
Incorporate your startup only when you’re forced to - Adrock
http://joel.is/post/32520533327/incorporate-your-startup-only-when-youre-forced-to
======
tptacek
Counterpoint: <http://news.ycombinator.com/item?id=1725008>

_Read that whole thread carefully_ before you decide whether or not you're
willing to spend ~$150, the equivalent of a month's Starbucks habit, to do
business as an LLC with contract liability protection. That thread is a
perfectly ordinary situation that business founders routinely find themselves
in.

If you're not going to be entering into contracts and you're not going to be
conducting business transactions as a vendor to other businesses and you're
not going to be employing people, I don't have a strong opinion about whether
you incorporate. On the other hand, those are pretty important things for a
business to do.

To that, I will only add that the meme that incorporation harms your chances
of being funded is, in a word, horseshit. If your corp structure is simple, as
with a Delaware or home state LLC, and your ownership structure is simple,
then the cost of converting it to a C Corp is a small constant factor added to
the cost of incorporating as a C Corp to begin with. If your structure _isn't_
simple, you clearly didn't have a choice between incorporating or not. There
are corporate structures that make it very annoying to get back to the "clean
slate" investors want you to be at, and my gut is that this is the concern
animating things like "don't incorporate if you don't have to". If your
company is amazing, people will invest even if some crazy guy in the woods
claims to own 90% of it; if it's not amazing, an LLC isn't going to push you
off the bubble.

Corollary: if you don't know the difference between a C Corp and an LLC, then
your default position should be "get an LLC ASAP", because you don't know
enough to be making this decision based on some dude's blog post.

 _Late edit: I went and looked for LLC- >C conversion costs and found a Quora
post from a startup lawyer suggesting ~$1000, and, as I expected, that the
costs mostly involve working around the need for unanimous consent from all
the members of the LLC, which in small new LLCs where all the members are
still active, unanimous consent isn't a big deal._

~~~
georgemcbay
"Read that whole thread carefully before you decide whether or not you're
willing to spend ~$150, the equivalent of a month's Starbucks habit, to do
business as an LLC with contract liability protection."

YMMV on the $150. In California that covers the upfront costs for setting up
an LLC, but be aware that one year later (and each year after that until you
dissolve the LLC) you will receive a tax bill from the state of $800,
regardless of whether or not your LLC made a penny.

~~~
tisme
$150 or $1000 might be enough to swing the decision about where to incorporate
for some instances but for most that is a rounding error. And anyway, all
expenses that you are going to have should be part of your businessplan when
you're at the go/no go stage. If $800 scares you then you're not doing
business.

~~~
georgemcbay
I don't disagree that the difference between $150 and $1000 isn't a huge deal
for any serious venture, but the topic of this conversation covers a wide
range of possible levels of seriousness and some people suggest always
incorporating even for goofing-around projects but those people never go into
the fact that incorporating in some states will cost you some serious dough in
minimum yearly taxes.

------
tisme
That's advice that is applicable only to a limited subset of the startup
class, the ones without a product and without cashflow.

If you're going to do b2b you'll never be forced, it's just that nobody will
be doing business with you and your circle of friends.

VC's and angels don't like it when you incorporate early because that means
that you've probably done a whole bunch of homework already and thus are a
tougher negotiator.

Not incorporating when running a company is a great way to get into a lot of
trouble. Fixing a bad incorporation at a later state is costly (but it can be
done).

As soon as you start dealing with money and responsibilities to outsiders you
should incorporate.

~~~
jdh
Just FYI us VCs aren't sitting around just hoping some rube will come by who
is not incorporated so we know we can take advantage of him in a negotiation.

Our model isn't leveraged around finding naive people to take advantage of. No
price is cheap enough for a bad team or deal...

~~~
tisme
Not all VCs are equal, and I apologise for lumping in the good with the bad.
But there are plenty of examples of venture capitalists (and angels too)
taking advantage of inexperienced entrepreneurs. And in that case it helps a
lot if you get to write the contract.

------
fourply
This is just flatly bad advice. Entity selection and the decisions that come
with it should be made very early in the process or it can have very negative
unforeseen consequences down the road.

Education and clarity is important in any new business venture, especially one
that involves multiple parties. If nothing else, a good buy-sell agreement is
crucial in avoiding misunderstanding and back blood if one party wants out.

Liability protection is also hugely important. What startup doesn't need a
bank account? Separation of entity an personal assets and liability is a big
deal and should be meticulously maintained and documented from inception. This
discipline is hard to pick up late in the game, and there's no reason for it.

Also, if your attorney is recommending a C corp as your best choice of entity,
you either have a very unusual situation or a bad attorney.

------
DenisM
Also, do not take your legal advice from a random blog.

Talk to a lawyer. Many have open office hours or offer first hour for free.
There is nothing to lose and everything to gain.

