It’s Easy to Start a Company, but Hard to Shut Them Down

I started this group because I saw that a lot of people had questions about starting a company.

I wanted to share my advice from my experience that starting a company should be one of the last steps in your IH journey.

In many countries, you’ll find that it is easier and easier to start a company if you live outside that country. But before starting a company, you should ask yourself, “how will you shut it down if things don’t work out?” The reason is that the costs to shut down can be 5x’s the cost to start a company.

Also, the bureaucracy + costs that it comes with is not worth it unless you have a product that is really going to sell. What you don’t see is that many countries have made it easy to setup a company because they want to support a growing mini-industry of legal, accounting, and tax firms that center around company administration.

You’ll find plenty of advice of internet encouraging you to start a company and explaining how, but you won’t find much explaining the reasons why you shouldn’t.

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    Maybe it's because we naturally want to succeed and make it big? Great topic that many people don't ever want to consider. I'd love to hear a few reasons why a person might want to shutdown a company besides just not being successful, if there are any.

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      When I quit my job to be an entrepreneur the first thing I did was start a New York LLC. It was probably a mistake. It took some effort and in NY there's this old and weird law all new companies have to do publish themselves in a newspaper that no one actually reads. It cost me like $500 to do.

      I think people rush to form a corporation because it's relatively straightforward compared to what they should be doing and it feels like real business work™.

      At the beginning, most entrepreneurs need to learn more about their target customers' problems, so they should be sending out emails and scheduling interviews. You don't need a corporation to do that, just a computer and a phone. But it's scary and an unbounded problem. Forming a company, while it can be challenging, it similar to administrative work people are already comfortable with like filing their taxes.

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        California imposes an $800 tax to form an LLC regardless of whether the company succeeds, or even makes any money. This is definitely a deterrent if you are unsure about starting a company. It shows that the gov would prefer to scrape a few hundred dollars from you than help you succeed though.

      2. 2

        Agreed. People trick themselves into believing that they're making progress by forming a corp or llc but really often that illusion distracts them from actually focused on their differentiating business logic.

      3. 1

        Agree also. I think there’s also a need to feel legitimate. For example, I lost a first customer because he wasn’t confident that we were an outright scam, fly-by-night operation, etc. So, incorporating was one of the steps to feel legitimate. In hindsight, it’s OK to lose customers in the beginning because you need to know if there’s a real business or not. An early paying customer can be deceiving in a way because it feels like your business model has been validated, but he may be the only the customer you get. The need to look legitimate also sets entrepreneurs up for traps other than just incorporating.

    2. 2

      I’ve heard a statistics that 90% of startups fail, so that is definitely the #1 reason.

      I would say other reasons include:

      1. You need to change the company to another country (i.e. some investors only invest in country X).
      2. You find out that the country had a lot of a bad thing that you don’t need to deal with (patent trolls, stupid regulations, etc.).

      I would guess failure is the #1 reason by a wide margin though.

      1. 1

        100% agree with #1. That's the make or break one imo.

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    Anyone has experience shutting down an LLC in the US? (fyi - I'm not a US citizen)

    Just planning to create one so that's why I'm asking...

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        Delaware if I remember correctly.

        Is there a big difference between states btw?

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          Yes, very different in every state. Plus, there are some federal forms you need to fill out with respect to IRS.

          In Delaware, the basics of the process are that you have to file a paper saying you’re going to close, and then pay the franchise tax for the current year. If you don’t do all of it by the end of the year, you have to pay next’s years tax too.

          I would say Delaware is the more easy state to shut down in with respect to the mechanics of filing, but as I mentioned in the post, Delaware is one of those states that has built a cottage industry in this area.

          • don’t forget to file your federal tax returns for the last year in operation as well.
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            This is good advice. I'm in the process of shutting down a California LLC, it's pretty much the same process. You can do it for free by mailing in a form or pay $5 to do it online and receive confirmation. Also when you file your last tax return, you have to mark it as final.

            Some online research says that the Delaware cancellation fee is $200. https://www.nolo.com/legal-encyclopedia/how-dissolve-llc-delaware.html

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            Thank you for all that info! :)

  3. 2

    Hey @raymondcarl very true. I think a lot of it is to avoid personal liability. The thought of something going wrong and you being personally liable is definitely enough to rush to form some protective entity. Have you found any good resources / tips for how to dissolve a company if things don't work out? Thanks!

    1. 1

      Hi @bryce, the resources really vary based on where the company was formed.

      Especially in the US, I have a lot of empathy with the the fear of personal liability. But, I think for most startups, it’s an unwarranted fear because as startup founders, we’re thinking 5 years in the future and we don’t want any effort to go to waste. But for the most part, you need customers to incur a liability (with the exception of the IRS). And in the US, limited liability isn’t unlimited. In a criminal sense, limited liability offers no protection to the founder. In a civil sense, limited liability isn’t immunity. Just look at the how the Sackler family is sweating it out. Every scenario is different and nothing is certain in startup land, but in some cases, the founder is taking on my liability by forming a corporation than he will ever have from product liability.

  4. 2

    Thanks for starting the group, I have a C-corp in US registered by Stripe Atlas. And I have 0 clue about how to pay taxes and stuff like that.

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      There are some services out there, but they tend to charge a lot relative to a new startup that may not have any customers (not much sales to book). If you have the money, I would encourage you to find one that is at least semi-reputable because the IRS in the US is different from the revenue collection in other countries. If you don’t have the money, I don’t have any good advice for you other than to find out if your startup is going to work out or not ASAP, and if not, shut it down ASAP.

  5. 2

    It took me more than 1 year to close an Estonian company. It was pretty hard and so, and I even got help with some agents.

    I think this part of the lifecycle of a company, it is easier to have a company in your own country. But that's just assumption of how hard this and time-costly this was in Estonia and how friends can start and shut down twice or thrice per year in Sweden.

  6. 2

    That's an interesting perspective. Can you give examples of countries where it's easy to start a business and hard to shut it down?

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      Estonia. Very painful process to shutdown a company.

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        I've read it's very easy to start a company in Estonia though, is it so?

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          It’s very easy and fast to start a company in Estonia, yes. But, take a look on Google what is involved with shutting one down.

        2. 1

          Forgot to add, it’s very easy if you have an e-resident card. Not so easy without one.

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            Sure, will do. Attended their monthly webinar on e-resident program recently, it sounded quite simple and straighforward. But yeah, never thought about shutting down one :). Thanks for your reply.

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              No problem. If you’re still going to start a company in Estonia, you can contact me by email or twitter (links on my profile). There is a woman I found on Upwork who help me shut down my company. I had to go there because the places that open companies charge a crazy amount of money to liquidate companies. She’s independent, so I found it beneficial to work with 1 specific person when it came time to taxes, annual report, etc. Very reasonably priced too.

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                Sure thing! Will get in touch once I finalize to start one there. Thanks again.

  7. 1

    Can you please explain why it was so hard to shut down your company? What was the procedure like?

    1. 1

      Hi, check the post from confact below, but it really differs depending on the country.

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