Halloween is right around the corner, and I’ve been thinking about the scary moments entrepreneurs face when they start their businesses. The most frightening moment isn’t when you take out a loan. It’s not when you’re drafting an in-depth business plan. The scariest thing a small business owner can do for their startup is to put off incorporating the business.
The domino effect of bad things that can happen to your company if it isn’t legitimized is positively chilling, and many entrepreneurs may have no idea what horrors may await them if they do not take action.
Read on to find out what can happen to a small business that chooses not to incorporate or form an LLC if you dare.
1. Having an unincorporated business makes you personally and professionally vulnerable.
Imagine that you decide to incorporate as a limited liability company (LLC). You’ve talked it over with a legal professional and determined that this entity is the best fit for your business. By incorporating as an LLC, your business is now designated as its own separate, legal entity. This provides liability protection, ensuring your personal assets are now separate from your professional ones. Should any unforeseen circumstance arise, your private property, like houses and cars, will not be impacted.
Now, imagine that you decide to put off incorporation until later. An employee accidentally gets injured on site and chooses to serve your business with a lawsuit. You will be held personally responsible for what happened. The parties that decide to sue you know that you’re vulnerable because your business isn’t incorporated. As a result, they can come after the assets of your business or your personal property. You could lose everything you worked for, all because you thought you could put off your incorporation.
2. Building credibility becomes a serious struggle.
New businesses need consumer trust. They must build a following of loyal customers who believe in their unique products and services. The business focuses on creating incredible customer experiences that give customers everything they need and more. In turn, these customers will choose to buy from your business instead of a competitor and spread positive word of mouth to their networks.
Granted, it will still take a little bit of time to get your name out there and noticed by your target customer base. Incorporating your business allows you to build credibility from the beginning. This is your professional identity. You are showing potential customers that your business is legitimate, reassuring them that they have nothing to fear in doing business with you.
Imagine that your small business is an online storefront where you sell hardware tools. If you have not incorporated the business, there will not be any documentation on the site that proves your company is credible. Customers may be hesitant to buy from you as a result, afraid that their credit card information will be stolen or that their orders may not resemble what it showcased on the website.
3. You may never receive financing from investors.
Now that’s a spine-tingling thought. Remember that business plan I mentioned earlier? That plan likely includes a financing request from interested investors. The request for additional financing should cover how the money will be spent and the manner in which you will spend it on your business.
However, investors will be much more hesitant to invest capital in a company that has not been incorporated. A great deal of your business plan is focused on the long-term future of the business, so why wouldn’t incorporation be part of that vision? This is a red flag to investors, who may decline to work with your business regardless of how unique it may be.
What should I do next?
Are you thoroughly creeped out by all of these scary stories of what happens to unincorporated businesses? Change the narrative for your company now! Meet with a legal professional to discuss which business structure would be the best fit for your business and ask any questions you may have about the incorporation process. This will make it much less intimidating to get started and ensure that you will be able to give your business the legal protection that it deserves.
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Deborah Sweeney is the CEO of MyCorporation.com which provides online legal filing services for entrepreneurs and businesses, startup bundles that include corporation and LLC formation, registered agent services, DBAs, and trademark and copyright filing services. You can find MyCorporation on Twitter.