Everyone, at some point, has thought about starting a business.
Most startups begin in a small room somewhere without any legal documentation or even a business. In the beginning, no one is thinking about the legal part of a business.
Most new entrepreneurs are simply looking for a way to generate income. However, as soon as the business starts having a steady income flow, complications among the founders arise.
Without the legal documents that show who owns what and how a company should operate, you risk losing everything.
So… When exactly is the right time to incorporate your company?
Many entrepreneurs wait until the startup has tangible returns before registering their business with Accounting and Corporate Regulatory Authority (ACRA).
But… do we really need to wait till the business starts to earn sizeable revenue before officially registering the business?
The administrative and operation fees to incorporate a business entity deter a lot of entrepreneurs from doing it. However, by paying the fees, you are actually putting your skin in the game and thus making you serious in running the business.
This actually has an indirect impact to your sub-conscious mind for you to want to build your business seriously.
Benefits of Early Company Incorporation
There are several benefits that you can enjoy by incorporating your business in its early stages. All the benefits come from stipulating how the business is going to function daily. You can even start the process before the company is operational if you are doing a huge business venture.
Here are the benefits you should be able to enjoy from early incorporation:
- Stating the Company Ownership
- Intellectual Property
- Tax Management
- Establishing Company Corporate Bank Accounts
- Attracting Investors
- Preparing For Acquisition
Stating the Company Ownership
The process of company incorporation requires you to state the stake that each founder owns from the go. Stating that the ownership status of each founder prevents future altercation about the ownership of the business.
Therefore, co-founders who choose to leave the company cannot later claim to own more that they input.
Also, startups tend to pay employees or co-founders in equity before the company begins to make any returns.
Stating the share of equity that employees or co-founders get in exchange for work provided is essential. The documents ensure that each person gets the equity due when the company is successful.
Each multi-million dollar company has their secrets to success. Most of the secrets that make a company successful are in the form of patents.
Legally establishing a business in advance ensures that you can protect all your intellectual property. It also reduces the risk of an employee or co-founder stealing your idea and establishing a business.
When you have a patent for your intellectual property, you prevent competitors from using your secret recipe.
Entrepreneurs fear to establish a legal business entity because of the high taxes they may incur when the business is at an early stage. It is okay for entrepreneurs with small businesses that act like side hustles to forgo a company’s incorporation.
However, there are bigger risks than high taxes when you don’t establish big business ventures as companies.
You run the risk of dipping into your savings to pay taxes when running a company like a sole proprietorship.
Establishing Company Corporate Bank Accounts
You cannot open a bank account in a company’s name when you do not have all the legal documents.
Waiting to establish a company forces you to mix business funds with personal funds, making it harder to account for business funds.
Taking time to set up your company as a legal entity allows you to set up company accounts. You can easily manage company funds and keep them separate from your funds.
Investors are an essential part of any startup business. You need to have legal documents for your company and business premises.
Also, incorporating your business entity before you get investors gives you more bargaining power.
Investors tend to spend money on almost operational startups. Establishing your company will motivate interested investors to spend their money.
You can give a smaller amount of equity to the investor and keep the controlling share. Most investors who invest in startups that are not legal entities tend to ask for the controlling share when establishing the company.
You will protect your company from investors who may not share your vision or mission.
Preparing For Acquisition
The tech industry has popularised the trend of starting a company to sell it to top-tier companies. No one will want to buy your company when you don’t have patents, incorporation documents, and an established business name.
Companies that acquire startups prefer to buy startups that have all the legal paperwork. Handling the transfer for startups is more convenient for top-tier companies than doing legal work.
It can also save the founders from paying high taxes after the sale.
Is it Compulsory to Incorporate All Companies?
No. Small businesses, especially side hustles, do not need to be established as companies. However, you must start thinking about incorporating your company if you think it will grow bigger.
The legal parameters of establishing a company will protect you from liabilities and also protect the company from liabilities.
For example, Facebook once had a legal matter because the co-founders did not establish the stake each person owns in advance. Some co-founders or employees may want more stock for little input. It may be expensive to legalise your company, but it will be worth the effort in the long run.
Waiting for the right time to incorporate your company can turn into a costly mistake for you. You can lose intellectual property, your company name, and even your stake at the company. It isn’t a must that you legalise the company before it is operational.
However, it is a good idea to do it before things become too serious.
That way, everyone knows what is expected of them from an early stage. You also protect your company from people with malicious intent and ensure you reap the benefits of your hard work.