Im self funding myself (I’ve got some money saved up) and not really sure how to set this stuff up. Don’t have anyone I know personally to ask so I’m hoping an actual founder or solo app dev with this experience can let me know what they did and why.
I am in California USA
California is ridiculous with their fees. If it were me, I'd register the LLC in another state and pay a registered agent fee (you need a physical address in the state you register the LLC). Here's one for $99/yr:
https://startupsavant.com/best-registered-agent-services#zen...
Living in CA and having the LLC in another state might have some tax implications you could review with an accountant.
My business partner and I initially setup a partnership for rubylane.com, but then had to change it to a regular corp because once we actually had income, we were going to have to each file personal state returns in every state we had customers, ie, all 50. As a regular corp (and probably an LLC), you only file in the corporation's state. According to our CA accountant, an S-election would have put us back into the situation of needing to file personal returns for every state we had customers.
There are other tax implications you should review with an accountant, for example, if you setup a regular corp (no S-election) and decide to leave money in the corportion, you will get taxed on it at corporate rates, whereas if you pay it to yourself, you'll get taxed at your personal rate.
Another thing to keep in mind: everyone thinks that corporations provide some magic liability protection, and that is somewhat true when a group of people form the corporation. But if you are the only officer, a corporation doesn't provide much protection IMO: anything liability incurred by the corporation is obviously caused by you, so "piercing the corporate veil" is not much more than paperwork. Just my opinion. You'd be better off with an umbrella insurance policy - again, just my opionion as I'm neither a lawyer nor an accountant.
Setting up a business entity is easier than finding customers. And less important. If you don't have customers, then setting up a business entity is "playing house." It feels like work, but doesn't change anything important.
Keep in mind that while YC companies incorporate early on the YC pipeline, there is a sound business reason for doing so. They incorporate so that they can get YC's investment.
In California, an LLC costs a few hundred dollars a year. If you don't have customers, that money is clearly not doing anything for you. And even if you do have customers, there are probably opportunities with greater return than incorporation.
Incorporation is potentially insurance against personal liability. It won't prevent someone from suing you. It just means in the six-sigma event that you wind up in court with a good lawyer, the case might be thrown out. "Might" because very small corporate entities are sometimes no better than a sole proprietorship in the eyes of the law.
But if you want to set up an LLC or S-corp, talk with your accountant and lawyer (probably your insurance agent too, just to cover the full team).
Having an accountant, lawyer, and insurance agent is a reasonable bellwether for enough of a going concern for incorporation. If you can't afford an accountant, lawyer, and insurance agent, that's a symptom of an unviable business. It's probably not worth doing.
Good luck.
This is my first foray into business of any kind and I’m really looking for the liability protection offered by being a registered business entity.
Since I don’t have any revenue yet should I then dip into my amount set aside for this business to pay for those? You said if I can’t afford that the business isn’t viable, so just trying to understand. Thank you!
What liability do you actually have?
How will a forming a business entity protect you from actual liabilities?
What additional liabilities will forming a business entity incur?
How does the ongoing cost of maintaining a business entity effect cash flow from the business?
I'd put it this way. Building an app isn't usually a path to forming a 'real' business. Most apps don't generate any cash flow. Very very few generate the few hundred dollars a year it costs to incorporate in California.
Forming a business entity is easier than finding a revenue model. And finding a revenue model infinitely more important.
Be in a hurry to make money.
Don't be in a hurry to spend it.
Cash on hand is critical.
You can always form a business entity later.
It is not urgent.
Who would sue you?
Why?
In my case since it is a social app where people can meet virtually and also in person, the biggest risk I’m afraid of is people doing bad things that are against the TOS and I’m on the hook.
I appreciate those questions to ask self.
I tried looking up how dating or events app do things and most of those seem to have very structured business entities around them (like IAC)
The best favor you can do for yourself is get to "no" quickly.
Then you can decide what to do about it.
