Ask YC: When do you incorporate?
Hi YC, so I'm in the process of building a prototype of an idea I've had and I need to purchase some equipment to do this - probably about $3000 worth. Is it better to just use my own personal funds to do this as an individual or is there a significant benefit to incorporating? What state would you incorporate in as a software startup? I was thinking about MA, but CA and Delaware seem popular too - what do you think?
17 comments
If you're just prototyping something for yourself I'm not sure it matters. The major reasons to be a corporation are:
* You have assets that you want to shield from liability when your customers sue you -- you'd rather have them sue the corporation instead. But, no customers yet = no problem yet. Assuming that your new idea doesn't involve radioactivity or anything.
* You want to give away shares in your new business to angel investors, VCs, or partners. No investors = no problem.
In any case, if you really think you want to form a corp you should talk to an accountant, and possibly a lawyer, about the details.
* You have assets that you want to shield from liability when your customers sue you -- you'd rather have them sue the corporation instead. But, no customers yet = no problem yet. Assuming that your new idea doesn't involve radioactivity or anything.
* You want to give away shares in your new business to angel investors, VCs, or partners. No investors = no problem.
In any case, if you really think you want to form a corp you should talk to an accountant, and possibly a lawyer, about the details.
I incorporated my last startup when someone offered to buy it. This is probably slightly too late, but I think you should delay it as long as possible.
If you need an entity for tax purposes, a sole proprietorship or LLP works fine.
If you need an entity for tax purposes, a sole proprietorship or LLP works fine.
If you're going to take investment form a C-Corporation. If you're not going to take investment right away (or ever) elect S-Corporation status.
It's a hassle to sell "shares" of an LLC to investors for capital, so I wouldn't bother because it the possibility is left open with a C-Corporation or S-Corporation.
Being a sole-proprietor or partnership doesn't limit your liability and investment doesn't really apply to either, so they're right out at the start.
And if you're just making something for yourself then there's no need for any of this.
It's a hassle to sell "shares" of an LLC to investors for capital, so I wouldn't bother because it the possibility is left open with a C-Corporation or S-Corporation.
Being a sole-proprietor or partnership doesn't limit your liability and investment doesn't really apply to either, so they're right out at the start.
And if you're just making something for yourself then there's no need for any of this.
I incorporated right away so that I could write off big chunks of my day-to-day expenses. I write off a big chunk of my rent and most of my meals that I go out to eat.
Has an accountant blessed the idea of writing off your meals? You may be setting yourself up for an audit at some point where you have to explain how exactly that meal was business related.
True. You have to track your receipts also, and it might even be a good idea to have the corporation "reimburse" you for the computer through company funds. I hear you also have to be very careful with the home office deduction, because it's a major red flag for auditors.
I'm pretty sure that sole proprietors can write off business expenses as well.
Of course, depending on what you try to write off, the IRS might be very suspicious -- but that's true for corps, too. The rules about what constitutes a "business expense" still apply to corporations.
It does make the bookkeeping easier to have a corporation, and it may affect the odds of being audited, depending on exactly what your profits and expenses are. Again, there is no cheap substitute for a real accountant's advice.
Of course, depending on what you try to write off, the IRS might be very suspicious -- but that's true for corps, too. The rules about what constitutes a "business expense" still apply to corporations.
It does make the bookkeeping easier to have a corporation, and it may affect the odds of being audited, depending on exactly what your profits and expenses are. Again, there is no cheap substitute for a real accountant's advice.
This may be a silly question, but just so I'm clear, I'm assuming that you can't write off anything from the firm until it is actually generating revenues. Is that right?
No. Business expenses can be deducted even with no revenue: milage, business supplies, equipment, lunch about business dealings, etc.
Interesting. Do you deduct those expenses from future revenues or from your personal income?
In the case of a corporation (C-Corporation or S-Corporation) business expenses are paid by the corporation and most are tax deductible on the corporation's tax return. So if a corporation has revenue no taxes are paid on the money used towards deductible business expenses. This is one of the nicest features of corporations because there are so many deductible business expenses.
When do you incorporate?
As soon as you have to share (with investors or partners)
or to protect assets.Once you incorporate, you then transfer some personal money to the Corp. as either Owner's Equity or a loan and pay your expenses out of that.
You can write off purchases before you incorporate (as a sole proprietorship), if that's what you're asking. Incorporate if you need liability protection or if you're going to take investment. I typically do that right away if it's a project I'm serious about... why not?
If you're going to take an investment, you should consider Delaware C Corp.
Do you really need the equipment?
if u r going to apply to YC (or anyother YC clones) then they suggest/prefer not to inc. this is b'cause they (YC) help you with all these formalities in the best possible way - they have lawyers lined-up to help you.
But if u want to write-off ur expenses then its better u meet an accountant, most possibly he/she will suggest to inc.
But if u want to write-off ur expenses then its better u meet an accountant, most possibly he/she will suggest to inc.