violated.
All of the Required Paperwork. Registering for a business, filing for incorporation, and submitting intellectual property registration requires a large amount of paperwork and documentation in order to be successful.
Although you may be able to accomplish all the above tasks on your own, it’s always easier to hire an attorney who is experienced in startup formation and incorporation. A lawyer can:
Regardless of the size of your business, a startup lawyer can prove invaluable when you are initially establishing your foundations.