Ask IH: At which point you decided to incorporate?
I Started out two months ago and am a sole proprietor. I'm thinking about incorporating soon as business is starting to grow.
What was your experience with incorporating your company? Have you used Stripe Atlas? Did you do it at the very beginning or later in the process?
I don't recommend incorporation. I incorporated a previous startup but creating stock, holding meetings, filing corporate taxes and paying annual corporate fees really slowed me down. Sole proprietorship is fine and, if you involve multiple people, a partnership with a written partnership agreement that specifies percentage ownership is cheaper.
Incorporation is "sold" as "lawsuit protection". That idea is that, if somebody sues your business and gets a big judgement, your business is dead but your personal finances can't be taken. First, your business is still dead. Second, people can still sue both you personally and your corporation and, if they win a judgement against you personally, the corporation does no good. Third, business insurance is better lawsuit protection. And, fourth, that's assuming that you did everything properly to incorporate and, even so, you will have to spend money on lawyers to bankrupt your corporation and defend yourself when the other side tries to get at your personal finances, anyway.
VCs and YC prefer that you be a sole proprietorship or partnership (for your first funding) because it's super easy for them. They don't want to deal with shares that you unwisely gave to friends and family or incorporation papers written DIY, a legal website, Nolo or by some no-name lawyer.
However, many people, especially on their first startup, feel comforted by the fact that they are "incorporated like a real business". It's doable, in effort, time and money, but I'd prefer to see startups spend that effort, time and money in things that will make their startup successful.
I took a look at Stripe Atlas and they are leaving a lot of the effort, time and money aspects of incorporation to you. They do seem to provide some value-add but the customer is still doing a lot himself. The legal and tax experts might have some real value (or might not). A shared incorporation/corporate governance expert would really make this service stand out but they don't have it.
If you ask me, people should probably start thinking about incorporating around the $200K+/year mark but maybe even more if you are a contracting style business.
Wow, I did not know that. so if a VC offer you $xx,xxx for 20% (hypothetically) of your company, how would you legally provide this to them? Is a paper agreement enough in this case? and if you are profitable, do you just send them cheques for 20% of the profit every month?
When the VC agrees to fund you, then you will incorporate. Your lawyer does the incorporation but VCs are happy about two things: (1) the VCs get input on how you incorporate (e.g. how many classes of stock, stock rights, agreements) and (2) they know that you (and your partners) are the only owners so nobody else is involved. VCs really hate it when you gave 1% of the company to each of your 12 uncles for $5K and then you forgot. If you are a sole proprietor or a partnership with an agreement, having investors is impossible because, by definition, those structures don't allow investors.
If a VC invests, they only own stock. They only get paid if the company is acquired, goes IPO, issues a dividend or is dissolved. Profits are held inside the business and the Board of Directors decides how they will be spent, usually reinvested in the business or saved. So, you almost never send them a check.
That makes a lot of sense. thank you for that input!
I typically use LLCs. You get liability protection without the admin hassles and restrictions of a corp. In most states you can form an LLC just by filing a simple form with the state and paying a nominal fee. Most states do impose some sort of annual LLC fee or tax however.
Also keep in mind that if you do incorporate as a typical C Corp (which is what Stripe Atlas does), you will be subject to double taxation (earnings are taxed at the corporate level and then again at the personal level if you distribute any money from the corp).
i incorporated too soon and then the new year came and I had to pay taxes and state licensing fees and my product wasn't even live yet.
Incorporating gives you several great benefits. It helps to separates personal assets from the liability of the business. It can help reduce your tax bill. It makes it much easier to sell (depending on the share structure).
It comes at a cost. You now have a higher burden in filings. Taxation is more complex. Strip Atlas is DEFINITELY a great option to help with this if you are in the USA. Being in Canada, I found Atlas actually wasn't a good fit, as I would have to file both in Canada and the US... which got expensive fast. Plus I would lose all benefits of grants and tax programs in Canada.
As soon as you are selling to other people, you don't want to put your personal assets on the line if you get sued. Incorporating helps to shield you from that. So its a pretty good idea.
Thanks a lot! I'm in Canada too and was considering Atlas, I'll have to rethink this now.
Ya. Here are some thoughts on this...
If you are planning to file for the Scientific Research & Experimental Development Tax Incentive (SR&ED) where the Government of Canada will provide up to 35% in tax credit refunds for qualified expenditures, know that is only for "Canadian-controlled private corporations" (CCPC). If you use Stripe Atlas and incorporate in Deleware you lose that. As a startup, that can equate to real money lost since so much expense at the beginning is all dev expenses you can claim. You can file up to 15% as a foreign entity, but now you have filing with CRA and IRS which will eat away on the refunds, plus have huge paperwork costs to stay compliant. KPMG wanted to charge me about $5K a year additional to do the filings.
Then if you want to take part in in the Industry Research Assistance Program (IRAP), know that as a foreign corporation its almost impossible to get support. Ultimately the simple act of using Atlas could cost your 10s if not 100s of thousands of dollars.
I've asked Stripe to consider building an Atlas program in Canada, but it sounds like there just isn't enough interest yet. Hopefully that will change.
and eh, I'm from Vancouver too :P
the benefits of SR&ED are real. In the company I used to work for, it covered most of the dev salaries (70+ people)
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We use Stripe for our payment processor and like them. I would try our ChargeBee though because they are more flexible with SaaS pricing. I would incorporate right away, tbh.