Incorporation

When is the right time to incorporate your company?

Misha Britan

January 21st, 2015

Is it a good idea to begin going out for early adopters with an MVP, if I do not have a legal entity around it yet?

Mike PhD Founder at Sail Tactics, LLC, Principal at Sailor's Energy

January 21st, 2015

If you're going to charge money for the product, you're going to create a lot of hassles for yourself with accounting, getting paid, and legal/insurance issues without starting up a legal entity. You'll probably waste a lot of time switching over from your original payment configuration (presumably something simple like PayPal to your personal bank account) to your actual LLC or corporation payment system and accounts.

Small decisions like this often have large repercussions down the road. For example, I started using PayPal Recurring Payments for my subscriptions at sailtactics.com . A few months ago, we decided to switch over to Recurly for payments. Seamlessly integrating the old PayPal and new Recurly subscribers ended up as a failed 3 month coding campaign by my web programmer, and ultimately his burnout and leaving the company. Using Recurly from the start would have been nearly trivial.

Starting a legal entity like an LLC is not that hard. You can pay CorpNet.com $400 to rush the formation of your LLC in California. Then you pay the $800 franchise tax at the end of your first quarter in business. Paying $1,200 to be a legit business is a pretty good deal, considering all of the headaches that you'll have later because you didn't do it right the first time. I'm not saying this is necessarily the thing to do in your case but it's certainly worth considering.

Vijay MD Founder Chefalytics, Co-owner Bite Catering Couture, Independent consultant (ex-McKinsey)

January 21st, 2015

One consideration in C corp vs LLC is the ability to "disregard the entity" from a tax perspective vs facing double taxation.  If you plan on bootstrapping and have an alternate stream of income it can be beneficial to be able to offset the losses.  Of course, check with your advisor over taking advice at face value over the internet... 

Michael Brill Technology startup exec focused on AI-driven products

January 21st, 2015

Forming a Delaware C Corp is on the order of $500 using an online service (including all the post formation docs such as founder stock agreements, etc.) and takes just a few days. As Mike mentioned, you'd then need to register in your home state and start paying corporate taxes in a few months.

The advantage of not filing now is that you still have the $1200-$1300+ in your pocket. The downside is that you can't really do anything that normally requires equity... e.g,. getting an advisor on board, investment, etc. And, of course, you will have personal liability so if your MVP kills somebody's pet gerbil, there's no entity to protect you.

Would definitely *NOT* try to revive a musty inactive corporation. Who knows what liabilities, shareholder rights, etc. may be buried under all the dust. 


Mike PhD Founder at Sail Tactics, LLC, Principal at Sailor's Energy

January 21st, 2015

Misha, you'd really only be saving the initial filing fee, which is trivial. You don't want to be associated with any baggage (known or unknown) that your friend's company might have. As Frederic said, a financial advisor would probably give you better advice for only the cost of a consult. I would highly recommend the Nolo legal books like LLC or Corporation?, Legal Guide for Starting & Running a Small Business, and the like. You don't need to be an expert on all the legal aspects but you should be able to have an intelligent conversation with your business associates about your business structure, IMHO.

Misha Britan

January 21st, 2015

Thank you Mike and Frederic for your answers. 

Any take on the idea of using a friend's 10 year old inactive, yet tax current NJ registered company? then if things go well, incorporating mine as per Mike's post above and transferring all assets to the new entity? Thanks. 

Frederic Moreau Agile Business Transformer

January 21st, 2015

It is a very good idea indeed to make money before your incorporate yourself. Do not bother with this until you start getting solid orders, or even payments in some cases.

When to do it depends on several factors such as the velocity through which you can acquire clients, deliver the service and charge for it. The shorter this process with the highest traction, the sooner you should turn your business into a legal entity. Depending on where you live and operate your business, you may be untitled to start receiving incomes without being incorporated -- if you're buy yourself in this business mostly.
I did this in the past and turned to a fiscal advisor to get proper guidance.
All the best.