Startup my Startup

June 24, 2009 10:47 AM

I am thinking about incorporating my web-based software startup. First, I am not sure if it makes sense to incorporate. Second, if I do incorporate, I am not not sure where in the world ( not just the U.S. ) I should incorporate.

I may soon be leaving my corporate gig for a while to spend some time developing web based software that I eventually hope to sell through licenses or subscription fees. I will ONLY be selling web-based software. There will not be a physical product. Some of this software would store confidential information. I will most likely be hosting the software on Amazon or Google's infrastructure.

Does it make sense to incorporate? I will be spending money to do this right ( home office, marketing, graphic designer, possible travel, etc. ). I would like to be viewed as credible by my customers. Because I will be storing confidential information, I assume there is some liability.

Secondly, if I do incorporate, where should I do so? Right now I am living in Bermuda with a permanent address in Michigan ( my parents ). I could be selling software to anyone in the world. My product will be hosted somewhere out in the cloud. Does it make sense to incorporate in my home state of Michigan, the good old standby of Delaware, another state, or another country all together, i.e. Cayman Islands, Costa Rica, Singapore, etc.

I am not too concerned about LLC vs. S-Corp vs. Partnership. Ultimately, I want to boost my credibility, maximize my profit, offset my losses, and stay out of jail.

posted by jasondigitized to work & money (3 comments total)

Do you have a business plan?

A business plan can help you understand when it will make sense to assume some type of structure that would serve to distinguish your personal from business activities. It will also help identify the best course of action for other decisions.

When: I'd suggest not approaching this decision until you've either realised or are close to realising either a business need or revenue level - preferably the latter - that demands such a structure. The problem with many forms of business structure is that they typically come with certain cost levels, minimally in the form of annual reporting requirements, if nothing else. This causes many people problems as they are bleeding capital for R&D / etc and don't factor in compliance costs.

It really doesn't make much sense to incorporate now if your plans calls for twelve months of development time, with selling projected to start in perhaps nine months into development as beta product is available, and first revenue expected to be realised in perhaps twelve to eighteen months time.

Domicile: Well, definitely you'd like to minimise taxes however keep in mind just because you base your business in Cayman (zero corporate tax) doesn't mean if you sell into New York or California you still pay zero taxes. With few exceptions foreign entities need to register to conduct business, if for no other reason to insure they are properly taxed. For example, New York requires foreign entities to register within 120 days of when they undertake business in the state. This is another level of compliance costs to be considered.

Again, your business plan can help here, particularly the parts the specify your target market and key (prospective) customers.

Where would your largest revenue source(s) be based? It might make more sense to domicile in a state where your revenue will be generated, even just for the first few years. This won't be a terminal, permanent decision, and one that can be revisited if and when sufficient revenue is available from your enterprise.

Structure: A partnership is very different than either an LLC or Corp. An LLC is indistinguishable from a Corporation in the respect of separating personal and business activities.

If your goal here is separate business and personal activities and assume a shield you really don't want a partnership. Especially so as most partnership structures allow any one partner to make agreements binding upon all partners.

It seems there are lots of questions open at this time. If you do have a business plan perhaps you should incur cost to sit down with a professional and get it refined somewhat, slotting in these decisions. In any case, your business plan should be evaluated by a third party who will help to insure its rigour.

Your overall goal should be to minimise cost; to this end, it doesn't make sense to incorporate now if you're going to be slinging code for a period before your product will be available. Other key decisions should be approached from the same viewpoint.

All the best for your startup!
posted by Mutant at 11:44 AM on June 24

I've been a freelance software developer for a very long time. I was briefly LLC incorporated, because a large client was prohibited (by their own corporate management) from working with individual vendors, but could work with incorporated companies that happened to consist of a single individual. After a couple years, when that relationship came to an end, I saw no reason to continue as an LLC so let it go dormant.

Ultimately, I want to boost my credibility, maximize my profit, offset my losses, and stay out of jail.

Credibility: whether you're incorporated or not will have negligible effect here, unless you expect your customers to themselves be large corporations -- most individuals aren't likely to notice

Profit / loss: negligible effect. Incorporating costs very little money, all things considered; and while I'm the farthest thing from an expert on taxes that could possibly be imagined, I didn't notice a significant difference in my taxes during the years I was incorporated. (The paperwork was much more complex, but that was my accountant's problem, not mine.)

Stay out of jail: well, that's why LLCs exist; for this reason alone I'd consider forming one if there's any possibility of the type of software you're planning to sell going badly wrong enough to make you liable for substantial damages. But as Mutant said there is no reason to do this now; it's fine to wait until you have a product and a clearer business plan.

if I do incorporate, where should I do so?

If you do incorporate, you will have a lawyer handling it for you. Ask him or her this question.
posted by ook at 12:48 PM on June 24

I agree that consumers might not care about incorporation, but if you're selling to businesses, they'll care. I think you should incorporate for many reasons, including credibility and some protection of your assets. And if you're going to incorporate, it makes sense to do it now, because you're setting up a separate bank account and you're signing contracts with your subs (or at least you should be doing these things). You might as well do all that as an incorporated entity from the get-go to benefit from the protection. It doesn't cost more to incorporate now than later. In my state it costs $87, and you do it entirely online.

I incorporated as a one-person LLC, which means that for tax reasons, my company is "disregarded." This means that my taxes haven't gotten more complicated than they were when I was a self-employed individual--I fill out all the same forms.

You might look at publications from Nolo Press for more ideas on incorporating. I did it without a lawyer.

Whether it's fair or not, I'd be more likely to trust a corporation based in a major country than one in a small country that's associated with offshore banks. But this could be moot, since you don't need to publicize the location you've incorporated in. It's most likely to appear in legal documents. Investors might care, for example, and subcontractors, if the location is listed in your contract.
posted by PatoPata at 4:29 PM on June 24