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Ask HN: At what point did you incorporate for your startup or side project?
110 points by bradtx 9 months ago | hide | past | web | favorite | 53 comments
At what point did you incorporate (if at all), and why did you choose to incorporate when you did?

I haven't incorporated and don't intend to. I don't need limited liability, and I am not working with companies that require me to incorporate.

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.

I run a sole prop in Canada too. I agree for the most part, but I think the "more taxes" aspect would be very situationally-dependent. Perhaps if you intend to flow all of the corporations earnings through as income immediately then you may pay more taxes, but often one reason to incorporate is to be able to defer those taxes by only taking the income that you require at the time (tax deferral to years when you'll be in a lower bracket). The only way I've been able to avoid huge income tax bills as a sole prop is by making massive RRSP contributions. Being incorporated would give me a bit more flexibility in that regard.

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).

This is all true, but if you haven't seen them already, you'll probably want to read up on the changes that are being proposed to taxation of CCPCs currently. All the details are supposed to come out with the 2018 budget, but here are some blog posts covering the developments so far:

http://www.thebluntbeancounter.com/2017/09/tax-planning-usin... http://www.thebluntbeancounter.com/2017/10/tax-planning-usin... http://www.thebluntbeancounter.com/2018/01/the-revised-tax-o...

Curious, so are you running as a sole proprietor? Wouldn’t it be eligible for the small business deduction?

Ah man. I'm in Canada too and I wanted to incorporate for the sole reason of getting a Apple Developer account as a company instead of having my name. This would make my "startup" seem more legit. I guess even if an accountant doesn't want to bother with the headache of paperwork and taxes, I shouldn't either.

I'll just get a regular developer membership instead.

Is your project based around financial/accounting technology?

Unless your customers need you to incorporate, the idea is to incorporate when you start seeing potential liability. One of the earliest sources of potential liability, is when you hire a W2 employee (in the US). So that is a great time to incorporate i.e. before hiring your first W2 employee. And if you don't intend to raise money, issue stock, or setup international offices any soon, then LLC is a far simpler, cheaper (taxation at exit) structure to setup.

The LLC is great for smaller businesses and startups. Which is why it's a shame countries like the UK and Canada have no such structure and business owners are left to choose between sole proprietorship and a corporation. I have lived in both of these places and I know the governments in both talk a lot about promoting small business and entrepreneurship but talk is easy, they need to do the work necessary to make company structures available that would work for this group. I have written to the relevant UK government department and received no response.

I’m not too sure what problems you feel a UK private limited company has. It’s super easy to set up, requires minimal paperwork, and indeed most IT contractors I know work through their own limited companies.

They have no other choice. A private limited company is like a US corporation, it doesn’t have the pass through income an LLC does.

A few years ago, some friends and I entered a local government innovation competition, made a "bid", gave a presentation and were selected to deliver a proof of concept.

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...

I have one corporate entity that I use for both my "side projects" and for consulting work. Mostly did it to ensure limited liability. Also, if one of the projects goes big, it will make things easier later on. Also, if we're talking about iPhone apps and such, a corporate name looks more professional in the app store.

> Mostly did it to ensure limited liability

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.

From the research I did, limited liability is not at all to "protect liability between multiple participants", but indeed protects you from outside claims. It is indeed not bullet-proof (for example, if a one-person corporation owes taxes they can still go after your assets), but it is much better than nothing.

My lawyer said that's not the case, at least in my state. LLCs protect against criminal and contractual liabilities, but not tort liabilities.

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

I realize it’s state specific, but what were your approximate total charges for incorporating?

In my jurisdiction the actual incorporation is actually quite cheap (don't remember exact numbers unfortunately, but cost wasn't an issue at all). What's expensive is the services of a lawyer, but you really don't need it for a basic incorporation, the process is pretty self-explanatory. (Of course, if it's a startup with multiple co-founders, outside investment, etc, then a lawyer is definitely a must-have). The major cost, for me, is all of the ongoing tax accounting - you either need to pay for expensive bookkeping+accounting, or spend a lot of your time learning to do it yourself.

For the State of Hawaii, incorporation fee is $50 for for-profits, with a $15 annual business report fee thereafter. The annual report is a 1-page form stating total shares issues, officers, type of business, and addresses.

Exactly, doing the same as well. Easier to keep your options open.

I ran a side project for about 12 months as a subsidiary of my main business, but as soon as I brought a co-founder on board for it (as the side project grew), I filed for creating a separate company (Australian Pty Ltd - even though my co-founder was US based). That way, I could formally list both of us as directors and shareholders on it. Much cleaner legally (and tax wise) too, plus it made it easier to set up a separate bank account etc.

