

Going live with an alpha release before incorporating -- and not losing my house. - ivankirigin

In what situations is it reasonable to make a site live without
Incorporating my company? What if I'm taking money from users? What if I'm not taking money but am taking private data like email addresses?<p>I love the idea of pushing something out to users as soon as humanly possible, but I really don't like the idea of getting sued.
======
Locke
Is your website about spreading libelous rumors about rich people /
corporations? Are you putting up a webstore selling toys / food from China?

Seriously, IANAL, but lots of (unincorporated) websites collect email
addresses (right down to everyone's personal blogs). Lots of businesses
operate as sole proprietorships without problems... I may be stupid, but I
don't think limited liability protection for a startup is (usually) very
important. At least not in the early days.

~~~
run4yourlives
I'm with Locke here. What difference does it make? As long as you properly
declare your income, and aren't in a position that you're going to get sued,
you should be ok.

~~~
epi0Bauqu
How do you know you "aren't in a position that you're going to get sued?"

~~~
ivankirigin
Yah, the whole point is that living in this litigious society means anyone can
sue for anything. Losing a house doesn't necessarily mean you lost a
reasonable case.

It means you lose in trying to fight. Essentially, I'm trying to spend as
little on lawyers as possible.

~~~
epi0Bauqu
You don't have to spend anything on lawyers to create a legal entity with
liability protection. It really is simple and quick.

------
rfrey
There have been a number of comments about how effective incorporation is at
protecting you from suit, etc. They're all guesses: Sarbanes Oxley changes all
the rules, and the old rules concerning the corporate veil no longer apply.
(Anticipating an objection, no, SarbOx does _not_ apply solely to public
companies.)

The problem is that nobody knows exactly what the new rules are. There is no
case law yet surrounding SarbOx IT compliance that I'm aware of.

That doesn't really matter, though. nickb said that not incorporating is "just
dumb": if that's the case, there are an awful lot of really dumb entrepreneurs
out there, and really dumb business advisors, too. The cost of incorporation
is more than the couple of hundred bucks to file the paperwork: there's
ongoing compliance which costs both money and mindshare. It's probably not
worth it until you require the different tax regime or have a specific need
for the limited liability.

The bottom line is that you won't get sued until you have substantial revenue,
and then you'll get sued no matter what you do. Lawsuits follow the money.
Nobody is going to sue you to get your house because it would cost more in
legal fees than your house is worth. A website is different than a business
with a storefront, which has to deal with the possibility of personal injury
claims, and which invariably has an insurance policy to provide the honeypot
for suits.

~~~
epi0Bauqu
Can you give some specific examples how SarbOx "changes all the rules" for web
startups like those that people are generally making on this forum?

In other words, I think this is an extreme overstatement. For most situations
that people here will be concerned with, the case law regarding corporate
veils that has been developed over the past several hundred years will still
apply. And regardless, you still want to be protected as much as possible,
which results in the same advice of creating a legal entity with some sort of
liability protection.

Also, regarding getting sued. If you personally have a decent amount of money,
you are a target for frivolous lawsuits regardless of how well your business
is doing. And it doesn't cost that much to file a suit and fish for a
settlement.

Finally, regarding the fact that many people operate outside a corporate veil.
They most likely do it because it is the path of least resistance. This
doesn't make it right though. Like anything, it is a cost/benefit scenario.
Since the costs are so low, and the benefits are so high (protection from low
probability but high impact events), it just makes sense in many cases where
you are trying to build a big business, like most people on this forum.

~~~
rfrey
Can you give an example of web startups like those that people are generally
making on this forum that have been sued?

To answer your question: no I can't give an example. I don't think there are
any examples: that's why I said nobody knows the effect. My point is that
simple statements about limited liability might be correct, but might not be.

I agree that case law surrounding corporate liability has been developed over
hundreds of years. That's one reason why SarbOx is so widely reviled: it was a
reactionary, hasty rollback of much of that law. Problems are already emerging
and the provisos, exemptions, etc. are starting to be catalogued. Should keep
government lawyers and bureaucrats in steak and ice cream for years to come.

I totally disagree that most people choose sole proprietorship or partnership
because it is the path of least resistance (and by implication, because they
are simpletons). I think they do it because it is the best choice for their
business.

I didn't mean to make extreme statements: quite the opposite, what I meant to
say was the incorporation is complex and highly dependent on individual
circumstances, and blanket rules are unhelpful. That seems to me to be pretty
middle path, although all extremists believe they are middle path, I suppose.

