When should you incorporate? You know that you should incorporate eventually, but when's a good time to do so?
Don't incorporate just because you've got an idea for a business. That's way too early.
Generally, incorporating a business is more than filling out a few government forms and requires professional help. If there is more than one owner, if there are outside investors, debt, intellectual property or employees involved, if the business is a franchise or a regulated profession like medicine, or if there are not-for-profit or charitable components, you should get a lawyer to incorporate your start-up.
There are two things that define a corporation. Owners (shareholders) have limited liability, and the corporation is a separate legal person.
Limited liability means that shareholders are not personally liable for the debts of the corporation. If a corporation is unable to pay its debts, the maximum that you (as a shareholder of the corporation) may lose is the amount that you've invested into the corporation's shares, and no more. This means that you won't lose your house if your start-up fails.
Under Canadian law, a corporation has the capacity, the rights, powers and privileges of a natural person. For example, when renting office space, you can cause the corporation to sign the lease (and assume the liability) on its own behalf.
The general rule of thumb is that you should incorporate before your start-up takes any big steps or makes big commitments. Generally, you should contact a lawyer and incorporate your start-up before any of the following occurs:
- Having outside investors invest in your start-up
- Having more than one owner or responsible person
- Splitting or sharing the ownership of the start-up with another individual or corporate entity
- Obtaining debt such as a loan
- Leasing or buying any big ticket item like office space or expensive equipment
- Signing any agreements with suppliers or manufacturers
- Putting warranties on your products
- Hiring employees
In the meantime, here are some things that you should feel free to do even if your start-up is not incorporated:
- Applying for patent or trademark protection
- Marketing and selling your product or service