By Adam S. Juratovac (@AdamJTheLawyer)
www.JuratovacLaw.com
Entrepreneurs often ask, “I have a business, I have some traction, and should we incorporate it in Delaware?” This is a common question I receive and typically it is because the entrepreneur has come to a point where she wants to take her business to the “next-level” or scale her business. This is a very exciting time for an entrepreneur because it means that she is mentally ready to progress with her business, but sometimes, a business does not need to be incorporated.
Here are three situations when a business can be, and probably should be incorporated:
The Business Is Entering Into Contracts
One benefit of incorporating a business is that the formed entity (LLC, LLP, C-Corp, S-Corp) limits the liability of its shareholders to their investment in the business. What that means is, if the business independently enters into a lease, and the business breaches that lease, the landlord can only go after the business. Not the individual shareholders. This provides a liability shield for an entrepreneur’s personal assets. This protection of assets is to encourage entrepreneur’s to start businesses and build things.
If her business is entering into leases, licensing agreements, or master service agreements, she should incorporate her business.
Note: Heads up for contracts that require an entrepreneur to co-sign personally in addition to their business.
2. The Business Wants To Build Its Brand and Name
A business that is incorporated seems more professional than a sole proprietorship because incorporating requires filing incorporation documents with the Secretary of State. This requirement is an additional step than required by a sole proprietorship. So when a company wants to form a partnership with her business, the company will see “Inc.,” “LLC,” or “LLP” behind the name. This signals the company that the group they’re doing business with is at least sophisticated enough to incorporate their business. This builds trust and reputation.
3. The Business Is Taking On Investment
Similar for the reasons in number 2, when a business is taking on investment, investors typically want to see that certain business steps have been taken to protect the assets of the business and limit the liability of the shareholders. Before any investor invests in a business, she will want to ensure that her personal assets (her home, her car, her other investments) are not subject to lawsuits that the business enters into. The investor will want to limit her liability to the investment she is giving to the business. If the business falls flat, she wants to make sure that creditors will not be able to access her personal assets.
These are three situations where it would be wise for a business to incorporate. There are many other reasons why a business would or would not incorporate and ultimately, it is the entrepreneur’s decision. I have seen very successful sole proprietorships, I have seen very successful LLC’s, and I have seen very successful C-Corps. The decision to incorporate is fact specific, but these factors may be the most general reasons of “WHY.”
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If you have any questions about this article or the benefits and detriments of each structure, feel free to contact me at Adam@JuratovacLaw.com.
NEXT WEEK’S ARTICLE: The Trademark Process (At A High Level)
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