Starting a Company? The Incorporation Process and Early Considerations

November 27, 2020

Very early-stage companies are often cash-strapped and aren’t quite sure where to put their resources. And we all know legal fees are very expensive. But failing to prioritize legal spend on legal issues can result in higher costs down the road. Usually, it’s much better to embed legally-sound processes and policies than it is to clean up the aftermath.

 

Considerations When Starting a Company

Areas of a Business Where Getting an Attorney Involved Is Crucial

  • Fundraising 
  • Hiring
  • Equity
  • Intellectual Property.

 

Forming a Separate Legal Entity

A corporate entity essentially acts as a separate legal ‘body’ in which a business exists. It separates the business from you as a person to become its own legal being. This can be valuable in a number of situations. 

First, it protects you from personal liability. In an instance where there’s a claim against the company, the corporate entity is going to protect your personal assets from that legal claim.

Additionally, a corporate entity allows you to put all the value that multiple people in your company bring to the table into just one package. It ensures that intellectual property is properly owned by the company. This is desirable because it’s where a lot of the value comes into the business. It is also something that investors look at when they decide whether to fund your company. Moreover, it prevents awkward discussions (or legal action) arising around the proper assignment of intellectual property.  

Evidently, it’s important to figure out the best entity for your business and get that set up properly.

 

Choosing the Type of Entity for Your Business

Here are some of the common entity structures chosen by those starting a company:

  • LLC – This a pass-through entity so you’re only taxed at the member level, not a corporate level.  
  • S Corp – It is a pass-through entity similar to an LLC, so you’re not taxed at both the corporate and the shareholder level (which you are as a corporation).
  • C Corp –  If you’re going to bring in an outside investor and create a preferred series of stock that’s going to blow through your S Corp election, you’re going to automatically become a C Corp.

 

When to Form a Corporation

If you’re considering becoming a corporation at any point, it’s worth investing the time and money to set it up properly at the outset. Converting between an LLC Structure and a Corporation is an expensive undertaking, particularly for mature companies. 

 

Other Things to Consider when Starting a Company

  • Set up a separate bank account for corporate funds. Many people who start their businesses commingle funds from the company into their personal accounts. This can impact your legal rights, so it’s critical that you separate your business and personal finances.
  • Check your company name first to make sure it’s available. Be flexible when it comes to the name of your company. You might have to change it or you might have to add some things to the name in order to make it registerable in the state you’re wanting to incorporate it.

 

Key Takeaway: Spend time thinking about your business future from the outset to limit the issues arising down the line. 

Even meeting with a lawyer for just an hour can provide plenty of insight and direction. It’s going to be money well spent.

To learn more about the other key considerations you need to take when starting a business, check out https://cgl-llp.com/podcasts/cgl003.

 

Disclaimer

The materials available at this website are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem. Use of and access to this website or any of the e-mail links contained within the site do not create an attorney-client relationship between CGL and the user or browser. The opinions expressed at or through this site are the opinions of the individual author and may not reflect the opinions of the firm or any individual attorney.

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