On Incorporation - Hold Off Until You Have The Cash To Spare | Hacker News Reader

On Incorporation - Hold Off Until You Have The Cash To Spare

blog.meatinthesky.com

39 pointssachinag33 comments

As a lawyer, I try above all to work with clients in flexible ways. Every lawyer should do this and many do. A client should never feel that coming to a lawyer is something at all costs to be avoided unless and until he is prepared to pay in blood.

Now this is a thoughtful piece and I am not saying that this is the tenor of the argument.

But all or nothing is not the way to approach your company formation legal issues.

First, as early on as possible, you should meet with a good lawyer in the startup field to get a strategic perspective on the legal issues. What are the legal goals you need to accomplish? How do you best go about them? What are the likely costs of different ways of going about the process? Is there a fixed-fee package that make sense for your goals? This type of initial meeting might be introductory and general (and free) or might get into all the specifics of your case (in which it would likely cost you something, but not much).

If you are a sole founder, do the quickie incorporation and be done with it, as soon as possible. In that situation, it is not an issue of "doing it right" because you can pretty much stumble along blind and still get it basically right for the simple legal issues involved.

If you are part of a founding team, and need to impose vesting on founder stock, file 83(b) elections, capture IP via assignment agreements, set up equity incentives for key people, etc., then do not wait to shop this around to knowledgeable law firms. If what you hear is rigid and expensive, then perhaps you should wait but doing so carries its own risks. I think what you will find, though, is that you can get a knowledgeable lawyer to do this sort of more sophisticated package on reasonable terms, sometimes as low as $2K or $3K for legal fees if the founding team is reasonably sophisticated and does not need a lot of hand-holding.

If you shop it around and don't get the right quotes, then you can make a conscious decision to say, "I know I might need this but I will take the risks and wait in order to stretch my dollars." If you have gotten a strategic perspective from an initial meeting, and done the shopping, then you will make such a decision based on a careful analysis of the issues involved, giving each of the trade-offs their due weight.

Perhaps this is all another way of saying just what the author does ("hold off until you have the cash to spare") but perhaps you really do have the cash earlier rather than later if, by following these simple steps, you discover it really is not such an expensive process to "do it right" for your circumstances right up front.

As the author, this is sufficiently similar to my argument that I'd say we agree, mostly. At the very least, please shop your incorporation business and get bids. However, I still don't think the corporate veil you get as a sole founder in a quickie incorporation is worth the cash.

Doing a quickie LLC then fixing the quickie incorporation later (doing the merger transaction and dissolution of the quickie LLC) can often be more expensive than just waiting to do a C corporation the right way.

And I would agree with your additional point as well. A quickie incorporation is fine if you are intending to start as a sole founder and anticipate remaining that way. If you plan to add a founding team and anticipate needing a more sophisticated set-up, then you should be more cautious about doing it right from the start (we often get "instacorps" brought in for such repair jobs and, yes, it is true, it can cost more to repair them than it would have to do it right in the first place).

Great pieces by the way (I don't want to come across as just a critic - my points really touch on your argument at the edges, I think).

It would be interesting to learn these actual costs from a lawyer, or someone who has gone through this process. I've worked at 4 different startups that changed from an LLC to a C corp. I wasn't privy to those costs, but I don't remember anyone being too worried about them.

My lawyer gave me a LLC agreement that had C corp conversion language built in. He says it saved him the headaches he normally encountered when doing so. So, perhaps it's worth asking about when shopping around.

I don't know what the situation is in the US, but here in the UK incorporation is so utterly trivial to do and offers such benefit that it is something of a no-brainer for any venture which has even the smallest risk of unexpected liabilities. Although you can spend hundreds of pounds on incorporation, you can just as easily do it for 25 quid.

The side benefits of incorporation can be significant. Many component manufacturers provide more resources to registered companies. Access to distributors and lines of credit is far better. Many potential customers won't even talk to you if you're not a registered company.

Maybe the OP needs a better lawyer, maybe the US needs better law, I don't know.

