Lesson: Incorporating You Venture with Augie Rakow

Step #2 Protections: Why you need to incorporate

Why do people do it? Why would a tech entrepreneur do that? There really are a few different reasons. One reason is it's easier to pool capital. It's easier to bring money in and pool capital for purpose of the venture.

Another reason to do it is it's easier to divide up control of the venture. If you just say, "I want to sell muffins. I want to build a big muffin empire. I want to do that. Give me some money and if I make any money, I'll give you a bit of it." And you keep it just on a handshake like that. It's very hard to regulate that and if you get lots of people involved, it's very hard to make that and do that efficiently and for everyone to know what their rights are. It's hard for someone who's living in India to go online and buy shares in your business if there is no kind of structure to their ownership of the business if it's just through a handshake or e-mail. So corporations are developed to chunk and divide up ownership in a rigorous and logical manner, so the rights and control and rights to benefit from the operation are regulated in a predictable way. That's the second reason.

So pooling capital, modulate control of the business and the third reason, and this is really probably one of the most important, well, these three are the most important. When running a business you expose yourself to liability, right? You enter into a contract to lease a building, and then your business does not generate enough money and you can't pay the lease. Or you offer to hire someone and you recruit them to come fly out to New York and join your company. You've made this offer to them and they come out, but it's not a good fit. And you fire them and they're pissed and they sue you. You're exposed to liability. What a corporation does is that it creates a buffer of liability so that you personally are not liable. This corporation is liable. So it creates what we call "limited liability."

So pooling capital, regulating control and ownership, and creating limited liability, those are three main reasons why people incorporate.