You will find this funny question that is asked on Quara often – “I want to start a business. How do I register my company?”
It’s funny because when you are just in the beginning stage, registering your company or incorporating your company is the last thing you think about.
So, when do you really do it?
There are many pros and cons of incorporating a small business, depending a lot on individual situations.
With this article, I want to explore: when is the right time to incorporate?
Idea stage or MVP testing
When you are just at an idea stage, whether searching for an idea, or validating the idea, incorporating a company is absolutely a no-go. Even when you are running your MVP experiments, trying to engage with early users, your focus is really validating the assumption rather than clocking sales. Here, you are not sure if this idea works or if you will be onto some new idea in few weeks. Mostly, this stage also signifies your working alone or with your partner, without really formal team.
You should be very hesitant about incorporating a company, and instead you should maintain focus on what matters in order to take your idea to something that could be a real business: users and a product that solves a problem.
However, this changes when things start to work? When your product starts to gain traction and you have many users and perhaps some paying customers. Clearly, it’s important to incorporate a startup at some point in time.
And, here are some of the triggers for you to consider the option of incorporating:
Building your team
When things do look like working, you want to formalise a founder’s agreement (vesting, etc.). You would want to give equity or stock options to founders (and to employees). At some stage, you need to hire key employees. This stage also would see you setting up an office lease and all these need that your business is incorporated.
Chasing big enterprise customers
If you are a B2B startup and chasing some big companies, you have a situation on hand. Big companies are less likely to take you seriously If you are not a formal company, unless the product that you want to sell to them is not of a big strategic importance.
When your main traction channel is partnering with existing big companies
Many companies like Google got most of their initial traction from two key partnerships. In 1999, they partnered with Netscape to be their default search engine for the popular Netscape Navigator web browser. Google also reached an agreement with Yahoo! to power their online searches. These two deals were critical to Google’s eventual success as the world’s largest search engine. Like Google in early days, if you are relying heavily on this traction channel, you may need to consider incorporating your business.
Raising the first external equity money
If you plan to raise funding for your start-up, it is a great idea to wait until that point in order to incorporate. If you reach the point where you can seriously consider raising investment and believe your start-up is fund-able, then that is a good time to incorporate, since you’ll need to be incorporated to formally close the round and investors will ask you if you about company structure.
Incorporating costs money. Incorporated entities need to file more paperwork, such as tax returns, an annual return etc.
So, the short answer is, if at all possible, don’t incorporate till it is impossible to live without incorporating!
Incorporating will irrevocably complicate your life, so you better be 100% sure that you want — need — to incorporate before pulling the trigger.