Business Strategy · Startup Law

What's the right time to Incorporate?

Caroline Rouben Founder at PopSoles

September 8th, 2016

I've been putting off incorporation of my new venture because I have two other (corps) already, and I find them a pain to keep up (tax year ends, etc.). However, the new venture (a modular footwear brand) will likely be doing a Kickstarter in a couple of months. This has come up because I started to work on filling a trademark and have been told by my lawyers that if I do it under my personal name and don't have an appropriate license agreement set up (which will cost the same as the incorporation) it may cause issues with respect to the notion of "use" as defined by the Trademarks Act. Help! It seems like a pain to incorporate again, but may be necessary. Also note - will likely start fundraising in 2-3 months time...I have an Ad agency, can I do a kickstarter and everything else under the same banner?
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Gray Holland founder / director at UX-FLO

September 8th, 2016

If you have a business entity that you run the business under -- then use what you have in place already... But maybe then you want to "trademark" the new brand and just "do business as" to save time, cost, hassle. 

BUT one of the main reasons for incorporation is about liability and such, given your shoes and worn and could be subject to liability or other injuries -- you want the corporation to shelter you from legal action that would hold you personally accountable (another reason to not use your "name" as well). 

So there is accounting, banking, and taxation reasons, 
also legal protection reasons for incorporating, 
and last there is the allocation of equity if you take any investment...

-- next is the different versions S Corp, LLC, etc... but that's another topic. 

Jason Kiefer CEO at Pixoto, CFO at Sugarwish etc

September 8th, 2016

I would suggest creating an LLC.  Usually only costs about $50 and can be turned into a C or S corp at a later date.  It's more flexible than an S corp too (i.e. can have corporate owners). I don't see why anyone would go C or S unless required to by a funding source (and even then I would push back).  You don't have to file separate tax returns for an LLC - it can just be part of your personal return.

Kevin Smith Advisor at SmartEar, Inc.

September 8th, 2016

Caroline, Your lawyers are correct with respect to the TM issue but two more pressing issues are that (i) without a separate entity to house your venture, you cannot open a bank account for it and (ii) your finances are therefore intermingled with personal finances or those of another business and that means you open yourself up to increased liability. For the cost of several hundred dollars/year, you can segregate your legal liabilities. It's a good deal. Moreover, it's going to be very hard to raise outside funding for the venture unless it is a separate entity: what would investors in the entity otherwise be getting in exchange for their capital? If the venture is selling a product and you expect to raise outside capital for it from traditional seed funding sources (angels, F&F, venture), then you'll need a c-corp formed in Delaware. Anything else will raise substantial barriers to investment. It is easy and not complicated to form a new corporation in DE and register it in CA. BizFilings (my favorite) can do formation and provide registered agent services for a few hundred bucks. Regards, Kevin

Darius Lahoutifard

September 9th, 2016

Since you already have 2 corporations, if you fully own them or if the shareholder structures are compatible, you may consider running the new business under an existing umbrella until it grows. Large and small corporations do this all the time before spinning off the new business after a period of incubation. or even selling them out. You also need to check if your articles are adapted, if not amend them.
Trademark and branding are not an issue, since you can brand as you wish any activity and have a fine line footnote mentioning the legal ownership of the business or the brand.

Caroline Rouben Founder at PopSoles

September 9th, 2016

I should have mentioned I'm in Canada. We don't have LLCs.

Paul Mobley, MBA

September 9th, 2016

I agree with Darius...using existing corporations to incubate new business ventures makes sense. I am currently doing this with a new venture and simply filed a DBA for the existing corporation to be able to open a new bank account, reserved the corporate name in Delaware so I know the name is ours, and used MOUs (memorandum of understanding) to document agreements with co-founders in regards to the allocation of founders shares upon incorporation. Trademarks can be registered in the existing company and transferred to the new entity in the future. Until the business is cash-flow positive or reaches certain milestones (i.e. outside investors) the new entity can be delayed. I wouldn't do anything under my personal name but as a new division of an existing corporation it allows you to proceed with the benefits of incorporating without adding additional administration and expense before the time is right.

Giles Crouch Digital Behavioural Economist | Speaker | Writer | Technology Strategist | on Twitter @Webconomist

September 9th, 2016

Actually Caroline we do have LLC's in Canada, we just use the term Ltd. but provincial statutes vary. I'm in Canada :-) Maybe take the approach of do the kickstarter under your current company (whichever you choose) and if it takes off, spin it out as a new company, registering then. You will have an asset issue for tax purposes, but than can be managed to reduce the tax burden, a good accountant can do that. That way, if it doesn't fly, it can be a tax write-off to your current company. It's one approach that I've used before quite successfully. This allows you to mitigate risk.

If you then roll out a successful campaign and raise equity (or debt) then you can incorporate at the time of closing an equity round.