Early Stage Startup Series
I got asked this question a lot at the start of my legal career, so I wanted to start with incorporation for my Early Stage Startup Series. Here, I’ll provide a few considerations for founders who are considering when to incorporate.
In short, a founding team should consider incorporating an entity when they want to do any of these things:
Documenting the founding team’s commitment is often the most compelling reason to incorporate. The only way for founders to issue shares and start vesting is through incorporating first. The same goes for signing employment agreements to become official employees at the company, and to assigning all IP for work done. Usually, issues and questions as to commitment and job responsibilities will surface at this stage, and it’s a red flag if a co-founder is hesitant to incorporate, agree on equity and job responsibilities or assign IP for reasons other than budget.
Incorporation makes sense when the founders need to sign contracts to get the company going, as institutions and companies usually only sign contracts with an organization. A few examples include:
One big reason incorporating makes sense for founders is to minimize their personal liability. If an individual operated a sole proprietorship, meaning they do not incorporate, creditors are able to sue that individual personally to satisfy debts and their personal assets are at risk. The individual would also have personal liability for any injuries that result from the business. Most businesses choose not to operate as a sole proprietorship for this reason. There are different types of entities that can be used to minimize personal liability, and some entities provide more protection than others. Companies also need to follow certain formalities to ensure employees and shareholders aren’t held personally liable. I’ll discuss the most frequently used options for startups in a later post.
Questions, comments or topic suggestions? I’d love to hear what topics would be helpful for you! Feel free to send me a note with suggestions at michelle@michellemaesq.com.