I incorporated at the very beginning, after a few beers at 2am. Ignorant of the law, I thought it was necessary to form right away. If I was doing it again, I would still at least have an LLC or equivalent entity for liability protection and to "look official". It has also come in handy for consulting work.

How did you incorporate at 2am?

You go to your state website and fill out the forms. Takes 30 minutes and a filing fee.

I had a side project that made some money and was eventually sold. Of course it became an official business entity much after I started working on it. I don't remember the exact timing.

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 did so for previous ventures. For my current consulting business I'm a sole proprietor.

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 incorporated after I decided I was going to make money, but before I actively started trying to make money. I figured it'd be easier to talk to potential customers if I could say the product was backed by a corporation.

I'm in a bit more conservative of an area than SV though, there's a different set of values. YMMV.

Somewhere around the 100k revenue point. I don't recall the exact reason, it was getting more serious at that point, I guess.

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.

On the flip side, what would the downsides be of incorporating early?

Depending on where you live, as soon as you incorporate, you have to start paying taxes. If you're not making money, it's just an additional burden and likely extra money involved.

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.

Around the time my hobby started making as much as my day job. Probably should have done so earlier, but had no clue at that point!

I work on a nonprofit and to receive donations, you need to have 501(c)(3) status, which can be a very painful and long process (took us 8 months, I've heard of it taking as long as 18 months).

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.

I guess it depends on type of business. If you end up running like healthcare etc which is heavily regulated, it is better to incorporate as soon as possible. Otherwise delaying it a bit is fine too.

You should incorporate when you make $1500 and/or when you need to start signing contracts. Why $1500? Stripe Atlas is $500 (comes with enough AWS credits to host your app for at least a year) and your increased accounting cost will be ~$1000 which is a high estimate.

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.

Are you saying sign up for stripe atlas?

About 4 months after starting - basically before we had to start paying our vendors. In retrospect, I think we could have done it even later, just before opening the online store.

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.

Formed a Florida S-Corp for my side project about 5 months ago (Single member LLCs in Florida don't provide as much liability protection as they do in the rest of the country).

Started accepting sign-ups about 5 days ago. Have had 2 trial sign-ups, $0 revenue so far

Maybe I should advertise? :D

Work on organic channels and improve the product. Probably it’s not very good right now, it’s hard to do things without customer feedback. Probably paying for customers now will be expensive. Assuming it’s saas even good projects can be expensive to advertise due to long payback period.

Also ad channels get saturated easily in saas in my experience. Start today building your organic channels and get the compound growth started.

Yeah, Florida SMLLC's aren't like other SMLLC's. Creditors don't have to give charging orders and single member's assets are up for grabs.

I'll probably also end up becoming a Florida S-Corp.

Rough cost to S Corp incorporate in FL?

The initial filing fee isn't bad: ~$80 or so. Annual reports come with a fee of $150 though.

Thank you!

Similar question but for those who live in a place where legal liability is not a concern and are working solo. Is there any significant advantage to incorporate until you are "big" ? It's just a lot of paperwork & compliance headache IMO.

From what I remember, in order to sign a lease for the solo office I was using, the property manager required payment from a business banking account (not an individual) and to have incorporation documents. It was at that point that I incorporated.

Was doing long-term contract work for two companies. Incorporated (Washington S-Corp), moved contracts over there for liability, tax, structural reasons. Huge pain in the ass. Basically took a year of my co-founder's time to set everything up properly and learn everything necessary to drive the thing financially.

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.

I've been running a site that started in 2000, never incorporated. Looked briefly at turning it into a non-profit a few years ago when I thought I was going to transfer it to new owners.

When I began creating projects, I figured I would someday turn them into a business and since I would likely be charging people, it would have been kind of weird to receive a charge from my own personal name, so I decided to choose a company name. I incorporated about 2 years before I released my first pay-to-use project. In my opinion: other than accepting donations, you should incorporate with at least an LLC to protect yourself and have a more professional appearance as well.

Right after I quit my job and just before I decided to raise money.

One more reason to incorporate as soon as possible is to ensure/improve the sellability of your startup/project. If everything (from saas accounts like analytics, emailing over monitoring to source code comments) is tangled with your name/main business it is much harder to sell a project.

Highly recommend this Stripe Atlas guide on incorporation: https://stripe.com/atlas/guides/incorporation

When we started to make money.

I never incorporated, but I formed an LLC. I did it when my startup: 1. made money 2. could become a legal liability

Cant agree more. Whenever I will feel more confident and ready.

When I had a confirmed deal and knew I would be invoicing in 30 days.

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