~~~
tptacek
This is usually good advice but it can be tricky with incorporation. Company
founders meeting a lawyer for the first time over incorporation issues often
find themselves convinced to pay thousands of dollars to establish a C
Corporation structure. Most new startups _do not_ want C Corps; at least, not
until they have investors and thus multiple share classes.

You can get an LLC from Delaware almost as easily as taking a ticket at a
butcher shop. It's a commodity product. That cheap-o Delaware LLC isn't a
miracle cure for investment or employee equity or vesting issues, but it
solves the core problem that incorporation is meant to solve: making it
absolutely clear to your external business partners that they are dealing with
a _company_ , and not with someone and their home mortgage.

~~~
Silhouette
_Company founders meeting a lawyer for the first time over incorporation
issues often find themselves convinced to pay thousands of dollars to
establish a C Corporation structure. Most new startups do not want C Corps; at
least, not until they have investors and thus multiple share classes._

If that is true, then surely the problem there isn't that the founders took
legal advice, it's that they took advice from a bad lawyer?

I'm not an expert on US matters but familiar with the UK, and over here if
you're getting someone to set up a new legal entity for your business, it will
probably be an accountant rather than a lawyer. An accountant might therefore
be better placed to advise on options for business structure in the early
days, or you could join one of the specialist small business support
organisations (FSB, PCG, etc.) and start by reading their standard guidance
before you take formal advice from whoever else might be relevant.

~~~
tptacek
I feel like our accountant also had more input on our company structure than
our lawyer.

I don't think it's a "good lawyer"/"bad lawyer" issue. I think that lawyers
are paid to cover all the bases, and most of those bases don't need covering
in the first 9 months of a tech company's life.

~~~
Silhouette
_I think that lawyers are paid to cover all the bases, and most of those bases
don't need covering in the first 9 months of a tech company's life._

Interesting perspective. To me, a major benefit of consulting a lawyer is
often that they _can_ give me an informed opinion of when I need to care about
which legal matters. Put another way, I'd say a lawyer who is covering all the
bases even when some of them don't need covering now and missing them out
won't create serious problems for later probably is a bad lawyer.

~~~
DenisM
My experience with several lawyers matches tptacek's, I've never seen any
other kind of lawyer.

I think it's something about their professional ethics as they see it - do
everything possible to protect the client, and only pull back when the client
makes it clear that business needs overrides legal concerns. Lots of people
don't realize that, and that's how some companies, or some part of companies,
end up being effectively ran by lawyers.

~~~
Silhouette
Interesting. Maybe it's a cultural difference?

The first time I consulted a law firm properly about setting up contracts for
a new company, almost the first thing they said was that they could probably
charge me tens of thousands to cover everything they could imagine, but in
practice they recommended that I put together a basic contract that covered
the essentials and leave the rest until there was enough value in the business
and enough danger of losing it to take further steps. I don't think any
lawyers I've spoken to since have contradicted that advice, either.

On the other hand, I'm in the UK, and our legal system has rather different
foundations in some respects, particularly when it comes to being hostile
toward fishing expeditions. If the real US business climate is half as
litigious as it's reputed to be on this side of the pond, maybe you _need_
lawyers who will default to covering everything from day one.

------
yumraj
IANAL: But from what I've heard and figured out, one should at least do an LLC
to avoid personal liability, otherwise if some nut decides to sue you, you can
even lose your personal assets.

~~~
genwin
And you can be sued by a nut on day one, for any reason. I've read that if an
LLC has only one member, judges are free to ignore the "limited liability"
part. It might be necessary to incorporate.

~~~
tptacek
I don't think this is true, at least in the broad sense you've suggested here.
There are lawyers on HN that will correct me when I say this:

There _are_ , in many states, special-case rules for "single member" LLCs.
There are also special rules in places for single-shareholder corporations.
Those special-case rules largely impact the manner in which equity in the
company is handled when resolving debts.

Meanwhile: there is a very widespread misunderstanding of how liability
protection in corporations of all sorts work. The protection you get from a
Corp/LLC is from _contract liability_ : third parties cannot attach themselves
to the assets of company owners to settle debts. But liability shields afford
no protection against torts, including contracts entered in bad faith. If you
own a company and the company enters into fraudulent contracts, you can still
lose your house in the ensuing legal drama.

~~~
wooster
Great response.

