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Nice piece and my only quibble would be with the idea of automatically deferring incorporation until you get outside funding.

On this point, the advice given is great is you are a sole founder but even then may create tax risks if you time your entity setup to match the time of your first funding (e.g., Founder A gets 90% for IP assignment + Investor X gets 10% for $100K = Risk of $900K taxable income to Founder). This tax risk is normally manageable but it also is most easily avoided or minimized if even a sole founder sets up an early shell (even an online instacorp) to give himself a buffer between first founder grant and first investment.

With a founding team, it is normally a mistake, in my judgment, to defer entity setup too long as people invest time and effort and develop IP for the project. It can and often does all work fine as long as the co-founders in such a case continue to cooperate right up to the point where they chose to document their relationship but they are at risk of, e.g., "I was promised 25% of the company" type of claims or "I developed key IP that belongs to me" type assertions if they have not defined stock grants with strings on them (restricted stock) and have not entered into work-for-hire contracts should they have a bust-up or serious disagreement of some kind prior to documenting things.

The practical risks of a disagreement may be low but my point is that, when you have a founding team especially, it is a mistake to have an axiomatic rule along the lines of "don't incorporate until you are working with Other People's Money." The issue should be consciously thought through by any founding team and the cost/benefit considered before deciding this one way or the other.

A more detailed analysis is found here: "When should I set up an entity for my startup business" (http://grellas.com/faq_business_startup_007.html).




There's another good reason to incorporate early: It permits you to set up your financial infrastructure. In order to set up corporate bank accounts and merchant accounts, you'll need to be incorporated. This is critical if you're planning on charging from day one.

If you're not incorporated, you can hack together something using your personal accounts, but this is usually a Very Bad Idea. It's far better to keep things clean by separating out your business and personal finances.

The piece seems to be targeted at startups that are both venture-backed and deferring revenue. Delaying incorporation is probably good advice for those folks. For those of us that are bootstrapping and charging money from the outset, it's far easier to incorporate as soon as is practical.


This is also the main I'd go with incorporating first.


I strongly agree that you should incorporate early. The author claims nobody in their right mind would sue a company without any money? They may if they think the founders have any cash, or they may just threaten a suit to scare off potential competition, which can be more effective if you're personally liable!


The other benefit of incorporation is that it may allow you to invoice and be invoiced by other businesses. If you're not incorporated and you, for instance, need to pick up a quick consulting gig, you may find yourself trapped into having taxes withheld.


More support for incorporating early is that the date of incorporation is important to some organizations and if you aren't incorporated, they'll simply pass on you.

Having been incorporated for the 5 years prior has value. Of course it depends on what you are selling.

additionally, it protects your personal assets, like your home, if you get sued.


Additional support for incorporating (at least with simple Delaware based LLC) early; if you build something and can pick up a partner they are far more likely to 'take' any IP generated as a result of products built during the partnership if you are a single, lone wolf contractor. If you get an EIN (employer identification number) and put that on your W9s you can negotiate from a company position for shared IP (as we have - 2 patent applications and the legal work is being paid by our partner...we'd never have been able to close that as two people working together to build a large corporation something).




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