When is the Best Time to Form a Company?

Something I get asked a lot is, “when do I really need to form a company?” The answer will vary, depending on your own circumstances.

One of the reasons people form companies is to encapsulate risk. By that, I mean they are looking to protect their personal assets from an attack through a business or investment venture. So, when is the best time to set up a company to protect you from risk? Before you start business.

I hear people say, “I’ll just start a business later, if a problem comes up.” But most of the time you can’t do that. If you try to protect your assets after someone has notified you that there’s a problem, you face the risk of being accused of performing an unlawful, or fraudulent, conveyance. A court can and WILL look at the timing of your move from an unincorporated business into an incorporated business. If it coincides with the time that someone filed a lawsuit naming you as a defendant, or even if someone just threatened to sue you, there’s a very good chance that the plaintiff will claim you are trying to hide assets to avoid the lawsuit. If a court agrees, they can force you to unwind the new company, transfer assets back into your name, and even fine you.

What if you don’t have any assets? Maybe you’re young, and just starting out, or you are starting over. If that’s the case, and you really don’t have any assets to lose, then yes, you could operate as an unincorporated business. But as soon as you begin to earn some money, or accumulate some assets, make the change.

There are many variables when you’re structuring a business. That’s why it’s hard to go through a quick-service website. Unless you talk to someone who’s got some knowledge and experience on both the tax and the legal side, it’s hard to know what you don’t know. And that can leave you vulnerable.

Got questions? Contact us! We’re here for you.

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