I'd add that it's worth Googling for "piercing corporate veil LLC", as well.

~~~
tptacek
This search will also quickly teach you not to use your company's bank account
to buy your groceries or pay your rent; mixing finances is a no-no.

The general rule of thumb seems to be: courts want to be sure that the
corporation you're operating is bona fide; that is, they want to know that
you're not simply using a corporate structure to conduct shady personal
business.

This doesn't have much of anything to do with whether you're a SMLLC or not
(except to the extent that having multiple members makes it harder to use the
LLC as a personal piggy bank).

------
juddlyon
While your at it, don't buy insurance, wear a seatbelt, or back up your files.
Most likely nothing bad will happen if you consider the odds.

------
bengi
This is Lean Startup taken to an impractical extreme. I know, I know, those
two hours you spend on LegalZoom filing as a Delaware C are hours you're not
spending outside the building talking to customers blah blah blah, but not
everything that doesn't involve "learning" is waste.

------
herval
That's a bad piece of advice if you have partners. It's the fastest way of
getting screwed by an ill-intentioned one, or getting your IP stolen, or worse
(At least in a few countries I know the laws - not entirely sure about the US)

~~~
tptacek
If you have partners, get vesting taken care of immediately. Don't do business
with partners that won't agree to vest.

You can set up a vesting (or equivalent buyback) structure with an LLC, but it
might not be "LegalZoom-easy".

The longer you wait on vesting, the harder it is to get it set up. Don't wait.

------
mrschwabe
Just as important, perhaps even a more noteworthy first step for up & coming
startups is to establish a separate bank account!

It's true, no need to rush into incorporation. But there should be an urgency
to setup a separate bank account (any kind of account, a savings would do) so
you can make your bookkeeping simple. The money you spend on your startup as a
sole proprietor can be tax deductable. And besides that, its a good practice
to show potential investors or lenders exactly how much you have invested
yourself. Having one account where you can pull that data makes these kinds of
bookkeeping/accounting tasks incredibly easy.

For credit card transactions, try to get a new card just for the startup - or
even use an existing card but make sure to dedicate that card exlusively to
the startup so months and god forbid, years later, you're not having to go
line-by-line through stacks of statements picking & deciphering what was
business and what was personal (not fun).

------
tylermenezes
You need to incorporate if you want to release on the app store under a name
that's not that of one of your co-founders. So that's about half of the
companies.

------
janezhu
An LLC also helps if you're planning on releasing an iOS app under your
startup's name, not your personal name.

------
SwaroopH
Joel, good points but I would advise going with at least an LLC/LLP when more
than one founder. Makes things more official and easier to do business
(payment gateways, etc). Also, it takes around $100 and 5 minutes on an online
form to set it up. Easy!

~~~
danshapiro
Incorporating as an LLC makes it harder and more expensive to do properly
later as a C-corp. I believe it can add >10k to the total costs vs. doing a
C-corp from the start.

~~~
tptacek
Living an extra mile away from your lawyer also makes it harder and more
expensive to do business, because you'll pay extra for gasoline.

The question is, "how much more expensive", and the answer W.R.T. plain-
vanilla LLCs where the transition to C-Corporation is uncontested by all the
members and all the members are still active is, "not very".

I'm sure you can easily rack up more than $10k in conversion costs if you let
things get complicated, but I'd like a cost breakdown or even just a citation
to a source for the idea that LLCs add $10k to C-Corp costs in the common
case.

------
dools
I've even employed full time staff as a sole trader in Australia and never
found it a hindrance in getting work. My accountant always told me to avoid
incoporation until I was consistently _netting_ over $100k because having a
company is such a headache. So I'd tend to agree with the OP but I'd also say
get a few professional opinions and especially make sure they're relevant to
your country of operation!

~~~
tptacek
I have no idea why Australia would be this warped, but that is _ludicrous_
advice in the US. If you're _grossing_ over $100k, your liability exposure has
doubtless scaled with your receivables. Businesses routinely experience abrupt
downturns. For the sake of less than 0.1% of revenues, you'd have that
exposure attach to your house? Insane.

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aoprisan
If you want to offer paying plans for your startup, it's better to incorporate
and open a separate bank account for the business. The same goes for business
expenses, it's better to incorporate to open a bank account and have all those
expenses on the company bank account vs. your own personal checking account,
for tax purposes.

------
omegant
Is there any book or reliable source explaining all the process of
incorporating? Pros and cons, vesting, stockoptions etc...

------
bitwize
Hello, unlimited liability, goodbye house, car, clothes on your back.

------
rprasad
While you're at it, don't hire a lawyer after you've been arrested until just
before your sentencing hearing. That way, you can save a whole bunch of money.
After all, the overwhelming majority of people plead guilty anyway, so what's
the point in having a lawyer until the stage that really matters?

