Formal incorporation offers many benefits for a business. Yet, it’s not something you jump into right off the bat. Incorporating too soon means you may spend unnecessary money and effort, and incorporating too late can hinder your business operations. This article will explain the main factors determining when to register your business formally.
When To Incorporate
The below situations signal that it’s time to incorporate your business:
You Are Prepared To Hire An Employee
The moment you’re prepared to hire a helping hand for your business, it’s necessary to incorporate. Employees, especially those in corporate roles, are reluctant to work with any enterprise not formally registered. They need to sign a contract with a registered legal entity, assuring them of the backing of the legal system in case of disputes.
As a sole trader, you don’t need to worry about incorporation; your company and yourself aren’t legally distinct anyway. However, registration is necessary when you’re ready to expand your enterprise by hiring employees.
You Need A Loan
Registration is compulsory if you want to take a loan from a banking institution. Banks don’t give loans to corporations not formally registered with the government. You’ll likely be asked for your company’s Certificate of Incorporation during the loan application process.
Registration also means the business can assume a separate legal identity and get a line of credit based on its finances. You don’t have to risk your personal credit to get a loan.
Working With Other Businesses
Manufacturers, raw material vendors, and distributors are usually reluctant to work with unincorporated businesses. You could be forgiven if you’re a sole trader with little operations. However, if you’re operating on a fairly large scale, suppliers and distributors will likely request proof of incorporation, giving them assurance that they’re dealing with a legal entity in case of disputes.
You Want To Raise Capital By Selling Shares
Incorporation is non-negotiable if you want to raise capital by selling shares in your business. Nobody can buy shares in a non-registered entity, or they might as well be throwing away their money. Investors will request proof of incorporation before buying shares in your company. They must sign binding agreements with a formally registered entity to guarantee legal backing.
When Not To Incorporate
Your Business Is A Hobby
Many people start businesses as hobbies; there’s nothing wrong with that. You can start a venture out of boredom. For example, if you enjoy sewing in your spare time, you can start making and selling clothes to your social circles. If your venture is admittedly a hobby, you must not incorporate it. You can operate as a sole trader for as long as you wish and upgrade to another structure if ready.
You Want To Save Time and Money
Incorporation comes with its burdens. For example, to incorporate a company in the UK, you must provide significant documentation to Companies House. You must also file annual financial reports after incorporating, which may demand the services of a professional accountant.
You can stave off incorporation to save time and money in the early stages. Many experts advise business owners not to incorporate unless there’s an explicit need to do that, e.g., you want to sign a contract with a vendor or request a bank loan.
Incorporating your business offers many benefits, such as higher trust from customers and fellow businesses and the ability to obtain loans from banking institutions. However, it’s not for everyone. We have explained the ideal conditions to register or not formally register your business.