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How do you know when the time is right to incorporate? If you incorporate too soon,
you could pay unnecessary fees and be required to file costly, time-consuming reports. If
you wait too long, though, you leave your business open to unlimited liability. Weighing
the right factors will help you identify the right time to incorporate.
Incorporation should come sooner for a business with multiple founders. No matter how harmonious
the company begins, the time will eventually come when founders disagree about the business’s
operation. Incorporating early will help avert these disagreements and potential dissolution
of the business. Once the business is incorporated, founders are limited to the number of shares
purchased, easily quantifying investment in the corporation, and shares can be transferred
freely without dissolving the business. Incorporation is particularly important if
there is property, including intellectual property, involved in a business with multiple
founders. Incorporating the business gives the business the rights to the property, and
not to an individual founder. Contract agreements with third parties will
also affect your decision to incorporate, because incorporation affects the liability
toward the third party. Before incorporation, liability for any agreement between the business
and a third party goes to the owner or partners. This personal liability persists even if you
later incorporate the business. It doesn’t matter when the disagreement happens, but
rather when the agreement was made. If you want the business to be liable and not the
individual partners for third party contracts, you’ll want to incorporate.
The potential liability will help you find the right time to incorporate. As you begin
to anticipate more and more liabilities, incorporation becomes more valuable.