When is it necessary to create a legal entity for a startup?

Let’s face it, as an early stage founder there are tons of things keeping you busy, whether it’s developing your product, getting users or hiring new employees. Not too many founders worry about the legal aspects of their business at an early stage, and most of them put off forming the actual business until much later on. It’s understandable that maybe you want to know whether or not your business is actually viable before you shell out money for legal fees. Regardless, we wanted to put together a list of four scenarios in which incorporating your startup business is a must.

First let me say, I’ve had some success starting 2 internet startups along with spending countless hours navigating startup legal issues.

Currently, I’m helping 100’s of startups get all their legal stuff done with https://www.lawtrades.com.

Alright, now that we have the experience out of the way, let’s get it on.

4 Situations Where You Should Incorporate Your Startup

1). When you have more than one founder or hire an early employee

When your business has more then one founder, you should incorporate to distribute equity amongst the founders. Formally incorporating your business allows you to legally distribute the stock. By holding it off, you run the risk of having disputes with your founders about how the equity gets split. Issuing equity at an early stage helps avoid conflicts and misunderstandings that can occur later on down the road. By incorporating at an early stage, you and your founders can focus on running the business.

This holds true for early employees as well. If you’re running a startup, there’s a good chance that you might not have enough cash to pay early employees or contractors. In order to give an early employee or a contractor stock, you need to have a formal business to assign him or her shares of the company.

2). Protecting intellectual property

If your startup involves any intellectual property, then you should definitely have your company incorporated. By incorporating, the intellectual property can be assigned to the company and not just one individual. By not assigning the IP to the company, it can create disputes later on. Imagine a situation where two founders created a unique patentable software process worth millions of dollars and they haven’t incorporated yet. One of the founders decides to leave the company and wants to take the IP with him; after all, he helped create it. This can become a huge legal mess since the IP is not assigned yet. It can cause an elongated dispute between both of the founders regarding the use of the IP. By assigning the IP to the company, it can help avoid any hassles that may come up.

3). Your startup wants to raise money

Chances are, if you’re a startup you’re going to look to get investors on board to help your company grow and expand. Whether it’s an angel investor, an incubator or a VC, you need to have your company formed in order for them to invest in your business. From a credibility standpoint, don’t you think all of this should be in order if you’re going to approach investors? Startups raise money in all different stages of their life cycle, whether its just an idea you’re experimenting with or you’re unexpectedly growing very fast. If the right opportunity presents itself, your business should be prepared to accept an investment that works for you.

4). Your product is ready for the market!

One important reason to incorporate is for the founders to avoid being personally liable for an issue that arises due to their service/product. The risk of liability increases as you continue to get more users no matter how great your product is. In order to avoid being personably liable as a founder, forming your business structure should be essential before you launch. Creating an LLC, C-Corp, or S-Corp essentially places a wall between the founders and the business. Thus, it’s definitely a good idea to formally create the business before your service even launches.

Aside from these four situations, it is develop your startup in the best way possible. As to what type of legal entity you should use, you should talk to a lawyer first and see what they say is your best option. Unfortunately it is difficult for startups to find a good, affordable attorney that will best fit their needs. You should take a look at our company; LawTrades. You can find a quality attorney based on your budget and connect with them 24/7, so you can find the time in your busy schedule. Once you get a good attorney, your company will be best suited for success.

I hope this answer is helpful. If you have any other questions or concerns, please don’t hesitate to reach out to me personally. Good luck with everything!

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[523.251,659.255,783.991]
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