Incorporating or forming a limited liability company (LLC) will secure many advantages for your startup, not the least of which is the ability to use Crowdfunder.com and attract investors. With only a few downsides (additional taxes), early incorporation is a smart step for your business’ longer term viability and growth.
Here’s why you should incorporate:
Startups need to incorporate in order to raise funds from investors on crowdfunder.com or elsewhere. If your business isn’t separate from your personal financial affairs, investors will not give you startup money. Instead, opt to run your company out of an entity like a corporation or an LLC. These entities can be split into many pieces, called shares or membership interests, which can be sold to investors who provide the business with capital. In return, the investors own a fraction of the business and have certain rights, usually including a share of any dividends declared.
More fundamentally, your startup should incorporate to make sure it secures its rights to any intellectual property (IP) you and your team are developing. If several founders are developing different pieces of IP for your business, but there’s no entity, it may not be clear who owns that IP. Proper planning and incorporation can vest the IP with the startup and preempt major problems.
Another benefit of incorporating is that it forces the founders to clearly address what position they will hold in the company and how much of the startup they will own. The earlier this is done, the less likely there will be disputes or even litigation between the founders.
Finally, incorporation limits your personal liability. If anyone sues the business and gets a judgment against it, the judgment creditor can only come after the entity and can’t reach your personal assets (e.g. personal bank accounts & investments, cars, homes, etc.). There’s an important exception to this shield against personal liability, commonly called “piercing the corporate veil,” which will be the subject of a follow-up post on this blog.
All of these benefits have a cost. There are filing fees, franchise taxes, and other tax effects. As with the legal consequences, the tax effects will vary from state to state, so if you’re unsure, make sure to check with your accountant or qualified tax advisor.
Ready, Incorporate, Crowdfund!
When you’re ready to form an entity, contact your attorney or accountant. Once you’ve completed the process, you will be able to post your startup on Crowdfunder.com, meet investors, get funding and launch your business into the world…
The above post is presented for informational purposes only and does not constitute legal or tax advice. You should not act or refrain from acting on the basis of any content in this post without seeking appropriate legal or tax advice regarding your own particular facts and circumstances from an attorney licensed to practice law in your state or from a qualified tax advisor. This post contains general information and may not reflect current legal or tax developments.