I’ve read lots of articles about the reasons why a business needs to incorporate. But creating a separate legal entity isn’t for everyone. Perhaps it’s worth spilling a little ink summarizing why one might not need to incorporate.
1) You are the only founder
One of the most important parts of starting a business is resolving disputes and potential disputes among founders. When more than one person is dedicating their professional lives to a project that has high risk and high reward, the potential for misunderstandings and misaligned expectations is high. That’s when detailed, specific agreements among founders are important. But if it’s just you, there’s no need for legal agreements to memorialize your understanding. If your expectations change, then they change. Legal agreements might tie you down to a structure or brand of corporate governance that could be unrealistic later. If it’s just you, you should usually wait to incorporate.
2) You don’t plan to hire anyone
While it is possible to hire someone to work for you personally, it makes sense to form a separate entity when you’re bringing on employees. From health care to tax compliance to comfort level, separating the entity from the person when there’s a professional relationship will help you move forward.
3) Your business or service isn’t generating revenue yet
Perhaps you have the next Facebook or Google in your head, but if it’s just you, you don’t have employees, and you’re not generating revenue, there’s no need to incorporate right away. Most banks will want to see some form of official registration with your secretary of state when you open an account. But if taking payment isn’t an issue, bank accounts probably won’t be, either. Wait until the business gains traction before taking the step.
4) You don’t need funding
Venture capitalists and angel investors aren’t eager to loan money to individuals in their individual capacity. Almost without exception, they want to invest in Delaware C Corporations. But if you have resources and don’t need assistance starting or growing your business, incorporation might not be necessary.
5) Liability is remote
If the likelihood of a lawsuit is low, you may not need to incorporate. That said, if you have a successful business, over time, your odds of getting sued are high. Don’t delude yourself into thinking that a well-run business provides immunity to lawsuits. Walmart and Apple get sued daily.
The only category of business for whom legal entanglements are unlikely are ones that have few customers or low revenues. Everyone else should form some type of limited liability entity.
Forming an LLC in Colorado costs $50 and can be done in an afternoon. It requires almost no maintenance. But if $50 hours and a couple of hours of legal and tax advice are beyond the purview of your business, then that may be a sign that you are not ready to take the leap. That’s ok, too. Work on your business and get more clients. Once you start making money and you get nervous about how to protect it, you’ll know it’s time to formalize things.