June 13, 2018

In all honesty, when should you incorporate?

Hi guys,

Now that I've been seriously considering side projects with the end goal of replacing my day job, I've have been very anxious about the legalities of having a business online and charging money from people.

Given that I'm not in the US, most probably I'll end up incorporating via Stripe Atlas.

That being said, and in all honesty, since I don't even have a website where I collect payments from people, so perhaps the idea of incorporating first should NOT be on my priority list?

So the question is, when should you incorporate?

From my position is kind of a chicken and egg situation, because for Stripe at least, you need a business bank account to charge people.

In other words, If you are a hobbyist just trying to figure things out, do you need to incorporate? and if not, how to take money from customers?

  1. 6

    Creating a corporation is all about shielding your personal assets from risk. When you're running as an independent, it really depends on what you're doing.

    You need to weigh the risk of being sued or otherwise held monetarily accountable to an entity over the cost and complexity of incorporation.

    You can use PayPal to take money from people initially. They don't require a business bank account, as far as I know.

    1. 2

      I think this is a great response. Personally, I'm very scared of being sued, not because I think it's very likely, but if it does happen, it would be a monetary disaster that could take years to recover from. Do you have any suggestions on how to weigh this risk (preferably without spending a lot of money for a lawyer)?

      1. 2

        The risk of lawsuits is a cost of doing business. Generally speaking, if you play by the rules, you don't piss people off, and you cover your ass, you'll be fine.

        If you're scared of getting sued, try to reduce your attack surface. Have a rock-solid terms of service, don't bring in partners, don't handle extremely sensitive information, use others' IP properly, etc.

  2. 5

    Lot's of interesting answers and views on this topic.

    I personally take a very pragmatic approach when it comes to incorporating. I choose to stay away from it as long as I possibly can. I only start considering incorporating when my day to day business operations are hurting by not being incorporated. For example; my business is in the b2b space and when we started attracting larger corporate clients who were starting to ask for proper invoices, this became a push to start considering incorporating. Hiring staff is another push to starting considering pulling the trigger. There are tons more examples, depending on what business you're in.

    I would advice anyone against incorporating simply due to some imaginary scenario (like someone might sue me). Do it when you absolutely have to and when not doing is hurting your bottom line.

    Final thought: if you're not based in the US, think long and hard before incorporating in the US as a Delaware c-corp. Exposing your business to one of the worst tax regimes in the world is not a decision to be taken lightly and there are tons of other options.

    1. 1

      Wow, that's super interesting. Don't you think that's very risky?

      1. 1

        No, I don't. In fact, I'd say it's a much more save and risk-averse approach compared to incorporating on day one because someone might sue you.

        The truth is, the changes of your business failing are way bigger than the changes of you benefiting from having a legal entity to get you out of trouble.

        Focus on getting your business to the point where the changes of you not being around next year and getting lower. Then, worry about your legal structure.

        1. 1

          Hey, thanks for your response! I totally agree with you, it's much, much more likely that your business fails than you getting sued. But the failure case is just so much worse: when your business fails, you've maybe lost a few thousand dollars, something that's pretty easy to recover from. But if you get sued, it could be a complete catastrophe, that brings you to personal bankruptcy. Do you really think that is so unlikely that it's not worth protecting against? Or is there something I'm missing? Thanks again for your help.

          1. 1

            Yes, I do think it's so unlikely that's not worth taking it into serious consideration. I have been doing products and online businesses for just over a decade now and haven't even been close to having anything like a conflict with anyone, let alone something that could escalate into a legal suit.

  3. 4

    Wait until your making $100,000 profit. Listen to episode 16...probably the greatest episode to date...

    1. 3

      It seems odd (and I haven't listened to the episode) that it would be good advice to make $90k and not dish out $500 to incorporate...

      1. 3

        $500 is the price of admission for incorporation. The amount of administrative overhead that you are buying is unnecessary until you are making job-level income.

