There are a lot of reasons for setting up a company – a legal entity – very early in your startup’s life. Here are a few:
- Intellectual Property: As soon as anyone starts to contribute ideas or designs or code (i.e., intellectual property) to your business concept, you want to make sure that the company (not the individuals) owns that intellectual property. You can accomplish that by having contributors (founders, consultants, etc.) sign a contact that assigns any IP they develop to the company. But to do that, you have to have a company!
- Credit history: You’ll need a company with a credit history, so create a legal entity so you can start building that history!
- Company and personal finance should be separate: Rather than co-mingling funds, you’ll want a company checking account so you’re not using your personal checking account do to company business. Why? Because at some point, you’ll need financial statements, and if you mix personal and business finance, you’ll have a real mess for an accountant to untangle. So get a company checking account – which means you need a legal entity to own that account…
- Ownership: creating a legal entity tends to raise the issue: who owns the legal entity? Assuming there are multiple founders, this is a very good question to raise – and to answer (in writing) – early on, so there is no confusion or misunderstanding.
So don’t delay – set up a legal entity very early in your startup’s life!
More reading – Choice of Entity
Why Incorporate in Delaware?, 2015 Aug 03
Do You Need To Be A Corporation To Raise VC Funding?, 2011 Sep 09