Incorporation would mean a ton of paper work, more taxes (in Canada at least), more complications, and 3x the accountant's fees.
For what it's worth, my project nets 200k, is 3 year-old, and I have a degree in accounting and taxation.
You could also employ a spouse in a role (e.g. administrative) to provide a form of income splitting (although the gov't is planning to crack down on abuse of this).
I'll just get a regular developer membership instead.
We incorporated pretty much immediately upon being advised of our selection for the PoC. This involved ~AU$600 for government fees and incorporation services.
We then retained a lawyer to provide us with a shareholders' agreement (~$1500) and obtained our legally required workers' compensation insurance (~$500).
We didn't sign the contract for the PoC until that point.
Conveniently, the rules of the competition allowed us to expense all that to the customer...
As for why we chose to incorporate - the majority of my team are somewhat risk-averse and legally-minded, and even though we were and remain close friends, we wanted to formalise our business structure to help manage any potential for disagreement later down the track.
As it turned out, our government customer was very happy with the PoC and was interested in engaging us further, but their timelines didn't match up with ours and we ultimately decided to take the $12,500 prize money, open source our PoC code and move on to regular megacorp/government careers.
Had we chosen to continue on, however, having a corporate structure would have been an absolute, non-negotiable necessity for taking on a proper government contract.
During the period our company was active, we never got an accountant - I learned more than I ever wanted to know about how to fill out an Australian corporate income tax return, with pen and paper...
Did you consult with a lawyer? I've heard that "limited liability" doesn't really apply to one-person operations, it's intended to protect liability between multiple participants - though that may depend on the state.
I google'd it since I couldn't remember his exact legal reasoning, this blog post just about sums it up: https://www.litigationandtrial.com/2009/05/articles/attorney...
Certainly better than nothing, but I was personally not concerned with criminal/contractual liabilities
At a later time, when I was applying for a job at a big company, I was informed by HR there was a mistake on my resume. They said I had the wrong start date on my one man company! I assume they looked at the incorporation date and then thought I was fudging my resume.
I'd advise against incorporating early. Especially with product-based startups there's this temptation to "do it properly right from the start" and plan ahead for when you need to do things like raising venture capital.
This is the business version of premature optimisation. In all likelihood you aren't going to need it and you most certainly don't need it when you're starting out.
In general, I'd say that incorporating only makes sense if either
- The risk becomes too high for you to assume personal liability. This can happen due to several factors such as needing to hire more staff or investing into machines or infrastructure (please note though: Banks generally expect the principal owners of a business to act as guarantors for loans anyway. So, limited liability doesn't help all that much in that case.).
- Some third party wants to invest money in your business in exchange for company shares.
I'm in a bit more conservative of an area than SV though, there's a different set of values. YMMV.
I wish I'd done it earlier, as certain loans (SBA) are only eligible if you're at least 2 years old. If you might pursue bank funding later for this, incorporate as soon as possible.
You may also have to submit paperwork to the government every year describing your business in some fashion. Failure to do so might land you in some hot water. Basically, almost every business is subject to at least some kind of regulation in most jurisdictions, even if it's just bare minimum.
The nonprofit industry has collectively come up with a hack to avoid this process called fiscal sponsorship. Through fiscal sponsorship, you basically "rent" someone else's nonprofit status for a percentage of your revenue (typically 7 - 12%). You operate as an independent project under someone else's 501(c)(3), so contributions to you are tax deductible and you don't need to wait on the state and the IRS before you can start taking contributions.
We had a fiscal sponsor and incorporated as soon as we could reasonably justify the expense (our lawyer cost ~$6k for the whole process) because being under fiscal sponsorship is so painful. You typically don't get access to your bank account directly, payroll has to be done through your parent org and sometimes they won't have systems in place for seemingly common situations, like hiring international contractors, and every large expense (large being >$500) has to be sent through their accounts payable department.
I'd really love to see someone start the Stripe of fiscal sponsors. I think you could enable a lot more people to start a lot more nonprofits without being stunted by fiscal sponsors or the large (for new nonprofits) legal costs.
Your company will start at break even, and you will be able to start a clean paper/bank/accounting trail for your profits and expenses.
I guess it matters where you are and what your business is. In our case, we are based in Europe and run an ecommerce company, so we had to be incorporated quite early on.
Started accepting sign-ups about 5 days ago. Have had 2 trial sign-ups, $0 revenue so far
Maybe I should advertise? :D
Also ad channels get saturated easily in saas in my experience. Start today building your organic channels and get the compound growth started.
I'll probably also end up becoming a Florida S-Corp.
On the other hand. Now we have revenue, payroll (Gusto), health insurance (Premera), an attorney, proper corporate paperwork, and products that we wanna make. Pretty happy to have done that all before looking for investment. Seems like we're likely to retain more of our independence than other potential paths.