Incorporating Your Business: Lessons Learned [Expert Roundup]Written by Mindaugas on February 21, 2019
Incorporating your business may come with more nuance than you’re prepared for. Such a decision should not be taken lightly as there is no turning back once you’ve taken the plunge.
However, before you start filing articles of incorporation, let’s look at what other entrepreneurs have to say about incorporating a business. It’s nice to read the first-hand experiences others have had before you – may help ease the legal transition process within your venture.
Jesse Silkoff, Co-Founder and President of FitnessTrainer
When my co-founder and I initially set up our company legal structure during college we were in a rush to do it as quickly and cheaply as possible.
We had learned about LLC’s during one of our business classes in college together and decided we would set the company up as an LLC. Having an LLC structure worked just fine for the first few years until we decided to raise capital from outside investors. In hindsight if we had known at the beginning that we would definitely be raising capital from outside investors than we would have set up as a C-Corp from the start.
This was an expensive mistake on our part because switching for an LLC to a C-Corp in order to take on those outside investors was both time consuming and costly.
Dylan Gallagher, Owner of Orange Sky Adventures
I learned several lessons incorporating Orange Sky, but the biggest by far is to let the professionals handle it, especially for your first company. Why? Because your lawyers and accountants can work together to set up the correct entity based on what you need, can hold your hand through the difficult parts, and can become a friend so when your business grows and you need more legal advice, you’ve already established a strong relationship.
The process may be more costly, especially when you’re bootstrapping at the beginning, but doing it this way can help you ten-fold in the future. It’s the reason Orange Sky, a small tour company in San Francisco, has a stronghold in one of the most saturated tour markets on earth. This month I plan to open a second company called White Wolf Private Tours. It all began from receiving the correct legal advice from the start.
Sun Dahan, Lawyer, Associate Director at Law Office of Matthew J. Kidd
A good reason entrepreneurship is tough is because there is no exact recipe for success. Different things works out for different types of entrepreneurs and businesses.
One takeaway of mine is regarding incorporation time – it should not be the first thing on the list. While spending time building a product and perfecting it, conducting market research and talking to potential clients and investors, many things can change. It is important for entrepreneurs to be fund sensitive at this early stage and many legal documents might be an unnecessary expense at.
Some entrepreneurs gets excited about their venture and eager to create an entity (which makes sense) since it makes the entrepreneur feels like the idea is about to become reality. Before incorporating any business entity, entrepreneurs should think about why the are incorporating the entity for: Buying inventory? Hiring an employee? Opening a bank account? Making a business transaction? If the answer is ‘no’, postpone the creation of any business entity until it’s needed (there’s no reason to take a big loan unless you’re going to buy a house right?).
Different people would provide different feedback on this: a lawyer would talk about the legal implications; An accountant will talk about taxes. It’s important to think about whose advice you’re getting.
There’s no reason to spend money and time to figure incorporation issue when the business is premature. Entrepreneurs should do what is best for their future business at a given time and not because it feels good.
Zach Hendrix, Co-Founder of GreenPal
We made a huge mistake when forming our company initially that ultimately cost us $20,000 in legal fees to correct.
When we formed the company in 2012 we did it simply as a Tennessee LLC. Quick and easy and cheap we figured it was the best way to get our company up and rolling, however we did not realize is that an LLC is a no go for institutional investors.
Any outside investors such as private equity, angel investors, or venture capitalists will insist that your company be a Delaware C Corp.
This is because Delaware has an abundance of case law that is favorable to corporate structure, investors, and board members and is generally accepted as the standard by the investor community.
When we raised capital last summer we came to the table with our Tennessee LLC and almost got laughed out of the room. We had to pay a specialist attorney to dissolve the old LLC and very carefully assign everything to the new proper entity which is a Delaware C Corp.
My advice to anyone forming their company is to to carefully consider going with a Delaware C Corp. if they plan on raising outside investors capital.
Jason Lavis, Managing Director at Out of the Box Innovations
The biggest mistake that I see, (and have experienced myself)… Is to spend time on company structure and incorporation before knowing that you have a viable business.
You might have a ‘great idea’, where everyone you ask offers encouragement. You spend weeks or months on a business plan, company incorporation, bank account etc. before market validation.
I believe that this is the main reason for business failure. The situations when you didn’t have a business in the first place. Ego and sunk cost can exacerbate that bad situation further. Product/market fit and a profitable growth strategy needs to come way before a company if possible.
Kuba Koziej, CEO and Co-Founder of Zety
We started growing our startup three years ago, and we quickly realized that we run at a breakneck speed. We started off with a Polish brand and moved to international markets only one year later with the new, international trademark.
In the heat of pursuing new markets, growing the company and planning strategic moves, we failed to catch up with the crucial thing- registering our trademark. One of those things that you keep putting off as you think, what are the chances that something can go wrong. Well, it cannot until it does.
We got contacted by a significantly large company claiming their rights to our brand name as it resembled their brand name and operating in the same industry, well- it could cause problems.
Without our trademark registered we could do nothing else than to step away and rebrand. It took us some time to get back on track with our hard-earned SEO traffic and brand identity. Hard lesson learned.
Nate Masterson, CEO of Maple Holistics
Do include bylaws detailing roles, responsibilities, and how to proceed with the removal or resignation of corporate members. You are better off getting an attorney to review your bylaws now than you are once a major issue arises. Insufficient or non-existent corporate bylaws have crippled countless companies, don’t let yours be yet another one.
How to choose a business structure:
The most important question to ask yourself before establishing your business structure is how separate you want your personal finances to be from the company. In addition to affecting how the IRS will tax your business profits, this decision also governs the degree of personal liability you could face in the unfortunate event of a lawsuit or debt.
Pass-through business – Pass-through businesses are companies which are taxed through individual income as opposed to through the corporate tax code. The IRS currently recognizes a wide and varied range of pass-through entities, including partnerships, proprietorship, S corporations, and even some LLCs.
Keep in mind that although LLCs and S corporations isolate personal assets from business responsibilities, profits are reported on the owners’ individual returns and are taxed accordingly.
Laura Borland, Founder of Vyllage
When I founded my start-up in 2015, I did it as an LLC, thinking that since there were only two founders, that we needed to keep it very simple from an operational perspective. Besides, it lessens the annual reporting requirements from the state.
However, we realized last year when we were crowdfunding via StartEngine, that in order to offer equity shares and to register with the SEC for a mini OPO, we needed to change the business entity from LLC to a C-Corp.
This required us to file a change of entity with the state, close bank accounts due to a newly issued EIN. It was a tedious process and we incurred costs due to time and money invested to make these changes.