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When to form a corporation and when to fund

    • 1 posts
    May 19, 2007 9:59 PM EDT

    Hi everyone,

    This is my first post to the community. After talking for a year, it is time for my wife and me to start to take action!!

    We have decided on our business model and working on the details of our business plan. My question: Is it reasonable to form the corporation before we have our details completed?

    The reason I ask is there are start-up expenses that we are incurring, which we are self-funding. I would prefer to apply these expenses to the business, rather than continue have it come from our personal funds.

    This brings up a second question. When we fund the corporation, is this done as a loan to the corporation? Does this require legal help to draft, or is to primarily a task that an accountant can help with?

    Thanks,

     

    Andy and Janet

    • 59 posts
    May 20, 2007 3:56 AM EDT
    Hello Andy & Janet and welcome to StartUpNation!

    Hi everyone,

    This is my first post to the community. After talking for a year, it is time for my wife and me to start to take action!!

    We have decided on our business model and working on the details of our business plan. My question: Is it reasonable to form the corporation before we have our details completed?

    The reason I ask is there are start-up expenses that we are incurring, which we are self-funding. I would prefer to apply these expenses to the business, rather than continue have it come from our personal funds.

    This brings up a second question. When we fund the corporation, is this done as a loan to the corporation? Does this require legal help to draft, or is to primarily a task that an accountant can help with?

    Thanks,

     

    Andy and Janet



    If you have decided that a corporation is the appropriate form of entity that your business should start out as then forming it now would be fine. 

    However, I have always strongly advised clients to speak to these THREE professionals BEFORE they decide on their entity choice:
    1.  Tax Accountant
    2.  Insurance agent
    3.  Lawyer

    The reason I advise this is that many people do not chose the most appropriate entity for their specific situation and the only way to know if you are headed down the right path is to talk to all three of those professionals. 

    Are you incorporating for tax reasons?  If so, ask your tax accountant, for your specific situation, what 3 entities would make the most sense and why.  They will need to know about your personal tax situation as well as your business projections and goals.

    Are you incorporating for liability reasons?  If so, ask your insurance agent, for your specific situation, what insurance policies they would recommend, what liabilities they would cover you and your business for, and how much the policies would cost.  Then ask your lawyer what liabilities your coporation would actual shield you from, in your profession, what the corporation would need to do to maintain that liability protection and what other liabilities exist that a having a corporation would not protect you from.

    Are you incorporating because you want to be in a position to obtain investor financing or some other more complex reason, then talk to your tax accountant, lawyer and possibly banker about those reasons.

    After you have spoken to all the professionals, then decide what business entity you should start out as, and which one you may want to change to later in your business life.  Since you said you have your business plan then you most likely have already made contact with these professionals, so that should help you.

    I wrote these articles on my blog that you might find useful:
    One last note, depending on what entity structure you choose, some of those "loans" may be more beneficial as paid in capital.

    Best wishes,
    Gina




    ---
    Gina L. Gwozdz, CPA
    http://GLGcpa.com
    http://TaxTreasures.com

    • 99 posts
    May 21, 2007 11:27 AM EDT
    I typically ask my clients to prepare and present me with their business plan before doing anything.  If prepared well, the plan will dictate the appropriate business type, and the right timing for it.

    Cheers,
    Dan

    ---

    Pepper Law Group, LLC
    21 E. High Street, Suite D
    Somerville, NJ 08876
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