As an advisor to startups, I see some common challenges many early companies face. One of the first is the decision on how to incorporate the business.
Since there are likely few employees (if any), and likely no revenues for a newly formed startup, it feels like overkill to register as a corporation and submit to annual meetings, reports, and filings as such. In addition to some extra annual filings, a C-corporation will also file its own tax return, and founders will pay taxes both as the corporation and on their personal tax returns. A limited liability corporation (LLC) has fewer requirements and a more streamlined tax process, and as you’ll see later in this article, comes with its own drawbacks as well.
Do your homework, but don’t get side-tracked
These decisions can get confusing and it’s good to find some resources to get informed before filing. Here’s a good video on how to choose between a C-corp, S-corp, and LLC for your business type:
I’ve been there. In 2008 when I started my first business, I felt nervous and confused, wanting to get everything right. Over a period of weeks, I agonized over making the right decision, trying to get all the information I needed and researching how to make all the proper filings. During that time I was completely distracted from the actual work of getting my small business off the ground.
Stick with what you know, outsource the rest
After starting two more businesses since then, I’ve learned not to get side-tracked by the busy-work of filing, and outsourced that work to someone who knew the regulations and required filings a lot better than me. In fact, there are companies which specialize in managing the incorporation process along with a whole list of other compliance issues which will come along with any business.
Don’t sweat the decision
Sometimes what seems right at the start doesn’t always stay that way. In 2016, a company I was advising was considering an expansion which would require additional funding. When incorporating however, the two founders had chosen to form a limited liability corporation (LLC). Because of the number of investors, they were not able to issue shares for the fundraise. After a brief panic and an expensive visit to a lawyer, they discovered conversion to a C-corp was not very difficult at all, and they engaged a compliance agency who made the switch in time for the funding.
What’s the lesson here? Don’t over think it at the start. Just focus on validating your product-market fit, and getting to your go-to-market strategy as quickly as possible. There are lots of great resources out there to help you with managing the corporate issues and they are worth every penny in terms of time they save and in the protection they provide by going to an expert. I’ve spoken with the experts at CT Corporation, a corporate compliance and registered agent provider. They provide a lot of good information on all these topics right on their website, and it’s free to call and just ask them what your options are on any business compliance issue. They also have an online chat feature for any quick questions you might have as well.
What are the takeaways?
- Do your homework, but don’t let the paperwork keep you from getting your business started
- Stick with what you know, outsource the rest to people who know more than you
- Don’t sweat your choice when getting started, changing your corporate formation is not hard when you have help
Resources from this article:
Do you have an experience to share? Have you experienced a pivot which required changing your corporate status? Let me know your experience in the comments!
This is a sponsored conversation written by me on behalf of CT Corporation. The opinions and text are all mine.