- Once a business is incorporated, is the liability protection retroactive?
- Are you protected against business liabilities that arise from pre-incorporation decisions?
- Is the state fee prorated if you incorporate later in the year?
When is the best time to incorporate a business? If money has already been spent before incorporation, should it be split evenly later on?
In business, you can be sued when you are making money and you can be sued when you are losing money. You get the picture. It’s good to have a liability shield to help protect your personal assets from business liabilities, which is the main reason to incorporate or form an LLC.
Generally speaking, the sooner you incorporate, the better. The liability shield is not created until the company is incorporated. You may have what is called “promoter” liability (personal liability) for pre-incorporation obligations, even if those are ratified by the subsequently incorporated entity.
With that said, end of the year incorporating is another issue. Should you incorporate before or after December 31? If you are about to incorporate and have not done anything to date, it may be better to wait until January 1, to avoid one year of annual maintenance fees from the state of incorporation (which are not prorated). So for example, with a Delaware LLC you can save $300, which would be due June 1, 2016 if you incorporate in 2015. Alternately, if you wait until 2016, this $300 fee would not be due until June 1, 2017.
Some pre-incorporation costs may be reimbursed and deducted by the business. You should check with your tax advisor.