Tuesday, October 11, 2016

Why Startups and Entrepreneurs Shouldn't Be So Quick To Form a Corporation or Limited Liability Company

After consulting hundreds of clients and via my own experiences starting several businesses I have noticed a common trend and pitfall among many entrepreneurs and people looking to start business ideas.  They are forming legal entities (i.e. Corporations, LLCs, etc.) to early.

If you ask an attorney "what you need to start a business" they will most likely tell you that you need to file the proper documents with the Secretary of State in the State where you reside or plan to do business in....and yes this forms a legal business.  And in fact after doing this you have started a legal business. 

The problem is when an entrepreneur or startup has not flushed out their idea and do not have a MVP or a Minimum Viable Product.  For example, you want to offer a service and you haven't yet put together a simple business plan or thought about how you are going to advertise the service.  Even worse you may not even know how to offer the service at all. 

Many clients I've have consulted have an LLC or INC that they are sitting on and do not have any experience running aa business or establishing clientele or a customer base.  This is okay but to bring on the added expense of forming a company is not necessary. 

Practical Advice: Try to find customers first, or build the product you are going to sell.  If you are looking for investors you can form the company when you get your first investor.  It is true that you legally can not do business without a "legal entity" but you can get as close to doing business as possible before forming one.  And more practically speaking you may want to form a sole proprietorship which is less expensive than an LLC or Corp. 

Sure, the $100 filing fee (various in from State to State) does not sound like much but then you get whacked with a yearly filing fee or something of the sort.  Time is your enemy when you start a business and your goal is to become profitable as soon as possible. 

Many entrepreneurs or people starting business love to act like they are in business rather than be in business.  They form a company, buy business cards & letterheads and do all these things that make them feel like they have a legitimate business.  A few months later they realize they have not sold anything and spent $1,000+ on their "business". 

No one will call the police if you offer a business plan writing service or DJ a party without a corporation name.  Similar you will most likely not get arrested for selling your widget before you form an LLC or Corp.  Try to get your first sale before forming a business entity and use the money from the sale to form the company. 

Hope this helps,

-Nick Coriano

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About the Author: Nicholas Coriano is a Business Consultant.  He is a graduate of The University of Connecticut Business School and the John Marshall Law School in Chicago.  He has worked at Merrill Lynch, The New York Stock Exchange and is currently a partner at Cervitude Intelligent Relations, which specializes in Investor Relations for companies valued under $1 Billion USD.

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