You have come up with a business idea. What next? Incorporating your business into a legal entity seems like the next logical step. While incorporation is essential, there a few things to consider beforehand – For instance, you have an idea in place, what about a customer base for your product? Have you figured that out?
In truth, brick and motor businesses function differently from tech start-ups. A traditional business needs you to incorporate your business before you open the doors to your customers because revenue begins on the first day. Tech start-ups function differently; sometimes they don’t make money for months but would have continuous business and product development expenses. This timeline will significantly affect your incorporation decisions. Here a few questions to ask yourself before making that incorporation decision.
- What is my revenue timeline?
If you are sure that revenue is going to start flowing in the first few months, then it’s a good idea to begin the incorporation process. Incorporation of business entities like private limited company takes time to complete, so, make sure you have enough time to get the ball rolling. Before a company is incorporated it cannot enter into any legal contracts, so make sure you have your incorporation papers, before entering into any vendor contracts.
- Does legal proof matter?
You don’t need to be incorporated to sell products and services. Thousands of sole proprietorship models are proof of that. A website, business stationery, and a tentative name for your business are enough. Once you are confident, you can start the incorporation process.
- Government Approvals
Incorporating your company will need to be done expediently in case the product that you are manufacturing and selling require government approvals. To secure government approvals, incorporation becomes essential. Most tech companies won’t need such pre-approvals, so, you can hold off sole incorporating your business until your first sets of products are manufactured.
- Funding requirements:
If you are a start-up looking for investment from angel investors and venture capitalists, then it’s a good idea to finish the documentation. Seed funding and financing will not be possible unless your company has been incorporated. For instance, how will you allot shares of your company to investors unless it’s a legal entity?
CLOSING THOUGHTS
Most start-up models are designed in a way that ownership of the company will be shared and divided between the founder, co-founder, and investors. For this model to function, your business has to be incorporated. As the stakes of the investors increase, your equity in the company will come down. If you want to remain the sole owner of your business, and don’t want to relinquish control, then you can follow the single proprietorship model.