Ask HN: Should I incorporate my new company?

14 points by taurenk 11 years ago | 16 comments

I started a project on the side and would like to release it to the world for use - charging users a tiny fee to use the service.

My question is - do I now need to file for a business name, Corporation vs LLC, or any legal things? This is my first time releasing a service/product and have no idea where to start, can any one assist me?

tptacek 11 years ago |

I'm not a lawyer, but I think you should (a) get an LLC, and (b) not spend real (meaning: hundreds of dollars) money on it. You can get a DE LLC online about as easily as you can order a book from Amazon.

The LLC allows you to enter into contracts as your firm and not you yourself. If any arrangement you enter into ever blows up and threatens you with tens of thousands in liabilities, the company eats it, not your home equity. If you're savvy at negotiating, you can even get some of your overhead expenses (rent, Internet) in the LLC's name, so if the firm dies you're not on the hook.

Having an LLC also makes it possible for you to do business-to-business transactions with big companies. Consultant friends of mine have learned that invoicing a bigco as a sole proprietorship is likely to end up with that bigco withholding taxes, or worse, severing the contract altogether.

The reason not to spend money now is that contract liability protection is really the only thing an LLC is getting you. Most of what you're spending legal dollars on with a new company has to do with equity allocation. With neither partners nor investors, there's no reason to get that stuff nailed down perfectly. In fact, should you ever raise a round, chances are you're going to rip all your current incorporation stuff up anyways.

lsllc 11 years ago | |

I am also not a lawyer, but unless O.P. is in DE, he/she will almost certainly have to register as a "foreign entity doing business" in his/her home state despite being registered in DE. In many states, this is about as expensive as simply registering the LLC there in the first place. Some states (such as NY) have somewhat byzantine requirements such as having to publish the application for your foreign (or even native) LLC in two local papers.

But otherwise, an LLC is the way to go; you might however want to elect to have the LLC taxed as an S-corp so you don't get taxed twice.

pw 11 years ago | | |

Diddo. My understanding is if you're doing an LLC, you should just do it in the state you're operating in not Delaware.

pzxc 11 years ago |

You're familiar with the term "premature optimization", right?

Don't bother forming a corporation, renting office space, or even making business cards when you don't have any customers or revenue.

It's perfectly acceptable, and the recommended approach, to simply operate as a Sole Proprietorship (no legal entity for the business, just self-employed income for you) until you have a REASON to form a corporation -- things like, to mitigate liability, to hire employees, to take on investors, etc.

As a sole proprietorship, you can still do business under a company name - this is called DBA, "doing business as". So if you go to get a business bank account, for example, you can open the account under the name "Firstname Lastname DBA MyCoolInternetCompany". You can also get an EIN or TPIN (employer ID number, taxpayer ID number) from the IRS without an official business entity.

Later on, once you have customers and revenue, you can then form an LLC for a few hundred bucks depending on which state you are in. You can do this first, of course, before actually starting your business and getting revenue/customers, and many people do -- but it's a common mistake for new entrepreneurs to focus on the fun/exciting stuff like making business cards etc instead of the boring but critical stuff like, you know, actually making money.

taurenk 11 years ago | |

Thanks for the advice! When I file for DBA, lets say "cool internet company", is it best to get the business bank account, EIN, etc? Or can I just skip this step?

philiphodgen 11 years ago | | |

The reason you get a DBA is so your bank will cash checks payable to "Cool Internet Company" and put the money in your bank account - without brain damage to you.

Apply for an EIN. Otherwise you will be spraying your personal social security number all over the place.

Your income and expenses go on Schedule C of your tax return. You pay income tax on your profit and you also pay self-employment tax. If you do well, expect your tax bill to hover around 50%.

Disclaimer - IAAL but all of that stuff I just told you is off the top of my head and probably wrong. Call up your local bar association. They probably have a referral program with cheap initial consultations.

Get a good accountant. If you are in San Jose on Dec 11 2014 attend the CalCPA Startup Conference and schmooze. http://calcpa.hs-sites.com/startup14-hacker

patio11 11 years ago | | |

The chief reasons to get a business bank account are a) if you're going to invoice larger companies it will make getting payments rather easier (you appear to not be doing this) and b) it makes it marginally easier to segregate business and personal finances, which will simplify your tax compliance.

I didn't have a separate business bank account for, hmm, ~7 years. It is skippable.

martinflack 11 years ago |

I would urge you to find a local lawyer that handles incorporation. Most small law firms will do a one-hour introductory consultation for free where you can get professional advice. They can explain properly the various choices and what that means for your situation specifically.

actraub 11 years ago |

It really depends on your product, what you are doing, etc. pzxc is right, do prematurely optimize. You also need to decide if you have any serious liability. Is it just you are do you have any partners...

How to start a startup legal lecture http://startupclass.samaltman.com/courses/lec18/

How to file in delaware http://corp.delaware.gov/howtoform.shtml

Types of companies http://www.bizfilings.com/learn/compare-company-types.aspx

cylinder 11 years ago |

Operate as a sole prop (report income on Schedule C) until you make serious money (really $75k+/yr). If you have substantial assets to worry about protecting from liability, then it's worth it to do a proper LLC or corp.

relaunched 11 years ago |

Without knowing what you are doing, I would say this is an ounce of prevention vs. a pound of cure problem.

Limiting your liability by setting up an LLC, or other liability-limiting entity, is worth the peace of mind, at least it is for me.

logn 11 years ago |

For a C-corp you'd be in over your head trying to meet all the requirements to stay legal. And it's totally not needed unless you have investors. An LLC in your home state is easy and probably about $100. But it's also not needed unless you expect substantial income--because the only way to actually limit liability is to separate personal finances from business. Probably with an LLC you'd end up filing a tax return where you merge business income into your personal income, so there's not really a tax reason then.

In summary, if spending $100 is no sweat, sure get an LLC.

--not a lawyer--

chadkruse 11 years ago |

For those suggesting an LLC for liability protection purposes, just a quick note to be careful here. Depending on your state, a single-member LLC might not actually provide any legal protection. For those interested, do a quick search for "piercing the corporate veil".

tl;dr the courts may see through the LLC "veil", determine the "company" is really just you, and may stick you with any liabilities/debts.

saluki 11 years ago |

Initially I would start out as a Sole Proprietorship, you can get an EIN number in your business name so you don't have to provide your SSN when working with companies who will be sending you a 1099.

Once you gain traction or see you have revenue growing then form an LLC . . . I would only form a corp if you take on investment or your accountant recommends it.

debacle 11 years ago |

Do you have any assets? If your personal net worth is 20k+, I would form an LLC. It's relatively painless, depending on which state you file in, and the cost isn't ridiculous.