On the other hand, there's a lot of value to launching quickly, and IMO usually this benefit outweighs the risk of personal liability. I'd just try to make sure that your terms of service includes a limitation of liability / indemnity clause.
One underrated aspect of not incorporating is that it keeps your company feeling more like a "project" than a company. And I think it's worthwhile staying in this stage for as long as possible, because it gives you more permission to experiment with wild ideas and iterate in weird directions, even if, as in your case, you have a pretty solid idea of where you want to start already.
FWIW, I didn't bother incorporating my own startup until I'd secured terms for my first fundraising round.
Tough luck with CA. You have to pay the $800 a year franchise fee before you make a single dollar in revenue.
Corporations are needed/good when/if you get investors, and need board members, and stock options, etc.
(Not legal advice, take with a grain of salt).
So the real question is "LLC or corporation"? There are good reasons for both, but some of the key factors are:
1. There's an upper limit to how many owners (members) an LLC can have, whereas a corporation can have an unlimited number of owners (shareholders). So if you're envisioning being a Unicorn one day, going public, having your stock traded on the NYSE, etc., then you want to be a corporation.
2. Venture capitalists will not invest in an LLC. There are technical / legal / structural reasons for this that I don't know all the details of, but take it as a given. VC's simply don't invest in LLC's. Now, if you start an LLC and then decide to try and raise money, does that mean you're screwed? No, as it's always possible to convert from one form to the other. But doing that is going to cost you time, money, attention, etc., and generally complicate your life. So it's probably better to pick the right option up front.
3. It's usually the case that forming an LLC is faster, cheaper, and simpler, and the annual reporting / paperwork requirements are likewise less burdensome. This is another argument in favor of the LLC if you're planning to stay solo or very small, as it's less b.s. you have to deal with as far as filling out and submitting reports and paying fees.
Both an LLC and a corporation provide a measure of protection from liability for you as the founder (the "LL" in LLC stands for "Limited Liability" after all), but neither is absolute.
You'll probably want to start either an LLC or a S Corporation. There are a lot of resources on the internet, and on youtube. Just look up "what structure should I use for my business" and searches like that. Watch videos and read about them. That way, when you go into your CPA to discuss which option is best for your specific requirements, your CPA won't have to waste time explaining what a C corporation or an S corporation or LLC, except for a few lingering questions that you might have.
There's a LOT of companies that will start your corporation up. They usually charge $50 or $100 or thereabouts. Don't pay some lawyer to do it for you for $5,000. Well, if it is a "standard" type of business, that is, which it seems like yours is. For example, you can use https://www.swyftfilings.com/ They charge $49. This does not include state fees. This is just the price that swyft charges for what they do. I would get the Basic choice for $49. It does not cost a cent for an EIN and it is easy and fast to get, for example. For the corporate bylaws, just do a search on that: https://duckduckgo.com/?q=corporate+bylaws+examples&atb=v217...
Just copy and paste into a document and see what pertains to your company. It helps to look at a bunch of bylaw examples to see all of them and take from then what applies to your company. when you see a lot of bylaws, you start to understand how they are put together, rather than just look at only one sample.
Here are a copy of the state of California fees: https://bpd.cdn.sos.ca.gov/pdf/be-fee-schedule-062018.pdf
Here is info on California's Franchise Tax Board: https://www.ftb.ca.gov/file/business/types/corporations/inde... You will see that there is a minimum of $800 per year for operating a California corporation.
Remember, the government comes first before anything. They are #1. Before paying rent, before paying your health insurance, before getting needed medication for your children. OK that last one was not really true but used to emphasize a point, in that the government is really #1. They will kick you ass with penalties and interest if you don't pay correctly. Do not mess around with them, especially with payroll. Use a payroll company, don't do it yourself. Most payroll companies will take full responsibilities to pay penalties and interest if they mess up.
