Starting Up the Start-Up: When is the Right Time to Incorporate?


Many social media and social gaming companies have launched products and achieved remarkable viral growth on a relative shoe string, in the process setting a new standard for efficient utilization of capital and human resources. I am frequently approached by new entrepreneurs who are about to launch social media or social gaming ventures and asked to incorporate their startups. In keeping with the mantra of efficiency and economy, I always like to take a step back and ensure that the time is in fact right to begin the incorporation formalities. It is possible to go through the incorporation process too early. It is also possible to be too late. Let's take a quick look at some possible consequences of each mistake:

Downside of incorporating too early:

Expenses are incurred before they are strictly necessary. Also, if the venture does not have a name yet, further costs will be incurred by starting with a placeholder name that would later need to be changed by amending the company's charter documents.

Stock may be issued before the founding team has gelled or been finalized, and if one or more "founders" drop out, then it may be difficult to get their stock back, particularly if stock was issued outright and not subject to vesting. On the other hand, if the company has been incorporated but the founders' stock has not been issued, then the founders risk not getting the benefit of limited liability, which is generally one of the reasons to do business in the corporate form.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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