To provide an idea of just how easy it is to incorporate a limited liability company (Limited / co.uk) under English and Welsh law, visit Companies House:

http://www.companieshouse.gov.uk/infoAndGuide/companyRegistr...

http://www.companieshouse.gov.uk/

Impressively, they even offer same day incorporation.

The authors arguments simply don't hold water IMO. He notes how incorporating became expensive due to an unexpected need to offer a stock purchase plan. Is he saying that incorporating forced him to offer an options plan? Its my understanding that such programs are entirely optional.

His point about finding an expensive lawyer to "build a relationship" for making introductions is equally puzzling. He might have found that such lawyer wasn't worth the investment, but that's not a reason for a startup to not incorporate.

For me, liability protection is extremely valuable. If you have no assets, perhaps the liability protection isn't worth it.

IMHO, his main point was incorporate after you are dealing with someone else's money. I would wait till the moment I have someone willing to pay me for my product/service. Until that point, it just gets in the way.

I don't agree with this. It is vital to have legal separation between your company and yourself--whether that be in the form of an S/C Corp or a Limited Liability Company. I just incorporated in Illinois and it cost me about $400 through LegalZoom. They took care of everything and all the rest was handled through my accountant for another $200. That amount is trivial given the structure and protection I now have with an S Corp.

As far as the stock option package--they messed up and shouldn't have formed an S Corp. S (Small Business) Corps are pass-though just like LLC's--the shareholders pay personal taxes on the profits of the company. They also only allow you to distribute one class of stock, making employee stock options hard to do.

The author's lawyer/accountant should have told them that, but I still can't see how all that came out to a $40K mistake. Word of advice: do your research. As a business owner/CEO, ignorance is not an excuse--do you're homework and ask the right questions.

You can have a sophisticated stock option plan with an S corp.

My classic case was when I had a founder come back to me after exiting his prior company $3B richer than he started and then used tens of millions of his own money to found and fund one of the most elaborate S corps I have ever dealt with. He wanted the S status to be able to pass the early-stage losses through as set-offs against other income.

There were about 100 employees, many of whom were not U.S. citizens or permanent resident aliens and virtually all of them got stock options.

However, since the options do not technically constitute a "second class of stock" (an S corp killer if they do) and since the plan and the stock option agreements conditioned the exercise of the options on the company's first having abandoned its S status (another S corp killer is to have a foreign national as a shareholder), the plan and the whole incentive scheme worked.

This was a more complex setup than usual but not $6K worth of complexity. What it primarily required was a good working knowledge of S corps and of equity incentive plans and how to properly mix the two to achieve the client's aims.

Sachin, I don't get it. It costs almost nothing to create an LLC. Do it, and now you can't lose your house over hosting fees. Later on, when you want to form a relationship with a lawyer, spend money on an S-Corp or a C-Corp.

Lose your house over hosting fees? When has that ever happened?

It didn't happen, because the person who would have gotten screwed instead bought hosting as an LLC.

I'd like to understand more about this situation. If you are in a position where there is a reasonable chance that you will incur large amounts of debt with no ability to pay it off, for example your free facebook game unexpectedly gets way more popular than you expected and you didnt read the fine print of your hosting agreement that says you suddenly owe them a zillion dollars in bandwith usage fees, then it does make sense to incorporate against this kind of liability but I'd like to know how the particular situation you are referring to came about.

What you're asking is, describe a situation in which a startup crashed with a large outstanding hosting bill. I'm not going to, but I don't think it's hard to see how that could happen.

I could give other examples, but they hit somewhat closer to home.

I'm not sure I'd consider it "almost nothing"; if your startup budget is $10k and ramen, it's a noticeable chunk of that. In California, it's $800 per year to keep an LLC incorporated, plus an extra $200 or so the first year in fees. In NYC, it's $1500 or so to set up an LLC. Some states are cheaper, though (Texas is a one-time $300).

This is the cost of starting up a business. It's not a Wordpress Blog--it's a business and it's gonna cost money. If you can't stomach $1000/year in filing fees you either need to find a business that will earn some revenue in the first year or move on to greener pastures.