Remember, the corporation really isn't "yours." The corporation is a legal person. A corporation can open up a bank account in it's name, but your office chair cannot. You will be both a board member and an officer, which are two different things, so you need to put on a different hat for each role. This is extremely important because if you run the company as an extension of yourself, the courts will "pierce the corporate veil" and declare that the corporation is not a corporation, and you will be personally responsible for any debts, etc. Which defeats the purpose of having a corporation. So what that means is that you don't pay for your personal expenses out of your corporate monies. This is in the same way that the CEO of Apple cannot pay his children's college tuition by writing a check on an Apple checkbook. In your capacity of CEO at your company, you are actually an employee, same as any other company. And if you DO want to pay for your children's education from your company, as a perk, then you have to go to the board of directors, ask permission, and get an approved written piece of paper that allows it. Even if you are the board member yourself. So you sit on both sides of the table. Your CEO persona must ask your board of director persona's permission. And then it must be approved by an actual real vote (even if it is only yourself - you have to keep formalities whether you personally think it is important or not). Then you have to pass the resolution and write it down and put it in your corporate binder, in case the courts ask for it somewhere down the line.
Here is the actual corporate code for California: https://leginfo.legislature.ca.gov/faces/codesTOCSelected.xh... Read it.
Good luck.
I’m so motivated now
Also, I don't know if you plan to grow, but your balance sheet, income statement, cash flow statement, keeping up with your books is the most important thing in a company. More important than the product or service you provide. Nobody works for free. Not you, not employees, not vendors. Not taking care of your financials is the #1 reason for businesses going out of business. The first order of every single day should be to go over your accounting. It should only take 5 or 10 minutes a day, when you are small or medium sized, and if it takes you 2 hours, that's great because it means that you caught something and have to fix it, that 3 or 6 months down the line could kill your company. Don't underestimate the importance of the cash flow report. If you don't want to deal with the financial side, then don't even start a business. You cannot outsource it or have another partner or one of your team members do it. At the heart of accounting, is so easy, it is addition and subtraction, which we learn in 2nd grade. And the other part is categorization. You know, which does not belong: cat, dog, car, or cow. Which doesn't fit? Again, something we learn in 2nd grade.
Also, learn about financial controls. These are controls that you put on your accounting to make sure no one is embezzling. For example, you never ever let only one person do the books. Don't let your bookkeeper work on it 52 weeks a year, because then they can hide their wrongdoing. Do a google search on embezzlement examples to get an idea of what happens to people. There's all kinds of financial controls to limit the damage someone can do. Another good one is never delegate the signing of checks or making payments to another person. Do it yourself until you are as big as Amazon. Not that big, but you have to be doing thousands of payments per week, for example. This is only if you start getting big. If you are a sole proprietor and you do your own books an you only have 1 customer a month, then don't worry about it. But be aware that financial controls are super important. Embezzlement. Here's a story of Rita Crundwell, who perpetrated the largest embezzlement of a municipality in history - $53 million. https://en.wikipedia.org/wiki/Rita_Crundwell I once read this long, long article on it, it was a fantastic article about how it all went down, a complete analysis.
Ubiquiti Networks was scammed because of poor financial controls - $47 million. https://www.forbes.com/sites/nathanvardi/2016/02/08/how-a-te... As you will read in the article, the relevant issue is lack of financial controls. "The company's description of events suggest a compliance breakdown. Typically, publicly-traded U.S. companies require at least two people sign off on large money transfers. “All companies will have some minimum level like $5,000 that a person can just write a check for, but over some limit you would expect additional signatures from an independent person,” says Edward Ketz, an accounting professor at Penn State University."
By the way, financial controls just means procedures that the accounting department must follow in receiving and disbursing money, and accounting for it. These are well known and do not have to be re-invented. There are many of them, but here is a list of 17 from one source: https://www.score.org/resource/17-internal-financial-control...
You should really understand financial controls as an owner. You can't leave it up to just the CFO or anyone else. Because it is ultimately your responsibility. I know other people say you can delegate the job, and to some degree the implementation of it and day-to-day you can, but you still need to know and occasionally get in deep to review what's happening. Again, this is if you grow a large company.