Incorporation
Most new business entrepreneurs immediately think about incorporating. After all, it seems like a natural first step in building a business – give it a name and make it legal. In many cases, however, those same entrepreneurs later find that they were too quick to do so and find themselves having to pay extra fees to undo or redo part of their initial structuring.
Why incorporate?
The conventional reason for incorporating is that it protects the individual founders (or shareholders) by providing a legal shield – the corporate will be the one that gets sued, not the individual. In general this is appropriate although incorporation does not necessarily protect founders as much as they might think.
Things to consider
Before you incorporate, he’s a list of issues to consider:
- Have you consulted your accountant? The way you structure a corporation or other such entity has important personal tax ramifications. Always discuss these with your accountant first.
- Have you consulted your attorney? There is more than one way to incorporate and hundreds of ways to structure the corporation you create. A discussion with your attorney is the first place to start.
- What type of company will you create? In the U.S. you can create a C-Corporation, an S-Corporation or a Limited Liability Corporation (LLC). In Canada you have similar options.
- Where will you incorporate? In the U.S. incorporation is something handled by the individual states. You have a choice of where you wish to incorporate. Some states are more favourable to corporations than others, and several offer significant tax benefits.
- What will the capital structure of the company look like? This means: who owns what. This is a bigger deal than most people believe. It has serious tax consequences, and if you have a partner, it can color the nature of your relationship for years to come. Many a pair of partners has agreed to a 50-50 split of shares only to find it a major headache in the future.
Whatever choices you make, and no matter how small your operation may be right now, these issues require serious consideration and often require consultation with appropriate legal and tax authorities.
Expense.
Lastly, incorporation can be expensive. It’s true that generally the immediate out-of-pocket expense can be as little as a few hundred dollars (Do-it-yourself kits often are less than $100 but require fees to be paid to the state or provincial government). But the moment you incorporate, the corporation also has certain obligations to meet including taxes, reporting, and other requirements.
