

On Incorporation - Hold Off Until You Have The Cash To Spare - sachinag
http://blog.meatinthesky.com/on-incorporation-i-still-say-hold-off-until-y

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grellas
As a lawyer, I try above all to work with clients in flexible ways. _Every_
lawyer should do this and many do. A client should never feel that coming to a
lawyer is something at all costs to be avoided unless and until he is prepared
to pay in blood.

Now this is a thoughtful piece and I am not saying that this is the tenor of
the argument.

But all or nothing is not the way to approach your company formation legal
issues.

First, _as early on as possible_ , you should meet with a good lawyer in the
startup field to get a _strategic perspective_ on the legal issues. What are
the legal goals you need to accomplish? How do you best go about them? What
are the likely costs of different ways of going about the process? Is there a
fixed-fee package that make sense for your goals? This type of initial meeting
might be introductory and general (and free) or might get into all the
specifics of your case (in which it would likely cost you something, but not
much).

If you are a sole founder, do the quickie incorporation and be done with it,
as soon as possible. In that situation, it is not an issue of "doing it right"
because you can pretty much stumble along blind and still get it basically
right for the simple legal issues involved.

If you are part of a founding team, and need to impose vesting on founder
stock, file 83(b) elections, capture IP via assignment agreements, set up
equity incentives for key people, etc., then do not wait to shop this around
to knowledgeable law firms. If what you hear is rigid and expensive, then
perhaps you should wait but doing so carries its own risks. I think what you
will find, though, is that you can get a knowledgeable lawyer to do this sort
of more sophisticated package on reasonable terms, sometimes as low as $2K or
$3K for legal fees if the founding team is reasonably sophisticated and does
not need a lot of hand-holding.

If you shop it around and don't get the right quotes, then you can make a
conscious decision to say, "I know I might need this but I will take the risks
and wait in order to stretch my dollars." If you have gotten a strategic
perspective from an initial meeting, and done the shopping, then you will make
such a decision based on a careful analysis of the issues involved, giving
each of the trade-offs their due weight.

Perhaps this is all another way of saying just what the author does ("hold off
until you have the cash to spare") but perhaps you really do have the cash
earlier rather than later if, by following these simple steps, you discover it
really is not such an expensive process to "do it right" for your
circumstances right up front.

~~~
sachinag
As the author, this is sufficiently similar to my argument that I'd say we
agree, mostly. At the very least, _please_ shop your incorporation business
and get bids. However, I still don't think the corporate veil you get as a
sole founder in a quickie incorporation is worth the cash.

Doing a quickie LLC then fixing the quickie incorporation later (doing the
merger transaction and dissolution of the quickie LLC) can often be more
expensive than just waiting to do a C corporation the right way.

~~~
starkfist
_Doing a quickie LLC then fixing the quickie incorporation later (doing the
merger transaction and dissolution of the quickie LLC) can often be more
expensive than just waiting to do a C corporation the right way._

It would be interesting to learn these actual costs from a lawyer, or someone
who has gone through this process. I've worked at 4 different startups that
changed from an LLC to a C corp. I wasn't privy to those costs, but I don't
remember anyone being too worried about them.

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jdietrich
I don't know what the situation is in the US, but here in the UK incorporation
is so utterly trivial to do and offers such benefit that it is something of a
no-brainer for any venture which has even the smallest risk of unexpected
liabilities. Although you can spend hundreds of pounds on incorporation, you
can just as easily do it for 25 quid.

The side benefits of incorporation can be significant. Many component
manufacturers provide more resources to registered companies. Access to
distributors and lines of credit is far better. Many potential customers won't
even talk to you if you're not a registered company.

Maybe the OP needs a better lawyer, maybe the US needs better law, I don't
know.

~~~
graham-miln
To provide an idea of just how easy it is to incorporate a limited liability
company (Limited / co.uk) under English and Welsh law, visit Companies House:

[http://www.companieshouse.gov.uk/infoAndGuide/companyRegistr...](http://www.companieshouse.gov.uk/infoAndGuide/companyRegistration.shtml)

<http://www.companieshouse.gov.uk/>

Impressively, they even offer same day incorporation.

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ryanhuff
The authors arguments simply don't hold water IMO. He notes how incorporating
became expensive due to an unexpected need to offer a stock purchase plan. Is
he saying that incorporating forced him to offer an options plan? Its my
understanding that such programs are entirely optional.

His point about finding an expensive lawyer to "build a relationship" for
making introductions is equally puzzling. He might have found that such lawyer
wasn't worth the investment, but that's not a reason for a startup to not
incorporate.

For me, liability protection is extremely valuable. If you have no assets,
perhaps the liability protection isn't worth it.

~~~
brianobush
IMHO, his main point was incorporate after you are dealing with someone else's
money. I would wait till the moment I have someone willing to pay me for my
product/service. Until that point, it just gets in the way.

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jsiarto
I don't agree with this. It is vital to have legal separation between your
company and yourself--whether that be in the form of an S/C Corp or a Limited
Liability Company. I just incorporated in Illinois and it cost me about $400
through LegalZoom. They took care of everything and all the rest was handled
through my accountant for another $200. That amount is trivial given the
structure and protection I now have with an S Corp.

As far as the stock option package--they messed up and shouldn't have formed
an S Corp. S (Small Business) Corps are pass-though just like LLC's--the
shareholders pay personal taxes on the profits of the company. They also only
allow you to distribute one class of stock, making employee stock options hard
to do.

