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Ask YC: When should you incorporate?

14 points by bitsantos ↗ HN
I've been working with a few friends from college on a web startup and we actually have a few things almost ready for launch, but we've put off incorporating and registering ourselves as a real company. Should we get that done now or can we afford to wait?

We're a bit low on money and we might not be able to afford all of the fees and any potential legal services we might have to get to get it all right.

What are the implications of not incorporating immediately?

7 comments

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eusman
depends of what you are doing? do you expect to get sued from day one? check out legalzoom.com if you need to save money on registering the company
nostrademons
When you

a.) Need to take money from someone else.

b.) Have done something you might get sued for.

The "might get sued for" doesn't mean when you've done something wrong (at which point it's undoubtedly too late - don't be evil ;-). It means when you're performing a service for money, or when you've got a fairly well-trafficked site that's attracted a lot of attention, or when you're doing something where there may be disputes involved.

We met with a lawyer for incorporation when we first launched, but he kinda dragged his feet and we're still not officially incorporated. In retrospect, he's doing us a favor, because we really don't need to be incorporated at this stage and the additional overhead of a corporation would just slow us down. (In particular, corporations need to file taxes as a corporation.) If we were successful enough that people were actually submitting much user-generated content or (gasp) had a revenue stream other than Google AdSense, we'd want to move the incorporation along, but while we're still developing/finding traction, it's not that important.

Flemlord
Most large companies are incorporated in Delaware because they do not tax out-of-state corporations. I also know Nevada allows one-person corporations, which is fairly unique.

Edit: I just realized I misread the headline as where should you incorporate.

thorax
They do tax out-of-state corporations, but it's a franchise tax not an income tax.
sohail
I incorporated a company myself. It isn't very hard. In BC, I did it all online (except registering a non-numbered company.)

If you have no revenue, DONT DO IT. Only do it when you have revenue. There is too much bookkeeping overhead.

On the other hand, if you are providing a service without revenue (i.e., you can get sued for it) you've got to think whether it is really worth it.

NoBSWebDesign
It really depends on where you are located and what you are doing. Is there a reason you want to incorporate instead of registering as an LLC (i.e. are you going to be seeking investment any time soon)?

At the risk of being unpopular (judging by the other comments), I would advise you to go do it now. It's not that difficult, and you will have to learn how to do it eventually. Furthermore, if you are really planning for your startup to go anywhere, things are most certainly not going to slow down. In fact, your time will just become more and more valuable, so right now would be the smartest time to incorporate.

If you are not yet making money, then that means your taxes won't be that difficult to file anyway. If you are making money, you are suppose to be claiming that on your taxes, whether you're incorporated or not. Either way, you can at least legally cover your personal ass(ets).

Keep in mind that my thoughts are based on procedures and tax law in MI, so if there is some mysterious overhead in your state that differs from MI, then you must take that into consideration.

So, I guess my suggestion is: If there is a good chance your startup will flop and fail within the tax year, and not get sued in the process, don't bother. But if you are serious about it and believe it has potential to grow, why not do it now?

pkaler
I incorporated right away. Mostly for tax purposes. I can write off 40% of my rent and a lot of my business meals.

I also plan on contracting to extend my runway. It's best to be incorporated for that.