Do we really need to incorporate?
September 27, 2011 8:17 PM   Subscribe

A friend and I are starting on a side project together - do we really need to incorporate?

A friend and I (both living in NYC) are starting a small side project (possibly hiring a developer or two to do some work for us). The eventual goal (if we get some traction) will be to transition into somewhat of a full time gig, but we're pretty far away from that point. This is a web based idea/project if it makes a difference.

My friend insists that we spend the time to incorporate as a C corp, set up vesting agreements, etc... but to me that seems like a bit of a waste of time and money at this point. Am I just being naive? I just don't think its worth it to spend the time writing annual reports, filing taxes, etc... when we're months, if not years away from generating any sort of income or even trying to solicit any prospects. At this time, we're both still working at our full-time jobs and I just want to focus on developing our idea.

I realize you all are not my lawyers, but we're definitely not at the point of hiring any lawyers of our own yet, so any advice would be greatly appreciated.

posted by jourman2 to Work & Money (12 answers total) 2 users marked this as a favorite
Yes. Because if you don't, and this thing takes off, you will have to do it when you're each way, way more vested in its success and your own personal chunks of it. If one person wants to do it, you have to.
posted by Etrigan at 8:23 PM on September 27, 2011 [4 favorites]

if you hire someone to work for you, and they pick a crazy fight with you, would you want them to be able to come after your personal assets? same thing, except you borrow some money for your business and you can't pay it back on time.

you might want to get a little bit more paranoid and a little less optimistic.
posted by facetious at 8:25 PM on September 27, 2011

If you're going to do this seriously you should solve the "what happens if we start to hate each other" problems in print while you like each other a lot.

Also, "not worth it to spend the time" and "months if not years away from generating any sort of income" are not inspiring words to hear at the beginning of ventures like these. He might be more serious about this than you. Whether you incorporate or not, be sure you two talk about what exactly you each think you're getting into.
posted by michaelh at 8:25 PM on September 27, 2011 [1 favorite]

Do it. I have an S-corp (that owns an additional LLC) and it really didn't take any time to set up. It'll take like an hour of a lawyer's time, and you need to protect your personal assets, as facetious says. Better to do it prematurely (although I don't think this is premature) than WISH you had done it sooner
posted by Countess Sandwich at 8:34 PM on September 27, 2011

The answers above are all correct. Heed them.
posted by dfriedman at 8:36 PM on September 27, 2011

Yes. Absolutely incorporate. You need to protect your personal assess from the debts of the business, or from your partner's personal debts.

It's easy and cheap to do. it's likely tax deductible as part of your set up costs.

Not only that, but set up a clear, detailed shareholder's agreement or some other document that sets out the terms of your partnership, what each of you will contribute, what each of you will do, and what each of you will get. Make you that you both understand it, sign it, and have a copy. A decent lawyer or accountant can help you with this.

This is essential. You're friends now, but what if you have a disagreement? What if he decides he no longer likes your deal? What if the whole thing takes off in a big way? Money changes relationships.
posted by His thoughts were red thoughts at 8:50 PM on September 27, 2011

Do it now. Otherwise you legally create a general partnership the moment you start working together in the expectation of sharing profits, and you lose any ability to negotiate anything other than a 50-50 split. What if he doesn't do any work, or loses interest in the business? Tough; you're a general partnership and all you can do is try to buy him out. What if you have another brilliant idea and want to work on that instead, with someone else? You can't; you have an obligation to the partnership. What if he gets divorced? His ex-wife owns ΒΌ of your idea. What if he tells someone in a bar that they can be your exclusive reseller? He just made a binding commitment on your behalf.

&c. &c. &c. Get incorporated now!
posted by nicwolff at 9:30 PM on September 27, 2011

I just don't think its worth it to spend the time writing annual reports, filing taxes, etc... when we're months, if not years away from generating any sort of income or even trying to solicit any prospects. At this time, we're both still working at our full-time jobs and I just want to focus on developing our idea.

Pssst: tax deductions come from filing taxes.
posted by Ironmouth at 10:01 PM on September 27, 2011 [2 favorites]

When I started my business I thought the same way you did. Why incorporate and spend the money and figure out taxes (definitely get a good accountant), etc. That involves hiring an attorney and an accountant and I had no money to start with. Absolutely none. So I started with a simple Doing Business As (DBA) filing at the local county building, cost about ten dollars. That let me open a business checking account and take checks in the name of my business. When I got more money I hired an accountant and got one of those books on filing an LLC and did it myself. I was glad I did because it was very simple to do (a one page form). I have no regrets with the way I did it, and I went one step further not that long ago and spent the $275 to trademark my business name.

Your situation is a bit different because you have a partnership, and a more complicated business form. If you decide not to incorporate right away, you definitely want to get some sort of agreement in writing between the two of you that outlines your business, things like what you both will contribute, your respective percentage ownership, etc. The thing is... if you both have full-time jobs, you CAN afford to set it up as a corporation from the get-go, and doing so protects both of you. So I too would recommend you just set it up properly from the beginning. That also gets you invested in the process. You've spent some money, now you have to build something great or you'll never get it back. That's not bad for motivation either.
posted by banished at 10:50 PM on September 27, 2011 [1 favorite]

Incorporating is not very difficult. You can do it yourself, without a lawyer, on-line.
Various web-sites (like this one) can lead you through it.

But why a C-Corp? I would think you want to be an S-Corp or an LLC?
Do you understand the difference in these corporate forms?
Before you just willy-nilly pick a corporate form, take the time to understand the differences.
posted by Flood at 4:52 AM on September 28, 2011

Just to be slightly contrarian, what you need isn't yet a corporation but some form of an operating and ownership agreement.

Incorporating in itself is pretty easy, and for the most part only deals with who owns what and how ownership is currently dispersed. You really need the document that explicitly spells out how ownership gets distributed if one of you ends up needing to get out of the relationship. Generally all shares go into a pool which vests over a period of time usually 4 years. So its a 50/50 split but if one of you only works for a year and then decides to go that person only ends up with 25% of their total 50% (12.5% total). These are the kinds of things you need addressed now. This is one of several details that needs to be explicitly laid out early. I'd say you don't really need to incorporate until A. You get outside investment or B. You get paying customers.

If you chose to go after angel or seed money at sometime then generally these folks prefer S-Corps to LLCs but once you take investment that will drive the details of your incorporation.
posted by bitdamaged at 6:28 AM on September 28, 2011

Two reasons to do this: Protect your assets, and get your understanding down on paper now before anything changes.

All the stuff about choice of entity above is valid, but can be confusing. Here are two good articles about entity types.

IAAL, so of course I think engaging a lawyer is worth it, but secretly I think if you're good at paying attention to detail, you can do this yourself at this stage. Get a Nolo book and look up your state's Secretary of State website, which will have details about the process, forms to fill out, and what ongoing compliance is necessary (including annual filings and taxation). Definitely get a lawyer before there is any real value in the company or any price attached to the company. If you are even considering raising funds or entering into any significant contracts, get a lawyer. If you're still in the idea stage, you're probably fine.
posted by chickenmagazine at 9:07 AM on September 28, 2011

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