Should I Incorporate?

C writes asking what are the pros and cons of incorporation or should he just run his business now and deal with incorporation later?


Dear C,

This is the first big legal question in the life of your startup.  I always recommend incorporating as early as your cashflow permits.

Some benefits to incorporation:

1. Risk reduction. If your business runs up mountains of debt, creditors can't go after your personal assets (unless you are really careless as a director or very fraudulent - allowing the court to "pierce the veil" of the company to get to you.)

2. Tax deferral/reduction. You can accumulate value in your company by having it operate as a separate legal "person" without worrying about the short term impact on your yearly taxes. You can put in place a long term tax efficient plan as to when you want to take cash out.

3. If you think you will grow and will want to raise funding, you will need a corporate entity to allow investors to invest into.

Some downsides:

1. Set up

• Setting up the company will probably cost between anywhere between a few hundred dollars to 1500 dollars (done by a law firm that will do all the organising resolutions, give you the minute book and seal, etc.) 
• You will need to file for a business number and depending on your revenue a GST number.

2. You have to do annual tax filings and annual resolutions. These may cost a few hundred a year.

3. If you are a director of your company you will have legal obligations you have to be aware of as your run your company (payroll, paying taxes, taking decisions in the best interest of the company)


If you are really early stage, and don't know where things are headed, don't worry, you can covert a sole proprietorship into a corporation, once you get traction. There is a mechanism by which you can transfer the assets of your business into a corporation in exchange for shares in the corporation - without owing tax immediately (you defer your tax obligation until the time you take your money out.)

If you do decide to incorporate:

Some people set up corporations with very complex share terms and classes. I recommend early stage tech companies go simple. Odds are, if you look for Angel or VC funding in two or three years, they will have their own preferred share terms. you will have to redo your share terms for a funding event so why try too hard (and spend money) in trying to predict what investors may want in two years.

Instead, go for a simple approach with one or two classes of shares. It may only cost you a few hundred dollars to amend your articles when you need to change things for a big transaction. And at that time you'll easily afford that expense.Follow our posts at our blog at StartupLegals, to continue exploring important legal considerations for your small business