Due to the pandemic, new trends and opportunities resulting from the shift in consumer behaviour have been observed within the startup industry, encouraging more aspiring entrepreneurs to take the first step towards achieving their goals. As such, the global startup and SME scene is currently witnessing a phenomenon called the startup boom. However, with 90% of startups failing largely due to the lack of risk considerations resulting in hasty decision-making, it is especially crucial for startups and SMEs to conduct the necessary due diligence before making important decisions.
One of the first crucial decisions startups and SMEs face with is the decision of company incorporation or company registration. Company incorporation is the process by which a company is recognized by the law where it holds a separate legal entity on its own.
For SMEs and startups who are usually limited on financial resources, incorporating at the right time is critical to avoid financial loss.
For instance, if a company were to be incorporated too early without having a sustainable or well-planned business model to drive revenue, it might suffer from a negative net flow where they pay fees for incorporation much earlier than needed.
However, when a company incorporates too late, it may risk losing unique features such as its name, intellectual properties, and some of its assets. Hence, this blog article will help SMEs and startups understand if they should incorporate their business.
According to Harvard Business School professor, Noam Wasserman, disputes between co-founders cause the downfall of 65% of startups. The absence of the need to strictly follow previous agreements often leads to disagreements where one founder breaks promise or holds a different interest in the company.
The registration of a company will reduce occurrences of such disputes as it requires a legal document, otherwise known as the article of association or a constitution, to be submitted. Within the legal document, the rules and regulations for the governance of the company, and the rights and responsibilities of key personnel within the company are established. As such, SMEs or startups with more founders are legally obligated to comply with the agreed regulations, reducing disputes amongst founders.
For a smoother and quicker incorporation process, companies should conduct the necessary due diligence on the documents required. Though the required documents depend on the requirements of the relevant authorities in the respective countries, there are a few considerations that are common across nations that companies should consider.
This includes choosing and registering for a company name, establishing the key personnel involved in the company – director and secretary, having a registered office address in the respective country, preparing a set of constitution documents with the rules and regulations clearly stated, and having shareholders and share capitals.
A common practice amongst incorporated SMEs and startups to curb the challenge of having limited financial and technical resources is the distribution of sweat equity to its employees. Sweat equity refers to the non-monetary investment that employees or individuals receive as compensation for their contributions to the company. The provision of sweat equity would help newly incorporated companies save costs, attract new talent and skills, or use it as an incentive to motivate their employees to work harder.
However, the issuance of equity, or sweat equity, to employees or any individual can only occur after company incorporation. Company registration can be the solution for SMEs or startups looking to provide sweat equity to their employees due to their limited financial resources.
To distinguish their company from competitors in the market, companies often own unique intangible assets – intellectual property. The protection of a company’s IP is especially crucial as it prevents individuals or business partners from using the business idea to drive revenue for themselves. Disputes on ownership of intellectual property are highly prevalent in the industry and are not subjected to the size of the company. For instance, the famous legal fight between Apple and Samsung over the ownership of smartphone patents lasted for seven years!
Especially for SMEs and startups, legal battles over the ownership of intellectual property should be avoided to reduce financial losses incurred from the time-consuming court case. By incorporating the company, the intellectual property would be protected whereby any modifications, improvements, or usage of the IP would belong solely to the company.
Opening a business often comes with a huge responsibility and liability, especially for them running as sole proprietorships or partnerships. In an unfortunate situation where a declaration of bankruptcy is needed, the sole proprietor is legally liable and would have to file for personal bankruptcy instead of business bankruptcy. That is, the individual would lose his personal assets in order to pay off the debts incurred by the business.
Company incorporation establishes a legal distinction between an individual and the business, recognizing both as separate entities. Likewise, when bankruptcy happens, the individual is not personally liable for business debts, and personal assets will be well-protected.
Company incorporation is often a tedious and lengthy process with many legal documents and regulations to follow. SMEs and startups often face the challenge of ensuring a smooth incorporation process due to the lack of a well-knowledge expert to aid in the process. Businesses often face rejections for incorporation or a large amount of money wasted on re-applying for incorporation again.
Hence, seeking an external corporate service provider to aid in the incorporation process would ensure businesses face a smooth and efficient incorporation process. This is where PikoHANA, a corporate service provider, steps in to provide SMEs and businesses with the help they need to quickly and effectively register their company.
Find out more about how PikoHANA can help your business here today!
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