When should I incorporate my startup?

Often founders are unsure if it makes sense to spend the time and money to incorporate their venture.

This is a legitimate issue.

In my experience, early stage ideas can take time to ripen.

Often, in the earliest stages, the future of a project or idea is still murky.

There is some potential for a business but questions remain unanswered.

Perhaps there’s a potential product but it’s not clear if it will be economically viable or meet consumer needs.

Or the project may have some traction but it’s not clear if it can generate revenues.

More research, tinkering and experimenting may be required.

In circumstances like this, the expense and formality of a corporate form may be unnecessary.

It can make more sense to let the project incubate and evolve until it is more clear what it wants to become.

Ripeness arrives when the Founders have achieved enough clarity that they are prepared to invest meaningful time, money or other resources into the business. They are ready to hit the gas pedal.

This isn’t always the case, particularly where the tinkering and experimenting involves a lot of money or multiple founders or activities with high legal risks.

For example, a team of founders who are investment in a bunch of money to R&D a medical device would want those relationships and investments fully documented.

Whereas a solo founder with a side software project may choose to focus resources on product development. That founder might use a basic pre-incorporation agreement to get on the same page with team members while they incubate the idea. Then, once it’s clear the software meets a real need and can attract paying users, they pull the trigger.

At that point, forming an entity will enable the founders to raise money from investors, hire a team with equity, enter into contracts with enterprise or consumer users, and so forth.

As the project grows and expands, more people are impacted and thus more risk is generated. Incorporation enables founders to assume those risks without putting their personal assets at risk.

Another way to think of this question is: what are the benefits that become available to me once I incorporate and when can I really take advantage of them? Again, the answer for the most part is when the business idea has become fairly well crystalized and founders are ready to start accelerating their efforts with investments of time and/or money.

I feel called here to add a typical lawyer caveat: every situation is unique. Corporate entities provide personal liability protection. The wealthier you are, the less it makes sense to wait and the more it makes sense to do anything potentially business-related through a corporate entity.