When should you incorporate?
Startup Attorney, Advisor, History Buff
Especially for first-time or young founders, wait to incorporate until you hit some triggers.
Ask: Are you personally exposed to risk?
Incorporate if someone is creating something for you that you want to keep after they leave.
Lesson: Incorporating Your Venture with Augie Rakow
Step #5 Timetable: When should you incorporate?
Timing. When should I incorporate? Some people say "Incorporate as early as possible." Some people say, "Cool your heels, wait until you hit one of the triggers," which I'll talk about. There's different schools of thought. Incorporate early is the more defensive, more risk-averse advice. Wait until you hit one of these triggers, which I'll talk about, is the more time-saving, possibly cost-saving, at least in the short term, advice.
Here are the triggers that I look for. One, are you exposing yourself to risk? Are you personally getting exposed to risk? Are you entering into contracts for dollar amounts that you can't cover and you can't pay for? Are you selling a product that people are paying for? Even if you're not selling it, are you making available a product that a lot of people are using? I don't know what a lot is, but we'll come back to that. Are you doing something that's a little dangerous? Are you manufacturing stuff? Do you have employees? Basically, are you doing anything that affects anyone else or can hurt someone else in any way? Are you at that point? In other words, are you exposed to liability yet? If you are, then you want that Limited Liability and it may be a good time to incorporate. That's one trigger.
Another trigger. Are you building something using intellectual property created by anyone else who, if they walk away from the business, you want to keep using what they built? In other words, is anyone else creating anything yet that you need, for you, that you need to make sure you keep? You and your friend get together, you each bring your own toy and at the end of the day you each take your own toys home. You aren't taking each other's toys, you bring your toys, play together, take your toys home. That's fine, but if you and your friend are pooling your toys together and building something and when that person leaves you want to keep what they built, maybe not for yourself but for the venture, and you want to keep it, then you're going to need to get an IP assignment from them. You're going to need to have them give you the IP that they built, because that's the whole point. If they leave and go home, you want that structure to stay in place. That thing that you're building, that app or whatever.
It's very difficult to tell your friend, "Hey, give all that to me." It doesn't go over very well. It didn't go over well in the playground and it doesn't go over well in adult society. It is a lot easier to say, "Let's create a company, and let's give all our goodies to the company."