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Comment by charlesju | Hacker News Reader

I think this is in terms of startup mistakes, seeing as how "life mistakes" could start an entirely new forum all together.

Here are my top 3:

1. Wasting money on a legal entity. If you're not making money, you cannot be sued. Wait until you make money or have someone willing to give you money before you waste money on protecting yourself.

2. Bad business partners. Judge your partners not by how much you like them but if they'll complement your skillz, add value to the team, and are dedicated to the project.

3. Not saying no. It's a personal problem, I'm a really nice guy, it's hard for me to say no sometimes, but it's necessary. It's not personal, it's business.

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Your #1 item is dangerously wrong. If you're not making money you can still be sued for personal assets (house, car, etc); and if you don't have those, you can be sued for debt.

I'm baffled as to how he could actually believe that. Also, the cost of forming an LLC to insulate yourself against that is trivial.

You cannot get sued for having a site that isnt charging anything because youre not giving any legal consideration. Without legal consideration, there is no contract between you and your user base. Thus, while you technically can still be sued, having that case go anywhere is very unlikely.

Of course if youre doing something legally grey like youtube or file sharing, then perhaps you should incorporate. But without any assets in the company, the corporate liability will most likely be pierced in court.

As for a LLC. Its nice but you should really do a ccorp if youre serious about business, and changing from a LLC to a ccorp is a pain in the butt. Or so I hear.

To go further, I challenge you to show me a single case of a company being sued that wasnt doing something legally grey and not making any money.

Applying your litmus test means that no OSS company has ever been (or will ever be) sued for patent infringement.

It is difficult to have a corporate veil pierced on the basis of assets held alone, and there are specific conditions in place in every state that must be met in order to pierce the corporate veil. Which you've actually argued for yourself in your claim that a C Corp is the entity that you want to use in order to protect yourself from liability, because that is the basis of most of the corporate law in the US.

I just think you're advocating gambling with your personal assets when you could just as easily spend $1000 to $1500 to have a professional set up your corporation and have some level of protection. Additionally, you could throw in a few hundred bucks and insure the new corporation against liabilities. The last time I purchased a policy, it cost me something like $300 a year to carry a $2,000,000 liability policy.

I bet most people starting a startup have spent more than that on the laptop they use.

[Edit: Maybe there is a lawyer who reads YC who can clarify all this stuff for us]

Look.

I totally agree that you should grab some sort of limited liability protection. I am not a lawyer, so most of this stuff is hear-say or just random observations from my, to be honest, limited knowledge of the legal system.

I do know however that setting up a LLC or C-corp WITHOUT any tangible assets, as most string-budget startups are, IS piercable.

http://wyomcases.courts.state.wy.us/applications/oscn/delive...

That's the specific case that's often cited for precedent in LLC piercing.

HOWEVER

-- THIS IS THE BIG HOWEVER --

If you have any sort of funding, I'd say over $20,000, you should grab some sort of limited liability coverage ONCE you get traction.

But since we're all just guessing about the actual legality of this stuff, why don't we have someone that is an actual lawyer come and put an end to this debate.

Icey: Do you know ANY open source foundation that has been SUCCESSFULLY sued for damages? Give me ONE example.

At the end of the day. It's financial decision. Think of ALL the startups ever created for the web, the amount of money/time to understand to create the limited liability shelter, and how many of these examples of these shoe-string startups (those without funding or serious traction) actually get successfully sued for damages.

The odds are, very very very very very small. And ok, while my personal advice might not be for everyone. I am currently almost broke, so for me, it makes no difference if they come after my personal assets because I can just file ch. 7, as opposed to the amount of capital and money and upkeep that comes with any form of limited liability.

If you think I'm wrong, digg me down, but note how no one has (1) shown a counter example or (2) has given advice from the standpoint of a seasoned lawyer.

I'm not a historian, nor am I a legal expert, that's far outside my realm of expertise. However, just because I can't personally name an example of that happening doesn't mean that it "cannot" happen.

I was merely pointing out that the advice you were dispensing was risky and negligent. That is still the case; I'm afraid the burden of proof is on you, as you're the one making spurious claims.

"Cannot" is a world of difference from "not likely to".

You've added a sentence to your post regarding requiring an example. What basis would there be for any legal suit if a company wasn't doing anything legally gray? Isn't that the point of a lawsuit?

Negligent tort?

Are you a lawyer?

Is this legal advice?

No. But I have run a c-corporation and I know how hard and unnecessary it is when you don't even have a proper product.

You can get sued for many, many things, even if you don't charge users. Copyright infringement comes to mind. YouTube doesn't charge anyone for anything. Any site with user generated content is open to that one.

There are scores of other reasons you might be sued beyond a disgruntled paying customer. To say that you shouldn't spend the couple hundred bucks it takes to set up an LLC is just ignorant.

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