As a startup founder, deciding when to register a company isn’t always clear. Below, we’ll look at the advantages and disadvantages to help you decide.
* Disclaimer: Although the below guidance applies to many (maybe even most countries) it’s important to note that different countries have different laws, requirements and costs – so you should always check the specifics in your own location. TLDR: considering 1 or 2 (relatively small) disadvantages, like costs, it is generally recommended to register your company as early as possible. That said, if you are only at ideation stage (thinking of idea) or research stage (researching the market), then that’s too early. If you’re actually starting to build something and assuming you have co-founders, then it’s time to consider incorporating.
Advantages of Registering a Company Early
If you’re in the early days of building your startup, you might wonder why you should even consider registering a company now. And you’re right. If you’re only thinking about ideas, or doing basic market research, then you probably don’t need to. But if you’re assembled a team and are actually working on creating something, or even about to start a pilot (evaluation) or raise money, then incorporating is something that you should be looking into.
Here are the benefits that come with making it official early on.
1. Intellectual Property Ownership
Intellectual property (“IP”) is creations like inventions, designs, brand names, logos, software, and artistic works, that can be legally owned and protected. Basically, this is anything original that you create. In the context of startups, it’s your business or marketing plan, your customer lists and perhaps most importantly the code of your website, mobile app or software.
For most startups, especially in fields like tech, your IP is the most important asset. If you’re developing IP before formally registering a company, then you (personally) own that IP as an individual.
Now imagine that you have a CTO who worked on the code, but after 4 months left the startup. Unless you have an IP transfer agreement, or a founder’s agreement, in which it says that any IP created belongs to the startup or company, then that IP will belong to him and you’ll have to start from scratch. Usually registering a company goes along with a founder’s or shareholder’s agreement which protects the IP under the company.
2. Avoid Tax Events When Transferring Intellectual Property
Two important background notes to help you understand this next part: (a) a company is a separate legal entity to the entrepreneurs. This means that the company can make decisions, take out loans, enter agreements and get sued. (b) When you get a salary or something of financial value, the government taxes you. The same with companies. When a company gets money or something of value, it needs to pay tax on it.
As mentioned above, if you develop the IP before formally registering a company, you technically hold that IP as an individual. After incorporating (as a company) when you want to transfer that IP to the company (because no investors will invest if not), and assuming that IP is worth something, then the company may be taxed because it has received something of value.
It may not be taxed that same moment, but when you eventually sell the company or get large investments, the tax authorities will check and they’ll go all the way back to the transfer date. Conclusion: all assets / IP should be developed after registering a company (or as close as possible) -in which case the IP would belong to the company. on would directly belong to the company.
3. Avoid Personal Liability
Until you register a company, you are operating as an individual. This means that any liabilities, debts, or lawsuits are your personal responsibility, putting your personal assets at risk. One of the biggest advantages of forming a company is the limited liability protection it offers. When you register a company, your personal assets – like your home or savings- are typically shielded from business-related claims, reducing your risk exposure significantly. This legal protection can be invaluable, especially if your business involves financial risk or legal complexities. It’s important to note that the above protection does not apply to the following legal setups: Sole Proprietorship, General Partnership and Limited Partnership (for the non-limited partners).
4. Investors Prefer to Invest in a Company, Not an Individual
When it comes to securing outside funding, one of the first questions investors ask is whether you’re operating as a registered company. Most investors won’t invest directly in a person – they want to fund a company that has a formal structure, accountability, and legal protections. This isn’t a major issue (as it only takes a relatively short will to register a company) but just something to consider.
5. It Adds Credibility
Being officially registered can add an immediate boost to your credibility. You’re no longer just someone with an idea – you’re a legitimate business owner. For clients, vendors, and potential partners, this signals that you’re committed to the startup, and not just testing the waters. Registration also makes it easier to set up a business bank account.
Disadvantages of Registering a Company (Too Soon)
The only downside of registering too early are the related costs / expenses:
1. Registration + yearly fee: when registering you need to pay a registration fee. You then need to pay a yearly fee (each and every year). In the US the registration fee is a couple of hundred Dollars. In Israel it’s about 2,700 NIS and the yearly fee is about 1,600 NIS.
2. Startup Lawyer costs: although in most countries you could do the registration yourself (often online), this is often a mistake as the importance is in the small details which can have a big effect later on (with tax or legal aspects). That is why it is advised to use an attorney. The cost in the US ranges between $1,000 – $3,000. In Israel: between 2,000 – 3,500 NIS (not including the document for opening a bank account).
3. Ongoing Accounting and Reporting Costs: Once registered, a company needs to comply with yearly accounting, tax filings, and reporting obligations. This means you’ll likely need an accountant. These costs are often more than the registration costs: In the US: about $500 a month + $2500 for the yearly tax report. In Israel about 200 NIS per month + about 5,000 – 9,000 for the yearly report.
If you’re not yet generating revenue, these expenses could weigh heavily on your budget.
4. Dissolution Costs if the Startup Doesn’t Work Out: if things don’t go as planned, shutting down a company is more complicated and costly than simply stopping an unregistered business. In many countries, there are specific legal steps and fees involved in dissolving a registered company, which can make an already challenging decision even harder. For some founders, this potential cost might be a reason to delay registration until there’s more certainty (also called market validation). Costs of company dissolution in the US: $1,000 to $5,000. In Israel: 2,500 – 5,000 NIS.
So, When Should I Register a Company?
The answer largely depends on where you are with your business:
- You’ve begun developing IP (usually code/software) + you’re not alone = register.
- Some market validation + You’re looking for investments = get ready to register.
- Onboarding clients or partners + any risk that they might sue you or you might cause them damages = register.
- Potential liability due to your product or service = register.
- Idea stage OR early market research = wait.
Bottom line: the question “when should I register a company” is a strategic choice that depends on your business model, funding needs, and the level of risk you’re willing to take.
Feel free to contact us and we’ll be happy to help.
