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What is the point of startup formalities (e.g., incorporating your company, having official job titles, etc.) before you have significant traffic?
3 points by amichail on Apr 26, 2007 | hide | past | web | favorite | 17 comments

Incorporation was really easy and fairly cheap. My corporation has one shareholder, just me, and no real rules outside the formal ones needed to exist.

I did this for three main reasons. First, I wanted to experience the paperwork and hassles when I wasn't on a deadline. Second, it gives me a limited legal shield. It's easy to say 'Oh yeah, that was done by the company!' if I ever get sued. Finally, it's a good springboard if any of my ideas and implementations actually take off.

The structure is there if I need it. The cost to get everything formalized was a few hundred bucks and about a hundred bucks a year to keep going. Easy investment. It will save me one more headache when things take off.

Also, it's nice to have business cards that say CEO on them.

It is a bit strange that while it is so easy for anyone to get a web 2.0 startup going, there is still this expectation of having founders go through formalities such as incorporating their startup, assigning official job titles, etc.

Bloggers for example expect this and it is less likely that they would write about your startup without such formalities.

Can anyone shed light on this situation?

For some, it's personal liability. After you incorporate, your personal liability becomes lower than before incorporation--from what I know.

It feels more serious. Gives you a bit of fear, "Oh shit, if this company fails I'm going to look like a HUGE loser". That type of thing.

These formalities are ways to show your commitment to doing a startup. Granted, there are other ways to show commitment, but there's nothing like putting a little money down on it. For most of us, writing code is not a good way to show commitment because we do this all the time, and sometimes for little or no profit.

If you're considering whether or not to incorporate, you should definitely be asking yourself if the reason you don't want to do it is really because of fear of failure. When you fail and you haven't incorporated, it just means your side project failed. If you failed and you incorporated, it means your startup failed, and you failed. You can't run a startup with fear.

Incorporating protects your personal liability somewhat, in the event that your startup tanks. It can be a paperwork- and lawyer-intensive process, and if you wait until you're seeing significant traffic, you'll be converting from a sole proprietorship, which will make for even more paperwork and lawyering, at a time when you'd rather be focusing on technology.

In short, if your company fails, you want to be incorporated because it protects your personal assets. If your company succeeds, you want to be incorporated because it makes hiring and taxes and office leasing much simpler. Venture capitalists won't fund a sole proprietorship, and they certainly won't buy one.

I live in Canada so won't incorporating my company here make it more difficult to get funding in the US?

Yes, I'm looking at incorporating outside the United States as well (HK to be precise) and would be very interested in hearing this point addressed.

I would like an answer to this question too.


How can a company fail? Can't you always pursue different web 2.0 apps over time? Or do you need to incorporate each one separately?

A company fails if its liabilities exceed its assets, and there's no reasonable way the situation can change.

You can always pursue different web 2.0 apps; but it's probably a good idea to spin them off into separate companies.

Imagine a case where you have four projects. One of them really takes off, while the other three are just barely profitable, and you hire someone to help you with the project that's taking off. After six months you decide to let him go. He slaps you with a discrimination lawsuit. Doesn't matter if it's true or not.

If you have incorporated your companies separately, the only company that lawsuit can take down is the one that employed him, because the assets of the other companies can not be used to pay off the liabilities of that company. If you incorporated them all together, that lawsuit can take all of them down. And if you haven't incorporated any of your companies, your assets can be used to pay off that lawsuit.

And the reason it doesn't matter if it's true or not is that, even if you were completely above-board and non-discriminatory, it takes lawyer time to establish that in court, and lawyer time is not cheap.

I understand the legal point, but I don't think incorporating should be a barrier to building another application. I wouldn't be afraid of pursuing different web 2.0 apps under the same company, but would definitely consider a spin off if one became successful.

Well, yes.

The key points are (a) when one interest starts to run in the red, you don't want it taking down your other interests; and (b) when your app takes off, you don't want to have to worry about app scaling and availability and converting from a sole proprietorship to a corporation or spinning off a company at the same time.


Why not let it just belong to you, the individual?

Because you shouldn't be an individual if you're starting a company. Didn't Paul tell you you need a co-founder?

Seriously, if you're a one man shop and happy about it, just file an LLC with your state. It's cheap ($200-$400 depending on state) and will protect you from any legal stickiness if one of your customers decides to get nasty because your app lost their data or you find yourself on the wrong end of a copyright lawsuit. It may be unlikely, depending on your business, but it doesn't take long, and the requirements are quite low.

If you're not really serious about starting a business at all, then, don't worry about it at all. Go get a job working for someone else and work on your projects as a hobby.

and will protect you from any legal stickiness if one of your customers decides to get nasty because your app lost their data or you find yourself on the wrong end of a copyright lawsuit.

Mostly. A corporation is no assurance that a court will not find you personally responsible for damages, perhaps due to (in the court's eyes) negligent or malicious behavior.

That said, you are of course better off with a distinct legal entity but you still have to cover your ass and document responsible behavior (e.g., that you pay bills on time, do due diligence on tools and equipment and hiring, etc.) and that you act in good faith.

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