“I have a great business idea. When should I form an actual company?”
We hear this question often, so we’re not surprised that you’re looking for answers, too. The good news: you’ve come to the right place.
Whether you have an idea on paper or a prototype, the first step towards a profitable business model is formation of a business entity. An operating LLC or Corporation allows you to legally protect your personal assets from any risks or liabilities associated with running your business. This is very important because it helps to separate your business assets from your personal assets, such as your savings, house, etc. If you weren’t operating as a formal business in the event of a lawsuit or other liability, your personal assets could be at risk.
So when do you actually need to form your company? While every situation is different, a good rule of thumb is this:
When your business idea is ready to start interacting with the world around you, form a company.
If you want to start spending money to build your idea, form a company. You’ll need a bank account. For tax and other reasons, it’s important to keep business expenses separated from personal expenses. To form a bank account, you need to provide the bank with company paperwork like an operating agreement and resolutions. Once you form a company, it is vital to keep your business expenses separate from personal spending—mixing the two is not legal and can lead toward you being personally responsible for the actions of your company.
If you want to raise funds rather than spending your own money, form a company. You’ll need investors, and investors can only contribute capital towards a business entity.
If you plan to sell your product or provide a service, form a company. You need to protect yourself and your personal assets with the legal shield of protection that your company provides.
If you want to protect your intellectual property, form a company. You may need to register a trademark or obtain a patent to protect your business idea, and only a business entity can hold that trademark or patent.
However, you may be in a position in which you don’t need to form your company just yet.
If you’re not ready to start operating, or if your concept is still being developed, you don’t necessarily need to form an entity to protect you, since there’s little risk of liability.
There’s certainly nothing wrong with forming your company early—and having a real, breathing business may motivate you to succeed!—but there is some expense to form your business. There are legal fees, filing fees, and registered agent fees associated with any business formation. Some entrepreneurs choose to wait on company formation until they’re ready to unveil their idea to the world.
Company formation expenses are usually the very first expenses incurred when turning your idea into a profitable startup or small business. The good news is that you can often count those expenses toward your initial capital contribution in the company. Also, you should speak with a tax professional to determine whether these expenses can be tax deductible.
PUSHTOSTART makes forming businesses very affordable and straightforward. If you’re not sure, speak to one of our startup attorneys and they can advise you on the best way forward. Once you’re ready for the next step, that same attorney will provide you with high quality documents to ensure you get off to the strongest start possible.
Is the time right for you to launch your business? Start now.