Thoughts on when to incorporate
September 29, 2012starting up
Update: I originally posted this article with the title “Incorporate your startup only when you’re forced to” and I had amazing feedback, particularly from Andrew Payne and David Hauser who have been through incorporating startups many times and know this domain much better than me. The original title wasn’t a great representation of my views in this post so I’ve adjusted it. Thanks for all your comments!
I previously wrote that I believe you should be very hesitant about incorporating an idea, and instead you should maintain focus on what matters in order to take your idea to something that could be a real business: users and a product that solves a problem.
However, what happens when things start to work? When your product starts to gain traction and you have many users and perhaps some paying customers. Clearly, it’s important to incorporate a startup at some point in time. With this article, I want to explore: when is the right time to incorporate?
You don’t need to be incorporated
With Buffer, we were fully focused on product and traction for a long time before we thought about incorporating. The thing is, you can run a business without being incorporated as a C-Corp in the US, or a Ltd. company in the UK and other places.
You can run a startup simply by being registered as self-employed, and you can even register this long after you have been running.
In short, you don’t need to have incorporation in your mind at all, and I believe it shouldn’t be in your mind. There are much more important things to do.
If you will raise funding
If you plan to raise funding for your startup, then I think it is a great idea to wait until that point in order to incorporate.
If you reach the point where you can seriously consider raising investment and believe your startup is fundable, then that is a good time to incorporate, since you’ll need to be incorporated to formally close the round and investors will ask you if you about company structure.
If you apply for an accelerator program such as AngelPad, YCombinator or TechStars, you’re generally in a better position if you apply without being incorporated. In fact, YCombinator strongly prefer it if you’re not:
"Don’t incorporate, though, if you can avoid it. It’s easier to start with our paperwork than to transfer an existing LLC or S-Corp to a C-Corp."
The thing is, once you get into one of these programs they will put you right through to the very best lawyers, accountants and anything else you need.
If you incorporate too early, you risk doing it in a less than optimal way, which could actually put you in a worse position. I’m very glad we didn’t incorporate Buffer in the UK before we got into AngelPad, since when we came to raise our seed round many investors asked us “are you delaware incorporated?” and we had an easy “yes” answer. It’s one of those checkbox questions you want to avoid trouble with.
If you won’t raise funding
If you won’t raise funding, I think it is still a good idea to delay incorporating. Again, you can run a business without being incorporated, and you have too many other things to focus on with the startup without the hassles of incorporating.
I think incorporation is one of those aspects where it is best to stay lean and do activities which will take you closer to becoming a solid, lasting business with a brand, users and revenues before you think about incorporating. When some of these important milestones start to happen, then perhaps it is a good time to consider incorporating.
Asides from fundraising, I see a few different scenarios during the process of building a startup, which may be good trigger points to incorporate:
- you get a government grant and need to be incorporated
- you hire a full-time employee
- you’re setting up an office and need to be incorporated for the lease
- you give equity or stock options to employees or founders
- you want to formalise a founders agreement (vesting, etc.)
- you need to set up a company bank account
Some of these things are good milestones which generally correlate with building a meaningful business, and therefore will be better times to incorporate than simply with an idea.
Incorporate when you’re forced to
This brings me to my current stance on when to incorporate. With the personal experience I’ve had of incorporating too early with a previous startup, and incorporating at a good time with Buffer, as well as speaking with many other founders.
I believe the best way to choose when to incorporate is to simply wait until you are forced. With Buffer, we had $120,000 of funding from AngelPad and needed a bank account to put it in. For that, we needed to be incorporated, so we got set up as Buffer Inc.
If you wait until you’re forced, there’s a much higher probability that you actually have something that could become a lasting business. If you don’t wait, it will most likely be a hangover going forward with whatever you do. I have a previous, dormant business with no revenues and it’s a hassle that it’s incorporated.
When did you incorporate?
Photo credit: AgriLife Today