Don’t register your idea as a company

This is a really good article and I like the thinking, however there seems to be an underlying assumption that a company is like a disposable paper plate -- once it's been used for something, it can't be cleaned and reused like a china plate. A company doesn't have to be horrendously expensive to set up, and can even be dirt cheap in some jurisdictions like the UK. If the idea fails, so long as the company isn't otherwise insolvent it can be reused or even kept dormant for the price of a decent lunch, ready for the next idea.

The thing that bothers me about this pre-incorporation experimentation phase is liability. This advice would lead to a window of personal liability in the beginning for the founders. Although I'm not used to the same level of litigation risk American entrepreneurs face, incorporation in any jurisdiction can (in most cases) serve as a really cheap form of legal liability insurance.

I also wonder (and this will be highly dependent on the jurisdiction) whether the founders will be liable for their pre-incorporation actions. For example, if they write software that infringes on someone's patent, would incorporating later ease their personal liability for the time before the business was incorporated and IP rights were transferred to the company?

You should consider the tax treatment of your decisions. Do you want expenses written off against your personal income or not? If you have something that must be capitalized, how do you transfer those assets (and tax deductions) to the company? How do you properly move any intellectual property that you developed on your own into a company?

I didn't incorporate my project. It only earned a bit of income but was then bought by another company. The sale ended up being more costly for me because of the extra work required to roll over the assets of the business (especially the intellectual property) into the newly created company.

I agree with Joel that we shouldn't launch a company, but an experiment. Very true! And the goal of that experiment should be to find a product/market fit. Again, true! But I don't agree that the above points mean that we should delay incorporating.

Creating an LLC is cheap and simple, and it doesn't have any tax complications. Moreover, it gives tremendous benefits in terms of reducing liabilities (what happens when a pedophile decides to use your website to look for victims, and you get sued?), and clearly defining ownership (can you be sure that your friend, who worked on the experiment for the first two months, and then quit for a job at Facebook, won't come back to claim ownership when you see any traction one year later?)

His reason for not incorporating -- your ideas will change -- can be easily taken care of. Just don't tie the ideas to the LLC. Maybe to remind yourself of that, you can name the LLC, Joel's Experiments LLC. And when your experiment is ready to be a VC-backed business, converting the LLC to a C-Corp is easy.

The best comment was something like

  Think of it not as a startup but an experiment. 

So much of our self worth gets rolled up in this great idea that if it is attacked, criticised or does not take off we feel personal failure. Putting up a once-removed buffer is likely to make that first step easier for many more people than the traditional entrepreneur mindset.

Henley school of business claims to be able to identify the personality type that will succeed as an entrepreneur. I think what we are seeing the lean startup movement might send them back to the drawing board.

I would generally agree that there isn't much of a reason to worry about company formation until there is an idea that you have has shown has some viability.

Otoh, for some incorporation or forming an LLC is a demarcation point in their thinking that they have something "official" and a certain level of seriousness about what they are doing.

While someone can easily hack together a website over the weekend (as the meme goes) having to put some effort into business registration, accountants, possibly attorneys and trademark registration seems to make some believe believe they are taking the first step toward something they are committed to and ties them up at least a little from walking away (consistency principle). Many things in life work in a similar way (marriage comes to mind as only one).

This is a relatively new phenomenon as starting a business before the internet generally required quite a bit more money (the commitment) as well as possibly renting a physical location or at least placing advertisements in the local newspaper or yellow pages. Even getting phone service was expensive.

While I'm sure Joel has some interesting points of view; for some reason I always get this error when I try to read them. This webpage is not available The connection to joel.is was interrupted.

Once you have other people involved, or any substantial expenses to offset, it's really worth incorporating.

I hate that California imposes a minimum $800/yr tax. That's the single worst tax law in California for startups -- a really pro business California would give companies years of minimal taxes ($50?) as domestic or foreign-registered corporations. Also, minimize all the compliance paperwork for a company with less than N employees, or where all employees own more than 5% equity. No UI/UC, WC, etc. Possibly a federal FICA holiday for small employers for 1-3 years, too.

I would say to register a company anyway and treat it as a way to charge for your work. You can use it for products and services too, if you want to sell any, but regardless of that it's a good mechanism that you will need anyway if you're into something big.

Note that this wouldn't work for a country where setting up a company would be a "heavy" operation so I can understan the author's advice in that setting. On the other hand, if it costs 50 euros or less and doesn't require much overhead if you have little or no activity, then why not.

Any developer freelancing or working on random side-projects should have an LLC in place. You can't go wrong, all it takes is about $300 on http://legalzoom.com, but it covers you personally if your product/services ever gets into any trouble and provides tax advantages too.

So, if you have something that's still an "idea" (with a bit of prototype software attached to it), which you really are only working on as a "hobby" (since you have a full-time job and can only fit in an hour here or there in place of your lunch breaks to hack on it), and you haven't made a single dollar from it yet--

but, you have a tiny, dedicated userbase (which you've purposefully kept small so you could personally tend the garden of your own community and work out bugs), and more than a few people jumping to invest in your idea, who want some sort of corporate entity to exist so they can own shares of it--

is it time to register as a company?

I've talked with a lawyer and you can establish a business and then run other businesses under this umbrella company to avoid liability. That's my understanding -- but this isn't legal advice. It makes sense if you have a product that isn't as polished as it should be (experiment) and it causes loss or damage to your users. Of course most people are fucking around with twitter api's and mashups and whatever is hot these days, so I think that is where the author is coming from.

If I had a penny for every time I doled out ~$50 for a business registration when I was ~10-15 years old... I would have ~10 cents.

I don't blame people for running out to incorporate their business or register their new idea with the local government, since that is seemingly the first step you must take before starting a business.

After you register a few business' however, you find out it's not.

I also think it is beneficial to incorporate/at least an LLC when you have a friend/business partner that you are working with on this hobby. This way you can have a common bank account, you can keep track of expenses, taxes are paid at differently and you have a common name to operate under.

“Don’t incorporate a hobby. Incorporate when you are serious about making your startup a business.”

1) When you need to take advantage of the liability shield.

2) When you take on investors, who will typically want a C corp or at least a LLC structure.

3) When you have good reason to bring assets or income under a company umbrella (for any number of potential legal or tax reasons).