The When to Incorporate Decision-Matrix

In a recent post, I detailed some incorporation-related points of interest if I launched my own startup. The post presumed I made the decision to push forward with the incorporation of my startup. But how do you know when the time is right to incorporate your startup?

Advice Varies

There’s a wide range of counsel on this topic. Most lawyers will say you should have incorporated “Yesterday!” while some non-lawyers will say that you can wait until your first round of funding because “Google did it.” There’s no right or wrong answer on this one, but you probably did not need to incorporate yesterday nor should you wait until your first round to do so.

My advice to you is simply: Don’t incorporate a hobby. Incorporate when you are serious about making your startup a business.

But for those of you who prefer the quantitative, I put together the following decision matrix:

When to Incorporate Decision-Matrix

Answer the following questions and tally up your total score.

(1) Does your startup have more than 1 founder?

Yes –> 10 points
No –> 0 points

(2) Are you (and/or one of your co-founders) working on your startup full-time?

Yes –> 5 points
No –> 0 points

(3) Will your startup take longer than one year to exit?

Yes –> 5 points
No –> 0 points
Maybe –> 3 points

(4) Is your startup hiring developers or designers?

Yes –> 7 points
No –> 0 points

(5) Is your startup granting stock options or other equity compensation?

Yes –> 7 points
No –> 0 points

(6) Is your startup high-risk for a lawsuit?

Yes –> 10 points
No –> 2 points
Maybe –> 7 points

(7) Is your startup seeking seed or venture capital?

Yes –> 6 points
No –> 0 points
Maybe –> 3 points

(8) Is your startup signing contracts with third-party companies for business services (not for IP creation or development)?

Yes –> 4 points
No –> 0 points

The Results:

24 points or less: Save your $$$ on incorporation and spend it on an iPad.
25 points or more: Incorporate now (iPad version 2 will be better, anyways)

Feel free to suggest a revised/additional questions or weight to the matrix. Of course, this is meant to be more of a “fun” exercise for entrepreneurs rather than an absolute guide.

Tags: Incorporation, startup

17 Responses to “The When to Incorporate Decision-Matrix”

  1. Cassidy Lackey April 12, 2010 at 1:15 pm #

    Thanks for the info, Ryan. I generally work an idea for 6-12 months before generating revenue so I've found it best to incorporate when I start working on merchant accounts, bank info, etc.. Also ensures I don't waste time and money on legal if I never get serious about making money on that idea.

    • Ryan Roberts April 12, 2010 at 2:51 pm #

      Maybe you just need to start generating revenue earlier. :) Did you ever make it out to a Dallas Startup Hour?

  2. Cassidy Lackey April 12, 2010 at 8:15 am #

    Thanks for the info, Ryan. I generally work an idea for 6-12 months before generating revenue so I've found it best to incorporate when I start working on merchant accounts, bank info, etc.. Also ensures I don't waste time and money on legal if I never get serious about making money on that idea.

    • Ryan Roberts April 12, 2010 at 9:51 am #

      Maybe you just need to start generating revenue earlier. :) Did you ever make it out to a Dallas Startup Hour?

  3. Nnena April 12, 2010 at 2:45 pm #

    Amazing insight Ryan (and slightly amusing). Thank you for always giving good advice that helps those of us who want to eventually follow in your footsteps–as an attorney to start-ups. Many Many Thanks!

    Do you (or have you considered) ever have on-line classes for young attorneys?

  4. Nnena April 12, 2010 at 9:45 am #

    Amazing insight Ryan (and slightly amusing). Thank you for always giving good advice that helps those of us who want to eventually follow in your footsteps–as an attorney to start-ups. Many Many Thanks!

    Do you (or have you considered) ever have on-line classes for young attorneys?

  5. Babar Bhatti April 12, 2010 at 11:13 pm #

    As someone who went from an LLC to a Corporation and paid the price in terms of cost and time, I find this advice relevant and easy to use. Good job Ryan!

  6. Babar Bhatti April 12, 2010 at 6:13 pm #

    As someone who went from an LLC to a Corporation and paid the price in terms of cost and time, I find this advice relevant and easy to use. Good job Ryan!

  7. Dino Dogan June 10, 2011 at 9:19 pm #

    wow…and here I thought we could slug it along for a short while still…I got 33 points…WAY over the 25 even point.

    thnx, I guess I need to start collecting some paperwork :-)

  8. Paul McNeal August 14, 2011 at 7:18 am #

    Ryan –

    This is an awesome matrix but I do have a couple questions. First, revenue. Is there a certain point that if none of the above is true, but I am generating a significant amount of revenue that I would need to incorporate? Second, taxes. At what point does it become advantageous tax wise to incorporate (writing off expenses)?

    Hope Dallas is treating you well and that they heat is not killing ya!

  9. Michael F February 18, 2012 at 6:18 am #

    Thanks for the post. So if I want to start charging customers for a service / product, do I need to incorporate (regardless of the other considerations)?

  10. STEVEN J. FROMM, ATTORNEY, LL.M. (TAXATION) September 3, 2012 at 12:03 pm #

    Hey Ryan: Very interesting and fun post. This gives readers another perspective on the need to incorporate based on a quantitative number. Nice going!

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