Startup Formation — How to form your company?


For most startups, it is important that you form a legal entity as soon as possible. Operating your business through a legal entity helps to avoid any personal legal liability for business debts and liabilities. Without forming a legal entity, your default status is that of Sole Proprietorship (if you own and operate a business by yourself) or a General Partnership (if you own and operate your business with one or more individuals). In either case, you would have unlimited personal liability for the obligations of the business.

In addition, setting up the entity properly and as soon as possible helps avoid future disputes over IP and equity ownership. It is not unusual for individuals who are involved in the early ideation phase of a business to drop out or be pushed out of the business. If you haven’t set up a legal entity, transferred the relevant IP to the entity and issued the founders stock, you face a significant risk of future disputes as well as a significant risk that a potential investor may be scared off from making an investment.

If you liked this article, check out my book that covers all aspects of the entrepreneurial journey.