    2. 3

      What happens if you get sued? Even if you didn't do anything wrong (patent troll or other malicious entity with lots of resources)? Won't you personally be liable with your own assets?

      1. 3

        Then you need to 'lawyer up' as they say here. The probability of being sued at < 100K is insignificant. Yes, your assets are possibly at risk if you are adjudicated guilty for trespassing someone else's IP. However, quite a bit can happen in-between receiving a legal notice and the end of a trial.

  4. 3

    If all you want is legal protection from your personal assets being seized, start an LLC.

    If you know you want to raise money (like.. yesterday), do a C-Corp.

    I've have a C-Corp and an LLC.

    The LLC is so cheap to maintain. It's about a couple hundred in franchise taxes/yr. and the tax documents are simple.

    C-Corp's get complicated in part because they have shares/stock. They have more taxes and more complicated tax policy. They also provide the legal protection that an LLC does.

    Say you're designing hardware (consulting for Nest or Google for example) and someone could get hurt from your designs, you'll want liability insurance as well. In fact, the large corporations will require it to do business with you.

    It's about $50/mo. for a $1,000,000 of coverage. You'll often need this to rent commercial space (if you ever build a team in the U.S.).

    Stripe Atlas is a good choice, btw.

    Hope this helps!

    1. 2

      Definitely talk to a lawyer. Silicon Legal is a reputable firm in the valley.

      SVB is the go-to bank here for tech companies, btw.

  5. 2

    Right around the time when first customer actually is going to pay you. Else, you might end up spending $500 on something that doesn't make any money.

  6. 2

    As soon as possible especially since you are not in the US as I am not either.

    It can get complicated, consult for sure a lawyer in your country before you move forward.

    There will probably be a monthly cost associated with it (accountant at least), even if you are a hobbyist you should do it. Then dissolve if you want to give up.

  7. 1

    Lots of great responses here. There are a couple extra details I'll add:

    • A legal entity is not required to get a business bank account, at least in my state

    • I hate paperwork and have in the past gotten into frustrating situations for forgetting to file paperwork during periods when I wasn't actively doing any business, so keep in mind that once you're on any government's books as a business, they will expect you to keep up with the overhead of communicating your business's activity, even if there is none, every quarter and will penalize you heavily if you forget (think along the lines of fines staring at $1k)

    • the calculus of this varies depending on your own financial and lifestyle situation. If you're in a place where several hundred or thousand dollars for peace of mind is a worthwhile trade, then do it now. If not, then wait until you've got a big client, a partner, or some other impending activities beyond "want to sell services/products/things"

  8. 1

    I asked a similar question in the past and got 50/50 answers. I decided to not incorporate for now: https://www.indiehackers.com/forum/ask-ih-at-which-point-you-decided-to-incorporate-914f989365

  9. 1

    Contrarian take here - incorporate now. This is Canadian-specific, but we started as a partnership and didn't incorporate until our MRR was $5k or so and we had built up assets (mainly cash).

    Transferring the partnership to the corp was a nightmare. So much accounting and legal crap..."deemed dispositions", rollover clauses, etc, etc.

    You can use your corporation for another business if your first one fails. When I start a new company, I'll just bite the bullet and pay the $500 to incorporate. Yes, there are additional compliance issues you'll have to deal with, but I think the benefits far outweigh the costs.

  10. 1

    By the way for incorporation. Use a service like clerky. It will simplify things exponentially

  11. 1

    Incorporation, aside from the protection discussed below, also helps to focus the mind. When you have a legal entity, you have a real business and that will always be a reminder of 'no turning back now'... It makes you feel like you're really building something.

    In addition, in my experience, you won't be taken seriously until you show to customers and suppliers that they are dealing with a company.

    Not sure what country you're in - but here in the UK, incorporation is really not onerous and so I'd put the wheels in motion reasonably quickly. Bear in mind too, it takes 4-6 weeks to get a business bank opened account after incorporation. Take advantage of trading through a company early - particularly when it comes to claiming back VAT from potential suppliers.

    Good luck!

  12. 1

    When you have revenue.