The author's lawyer/accountant should have told them that, but I still can't
see how all that came out to a $40K mistake. Word of advice: do your research.
As a business owner/CEO, ignorance is not an excuse--do you're homework and
ask the right questions.

~~~
grellas
You _can_ have a sophisticated stock option plan with an S corp.

My classic case was when I had a founder come back to me after exiting his
prior company $3B richer than he started and then used tens of millions of his
own money to found and fund one of the most elaborate S corps I have ever
dealt with. He wanted the S status to be able to pass the early-stage losses
through as set-offs against other income.

There were about 100 employees, many of whom were not U.S. citizens or
permanent resident aliens and virtually all of them got stock options.

However, since the options do not technically constitute a "second class of
stock" (an S corp killer if they do) and since the plan and the stock option
agreements conditioned the exercise of the options on the company's first
having abandoned its S status (another S corp killer is to have a foreign
national as a shareholder), the plan and the whole incentive scheme worked.

This was a more complex setup than usual but _not_ $6K worth of complexity.
What it primarily required was a good working knowledge of S corps and of
equity incentive plans and how to properly mix the two to achieve the client's
aims.

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tptacek
Sachin, I don't get it. It costs almost nothing to create an LLC. Do it, and
now you can't lose your house over hosting fees. Later on, when you want to
form a relationship with a lawyer, spend money on an S-Corp or a C-Corp.

~~~
_delirium
I'm not sure I'd consider it "almost nothing"; if your startup budget is $10k
and ramen, it's a noticeable chunk of that. In California, it's $800 _per
year_ to keep an LLC incorporated, plus an extra $200 or so the first year in
fees. In NYC, it's $1500 or so to set up an LLC. Some states are cheaper,
though (Texas is a one-time $300).

~~~
jsiarto
This is the cost of starting up a business. It's not a Wordpress Blog--it's a
business and it's gonna cost money. If you can't stomach $1000/year in filing
fees you either need to find a business that will earn some revenue in the
first year or move on to greener pastures.

~~~
_delirium
Or, you could just not pay those fees, and operate as a sole proprietor
initially. If you don't have large savings, there's not really much risk; if
you lose your $10k, declare bankruptcy and start over.

~~~
tptacek
Start over with a new company with a personal bankruptcy in your credit
history?

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brm
To be clear Sachin is not talking about setting up an LLC or an S Corp. He's
talking about setting up a C Corp, probably in Delaware, for a start-up where
your immediate intention is to go out and raise funding.

Service businesses don't apply and neither do bootstrapped web apps. If you're
doing one of those go ahead and form your legalzoom llc or s-corp and get the
worry out of your mind.

There's a reason YC and others want you to wait and its because untangling the
mess that self-incorporation can create is a needless and sometimes expensive
time sink when preparing you for investors who are used to dealing with this
specific case.

I'm not sure Sachin's part about needing a good lawyer for introductions is
important but the part about doing incorporation for a C Corp raising money
correctly is a proper point.

~~~
jsiarto
But a $40,000 mistake? I can't wrap my head around that number. With a little
forethought and a few days research you could have been ready with those kinds
of questions before meeting with a lawyer or an accountant. Especially when
your intention was to seek funding.

~~~
brm
No I doubt its normally a 40k mistake but he didn't elaborate... he said it
cost the business 40k, he didn't say they paid out 40k.

Both Sachin and his detractors are speaking in overly broad terms here.
Sachin's getting hammered though because he's taking one case and
extrapolating general advice from it. Some of the points against his argument
are fair and some arent.

The confusion here might also have something to do with the blurred semantic
differences that are occurring these days between traditional business and
start-up

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zaidf
Seems more like you hit _one_ extreme of shelling out too much money up front
and now are advocating the other extreme.

My philosophy: hold off till you get your first customer contract OR take on
some genuine liability(ie. DMCA).

How I'm handling it... 1\. I incorporated my startup after getting the
contract. It cost me $180 bucks. 2\. I told my good lawyer friend who was
after me to go through him that it would make more sense to consider him after
we raked in more contract over the next few months. 3\. I have not gotten a
bank account yet. I'll do so soon as I get the first check(off the contract).
4\. I do have a potential cofounder I'm thinking of bringing on board. I am
unsure how to go about his paperwork. In initial stages, we'll probably just
make a simple specific written agreement along with a set milestone by when
we'll officially redo the paperwork.

In general, I like to let revenue/liability/funding dictate any lawyer work.

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wglb
Wow: _he was unfamiliar with how an option plan should be structured for an
S-Corp and ended up having to do substantial research_ sounds like a lawyer
unfamiliar with some stuff that I would expect to be basic. As ever, read what
grellas says, and his $2k o $3k is what I as a consumer of such services have
come to expect.

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rwhitman
I agree with this. I incorporated a business that I really didn't need to and
it just ended up costing me a ton of cash I could have used, and added on
countless little complications to my life which I'm still trying to untie from
after having dissolved it.

If you're not dealing with other people's money (investors), and you aren't
running a business that is raking in solid revenue yet or not in a really
vulnerable position legally, its just not worth it...

~~~
ryanhuff
While I see your point, if your business gets sued, you personally could be
far worse off than the cost of incorporating.

~~~
natch
Wouldn't a personal umbrella policy cover this, for a sole proprietorship?

~~~
jsiarto
It might cover you financially--to an extent. But they'd still be suing you,
personally and not your company. As an owner/partner in a corp or LLC you have
full legal separation from your company (so long as you are running it
legally) and can't personally be held liable.

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jmtame
deleware c-corp through incorporate.com = $250. includes an EIN and a bunch of
other stuff that i probably don't even need.

i've built dozens of projects, but have only incorporated 3 times. the only
criteria i personally use: if i'm serious enough to where i may want some
extra help in exchange for 'common' (or 'preferred' to invest) or feel there's
a risk of getting sued.