I stand by what I said about getting sued. I know a couple of lawyers who do
not carry liability insurance on their side business for just this reason. If
you are worth several millions, you are worth suing, otherwise, not. Any suits
against a website are likely to be class action suits, so you would have to be
personally worth tens of millions at least to make it worth a lawyer's time.

~~~
epi0Bauqu
I was not implying that anyone was a simpleton. And I was not talking about
the millions of sole proprietors out there that operate small businesses out
of their homes for their neighbors. I was talking about the situation posed in
the post, i.e. a Web site available to the whole world where personal
information will be collected by users and shared with other users. In that
case, I think it makes sense to get legal entity protection and protect your
personal assets.

I also don't think at all that "any suits against a website are likely to be
class action suits." Those are just the suits you hear about. Individuals can
sue for almost anything and do. Most of these suits will likely be frivolous.
But just to deal with them takes time and money. It adds much more stress if
you are also personally named and liable because you don't have a corporate
veil behind you. Any trial lawyer will tell you that even if you have a rock
solid case, i.e. the case against you is completely frivolous, there is still
a non-negligible probability you will lose.

And now that I reflect further, I still think the best advice is to at least
become an LLC, even for all those small sole proprietors out there. It is just
so quick and simple to set up. And if you have any kind of assets, e.g. a
house, it just isn't worth the risk. One disgruntled customer with lots of
time can cause you a lot of damage. And in the case where you have a really
small business that just got started, you don't want to have the possibility
for it to sink all your personal assets. If it really did cost thousands and
took lots of time to set up, I think the balance would be different. But it
just doesn't. You can do the whole thing in under an hour. Given that, I just
don't see how it "is the best choice for their business." They spend more time
and money on car, health, and home insurance. Why stop there?

I guess we'll just have to agree to disagree :)

------
tuukkah
"Don't incorporate, though, if you can avoid it. We're less likely to accept
groups that are already incorporated, because it costs so much more to deal
with existing documents than to start from scratch."
<http://ycombinator.com/faq.html>

~~~
davidw
Presumably he's part of the 99.9% of companies out there who aren't lucky
enough to have YC as an option.

~~~
ivankirigin
We definitely have the option to do YC. Our application is in.

This faq is certainly a reason for making this post and asking, as our release
would come before the winter session starts and maybe before Oct. 11th, when
application results come out.

Is seems the consensus is to incorporate in some fashion just out of basic
prudence before a release. So the question for PG and folks at YC is "you'd
rather we no incorporate, but I think we need to, how should we do it?"

Another thread mentioned opening the "standard" papers YC uses -- and PG
mentioned the problem in papers that might be wrong or have holes for
companies. I'd like to hear about any progress on that front.

~~~
rms
If you need to incorporate, YC won't hold it against you. It's less risky for
them to invest in companies with customers anyways.

But make sure you do it as a Delaware Class C Corporation, because otherwise
YC will want you to convert and that's much more expensive than than doing it
from a scratch. So don't incorporate as an LLC from your state, even if it
might be cheaper.

------
rzwitserloot
Just incorporate. Over here in europe you need 18k in the bank and it costs at
least 1200 dollars in notary fees, and most people still do so. (Or
alternatively you could get an english limited but this makes further legalese
difficult as you need to conform to two different nation's laws).

The biggest problem, as I understand it (at least over here) is that changing
from non-incorporated to incorporated AFTER your company has built up
significant value is a complete pain in the arse.

------
nickb
Not incorporating is just dumb. Just get at least a basic LLC.

~~~
extantproject
I second that.

------
chaostheory
hmmm I could be wrong because I'm not a lawyer (so you have to check this with
a real lawyer), but I heard that even if you incorporate you're still somewhat
liable as long as you're not a passive investor.

For example, if you (yourself) accidently release all of your users'
confidential data to the public; you're liable for the damages that stem from
it

~~~
epi0Bauqu
Sorry, but you are generally wrong. What I think you are talking about is
called piercing the corporate veil:
<http://en.wikipedia.org/wiki/Piercing_the_corporate_veil>

Under almost all regular circumstances, including the example you mention, you
most likely wouldn't be held personally liable. You have to do something
grossly negligent or something clearly in bad faith. An example would be
committing fraud.

~~~
chaostheory
isn't that what I said?

------
mikesabat
I wouldn't sweat the liability oo much either, but why not just incorporate.
In most states it costs $150.

~~~
epi0Bauqu
Agreed. Quite simply, why take the risk? It is such a low cost, and you get
protected from liability arising from all sorts of low probability but high
impact events, some of which you probably haven't even thought of.

~~~
drusenko
cost is a hell of a lot more than $150... unless you're planning on
incorporating something that will end up providing no protection in court,
anyway, and will hurt you big time if you end up going big.

~~~
epi0Bauqu
This is just not true. Suppose you file the basic incorporation documents
provided by your state and you are the sole shareholder. How exactly will that
provide you with "no protection in court" or "hurt you big time if you end up
going big?"

~~~
davidw
You have to do some other things, like open up a bank account, and make sure
company things are separate from personal things. But there are books
(nolo.com has some for instance) that explain the steps necessary.

I guess it's all about risks/rewards - I don't have a lot of assets to begin
with, I'm not sure the company will go anywhere, so why blow thousands of
dollars on expensive lawyers? Better to learn the details of the process
myself. So I created an LLC in Oregon.

On the other hand, if you're already wealthy, and want to create some kind of
music sharing site... well, maybe some good lawyers are worth the money.

------
goofygrin
What about something like an umbrella policy? Would that cover a sole
proprietership (sp)?

~~~
epi0Bauqu
Generally umbrella policies do not cover businesses of any kind. They are more
for personal injury protection and intended to be an "umbrella" over your home
and car insurance policies.

