Ask HN: When to incorporate a SaaS startup (with partners) | Hacker News Reader

Ask HN: When to incorporate a SaaS startup (with partners)

6 pointsrpug3 comments

Hi,

I am working on a project that would be a web-based service (a mission critical service which gives me concerns about liability if we, unfortunately, have an outage.)

It is likely that I will be offering a percentage of the 'company' to two people in exchange for their work.

This service will be taking payments from customers (through some sort of credit card processor i.e. Braintree) and it will also talk to partners which I will need to pay for use of their API.

Does it make sense to incorporate up front? If so, S-corp, C-corp, or LLC? Delaware, Nevada? Or Massachusetts (where I live)?

I plan on consulting a lawyer but I'd like to go into that meeting with some knowledge and preparation. I'm hoping for some advice from people who have been there and done that (especially if they were offering a service.)

Thanks.

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My rule is that if you have trouble getting things done, make the software and then worry about incorporation so you aren't tempted to waste time obsessing with paperwork. In other words, don't incorporate if when you incorporate that's the only thing you end up doing. If that's not the case, then you should incorporate right away. If you believe at all the project is to be successful, or that it might have liability issues, then you really need to properly take care of the things that will be much harder or impossible to do when more money is at stake, or there is a threat of a lawsuit or an actual lawsuit pending.

Also, a corporation won't entirely save you from liability. If you think you have a liability issue, you will want to get business insurance that covers errors & omissions and covers the actions of board and officers. And, you will want a personal liability/umbrella policy as well.

Incorporate before you take a single dollar from a customer. It's not expensive if you don't use a filing service, only a couple hundred bucks. Regarding an entity type, investors will like to invest in a Corporation as opposed to an LLC. You could create an LLC and change it to a Corp, but it might be easier to file for a Corp straight away.

Regarding the filing state, best to consult a lawyer. Many companies file in DE solely for liability purposes, a lawyer will be able to gauge your risk for lawsuits.

I'll personally file all the paperwork myself, it takes under 10 minutes to write everything out. I don't get why people pay a company to do it?

"Does it make sense to incorporate up front? "

If you will be taking money from anyone up front, then incorporate up front. If you start as a free service in beta etc, may be you don't need to incorporate right away. But the moment money is involved, things get different. You want to protect yourself personally from liabilities etc.

Personally in my opinion, I would advise doing a corporation and not LLC. One reason is that it is much easier to convert b/w S-Corp to C-Corp if you ever get in the big leagues. The question would then be which one for now ?

I would say call up at least 2-3 lawyers or CPAs and talk to them. There are no one size fits all kind of answer here and even the lawyers/CPAs will give you different answers based on what they think.

My 2 cents and IANAL.

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