Reasons for Startup Incorporation
1. Prevent Ownership Disputes
The incorporation process may seem daunting, which is why many startups bypass it altogether. However, with multiple founders in the picture, things can get murky if a dispute arises. That’s why it’s always a best practice to get everything in writing.
Incorporating your startup ensures that all business owners are in agreement on ownership distribution, shares, and any vesting conditions. This will also help you in the long run if you decide to go public through an initial public offering (IPO) or are acquired.
Even if there are no disputes while you’re working on getting your startup up and running, it’s better to be protected than not. Think of incorporation as the perfect insurance for your business.
2. Protect Against Personal Liability
Of course, a perfect world would mean no business disputes; however, they can be unavoidable at times. And when a dispute happens, it can get messy pretty fast. Not only can incorporation help stymie ownership disputes, but it can also protect you from any personal liability.
Those three important letters at the end of your business’s name make it a legally recognized corporation or entity, no matter what stage your startup is in. While it’s unlikely you’ll find yourself in a courtroom in the first few months of business, incorporating a startup guarantees that personal assets (e.g., your house, car, etc.) will not be involved. Even startups classified as sole proprietorships or partnerships can be held personally liable if lawful action is ever taken.
Instead, incorporating your business means that your corporate entity will take the brunt of any legal disputes, ensuring your personal assets are safe. Not only that, it allows your business to take on any risks associated with partner or customer contracts with ease.
Recommended: Learn more about the best incorporation services for startups.
3. Attract Investors
Incorporation brings credibility to your business. When your startup is protected, investors are more likely to work with you because they know you have the responsible foresight to be prepared. Investors tend to trust what you’re selling when it’s clear you’ve done your homework.
Additionally, many investors require you to incorporate your startup if/when they decide to invest in your business. This goes back to your startup being its own entity once incorporated — no investor wants their money to be mixed with your personal funds. They want transparent business dealings, all of which are achieved when you incorporate. The process may be a long one, but it will all be worth it when the investors come flocking.
4. Boost Credibility
Credibility is your startup's best friend. Not only can incorporating your startup boost your credibility to investors, but it’s also a great way to show you’re in good standing to other potential business partners and customers as well.
We’ve talked endlessly about how the earlier you start the incorporation process the better, and it rings true here, too. Folks who are interacting with your business in the early stages are more likely to trust your products when they see you’re incorporated.
5. Potential Tax Advantages
Who doesn’t like making taxes easier on themselves? Incorporating a startup means that you’ll have to include the cost of ownership when filing your personal tax returns, so time is of the essence here. You may not see the need for this during the early days of your business, but as time goes on and profits increase, it will become important to keep track of this information through the years.
There are also plenty of tax benefits and deductions available for startups too. When you incorporate, there are different types of legal entities that your startup can be classified as. C corporation (C corp) is a common choice and includes tax deductions such as health insurance, retirement or disability benefits, vacation and education expenses, and more. This is perfect for startups that are seeing great growth and traction, as this will help attract and retain employees. Additionally, most investors expect startups to operate as C corporations because it streamlines ownership distribution, and they’re more familiar with the working laws.
Learn more about the benefits of startup incorporation by reading our comprehensive guide on how to incorporate a startup.