Or, you could just not pay those fees, and operate as a sole proprietor initially. If you don't have large savings, there's not really much risk; if you lose your $10k, declare bankruptcy and start over.

Start over with a new company with a personal bankruptcy in your credit history?

$125 a year for a PA LLC (and a PA LLC is a strong LLC, in some states an LLC is missing some protections that corporations have).

To be clear Sachin is not talking about setting up an LLC or an S Corp. He's talking about setting up a C Corp, probably in Delaware, for a start-up where your immediate intention is to go out and raise funding.

Service businesses don't apply and neither do bootstrapped web apps. If you're doing one of those go ahead and form your legalzoom llc or s-corp and get the worry out of your mind.

There's a reason YC and others want you to wait and its because untangling the mess that self-incorporation can create is a needless and sometimes expensive time sink when preparing you for investors who are used to dealing with this specific case.

I'm not sure Sachin's part about needing a good lawyer for introductions is important but the part about doing incorporation for a C Corp raising money correctly is a proper point.

But a $40,000 mistake? I can't wrap my head around that number. With a little forethought and a few days research you could have been ready with those kinds of questions before meeting with a lawyer or an accountant. Especially when your intention was to seek funding.

No I doubt its normally a 40k mistake but he didn't elaborate... he said it cost the business 40k, he didn't say they paid out 40k.

Both Sachin and his detractors are speaking in overly broad terms here. Sachin's getting hammered though because he's taking one case and extrapolating general advice from it. Some of the points against his argument are fair and some arent.

The confusion here might also have something to do with the blurred semantic differences that are occurring these days between traditional business and start-up

Seems more like you hit one extreme of shelling out too much money up front and now are advocating the other extreme.

My philosophy: hold off till you get your first customer contract OR take on some genuine liability(ie. DMCA).

How I'm handling it... 1. I incorporated my startup after getting the contract. It cost me $180 bucks. 2. I told my good lawyer friend who was after me to go through him that it would make more sense to consider him after we raked in more contract over the next few months. 3. I have not gotten a bank account yet. I'll do so soon as I get the first check(off the contract). 4. I do have a potential cofounder I'm thinking of bringing on board. I am unsure how to go about his paperwork. In initial stages, we'll probably just make a simple specific written agreement along with a set milestone by when we'll officially redo the paperwork.

In general, I like to let revenue/liability/funding dictate any lawyer work.

Wow: he was unfamiliar with how an option plan should be structured for an S-Corp and ended up having to do substantial research sounds like a lawyer unfamiliar with some stuff that I would expect to be basic. As ever, read what grellas says, and his $2k o $3k is what I as a consumer of such services have come to expect.

I agree with this. I incorporated a business that I really didn't need to and it just ended up costing me a ton of cash I could have used, and added on countless little complications to my life which I'm still trying to untie from after having dissolved it.

If you're not dealing with other people's money (investors), and you aren't running a business that is raking in solid revenue yet or not in a really vulnerable position legally, its just not worth it...

While I see your point, if your business gets sued, you personally could be far worse off than the cost of incorporating.

Wouldn't a personal umbrella policy cover this, for a sole proprietorship?

It might cover you financially--to an extent. But they'd still be suing you, personally and not your company. As an owner/partner in a corp or LLC you have full legal separation from your company (so long as you are running it legally) and can't personally be held liable.

                     PHILIP II OF MACEDON
  You are advised to submit without further delay, for if I 
  bring my army into Sparta, I will destroy your farms, slay
  your people, and raze your city.

                          SPARTA
  If.

Well, I didn't get sued. Fortunately I'm not manufacturing pacemakers.

deleware c-corp through incorporate.com = $250. includes an EIN and a bunch of other stuff that i probably don't even need.

i've built dozens of projects, but have only incorporated 3 times. the only criteria i personally use: if i'm serious enough to where i may want some extra help in exchange for 'common' (or 'preferred' to invest) or feel there's a risk of getting sued.

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