Do I need to get an LLC for my side project to protect myself and intellectual property?
I create a Delware C Corporation back in 2017 after hearing some bad advice during YC's Startup School. I ended up spending way too much money on paperwork and filing fees etc etc. $2,000 to form the C Corp and close to $1,000 per year in fees to Texas and Delware... The lesson that I learned is don't form a C-Corp unless you have investors that want to put money into your company. Likewise, I think the same would be true of an LLC as well. Just operate as a sole proprietor and you'll save yourself a lot of money in fees and pointless paperwork. Conclusion: Don't form an LLC or C-Corp unless you are generating revenue or are receiving interest from investors.
I totally agree with you
The main purpose of the LLC is to separate your business assets from your personal ones. Forming an LLC doesn't provide any additional protection for IP in the sense of copyright/trademark/patent/secrets. If we're talking code, you are the copyright owner as soon as you write that code. Registering the copyright can provide additional protection, though. If you're talking branding elements on a landing page like logos then that stuff is already protected as your trademark as well, given that you are using your marks while doing business. Registering these, like with copyrights, also gives some additional protection.
I would echo the making money part others have said. Initial fees to form an LLC are pretty cheap if you just fill out the form yourself after a little research. I have to do this myself in 2021, but even taxes are probably not too bad to do yourself with a single-member LLC taxed as a sole proprietorship (if you are keeping good track of things and your taxes weren't overly complex before).
The one thing I WOULD AVOID would be to form a multi-member LLC taxed as a partnership if you AREN'T making money. My brother and I did this for some apps we made a few years ago. We did it to be a legit, on-paper partnership but would never do it that early again unless generating actual revenue. We ran a tiny kickstarter and made a handful of bucks afterwards but, in PA at least, you have to file a return no matter the profit/loss. So navigating the extra business taxes and trying to do so as college kids who weren't making actual money and who weren't going to hire tax help to file for small losses each year was stressful. Learned a ton... wouldn't recommend 😅
Thank you for the great advice and potential headache.
Hopefully no headaches 🤞🏻 To me this whole side of things gets a lot less stressful when you have the option to pay someone to assist if needed. But it is a shame that navigating can be kinda rough during the early stages of a project.
You don't need a company until you make money.
You can start with an LLC once it starts to make money.
You can chage it to C-Corp if you want to get VC.
You can move your company off-shore if you want to optimize for taxation.
Straight forward and to the point, thank you.
Thank you everyone for the advice. Sounds like the general consensus is to avoid forming a company until income is being generated.
You did not post a country you are from which can determine the answer...
In my own country, if you stay solo proprietor you have liability with everything you own, so if you screw up, you are finished :(.
My advice is don’t worry about it until you are making a substantial amount of money 💰👍
Having previously looked into this and seen other threads, the general consensus is, avoid setting up one for as long as you can.
A good milestone to set one up would be your first paying customer, or first x paying customers.
In terms of IP, it's a bit harder to say, as I know less about that. If your idea is something you need to patent then you may want to get that done early as it takes ages to process.
To have a paying customer, you need to set up a payment processor. They would certainly ask you about your company's data. So you do have to have one before you have paying customers. The question is, which form of company?
I think you can set it up as a personal account? Would be taxed under a sole trader or something
Thanks, I missed that one.
I'd agree on this. If you're using a third party payment processor like paddle that holds the money until you transfer it, you can probably hold off longer. Really good rule of thumb is: do you need a bank account? When you need a bank account, it's probably a good time to look at an organization. Even that isn't necessary. But, if you're dealing with sensitive info and could have a frustrated customer, LLCs exist primarily to protect your personal assets and so the type of product is probably important.
My advice is as well would be to not worry about it unless you have investors coming in or atleast you already validated your idea and are assuming a good amount money to start coming in.
I thought really hard about this for my projects. I think it's good to know a little about the pros & cons of having an LLC, but I also think the best thing to do is try to get paying customers first. Unless your side project is going to be more of like a "shell" company that you constantly launch projects under, in this case it could be useful for your motivation to really build something substantial. Otherwise, it's not as important as actually having a something tangible to show to people and pitch customers.
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