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?
This is what I did, too. I registered an Ltd in the UK with an unrelated name (Stochastic Technologies) and it serves as an umbrella for my consulting, products and experiments. It's very easy to register, and all you need is a good accountant.
Even if I had no products, the company would still be useful.
You don't really even need an accountant. You can file it online at Companies House's website for something like £15 and minimally adjust a standard memorandum and articles of association. The record keeping is easy and all the processes for incorporating, running, and dissolving a company are very well explained by CH's guidance booklets.
The UK, for all its faults, is one of the easiest and cheapest places in the world to incorporate, and all the other formalities combined are trivially trivial. The only qualm I have about incorporating in the UK revolves around how much personal data Companies House sells that subsequently gets splashed across the internet for all to see, free of charge. It's better than it used to be (directors' and secretaries' home addresses are now finally protected under the 2006 Act) but it's still a little too much unnecessary data that's made public.
Hmm, do you have any details as to the filing? My accountant helps me with advice and only costs about 100 pounds a year, but it would be nice to know how I can file by myself in case I need to...
Thanks, but how the hell did you know?! Thanks for the information, I'll have a look at the site and see what I can glean. The HMRC are indeed very helpful, I even have my own tax officer I can call. I'm beyond satisfied, especially when comparing the experience to the Greek one (ugh).
All your personal details you filled out on form 10 become public record, including your date of birth, former names, etc. Before the 2006 Act, all former directorships and personal residential addresses were also part of the permanent record. Also, all amendments you make become part of public record too.
If I really wanted, for a few pounds I could buy copies of your filings from Companies House! [1] [2]
Search your own name and you'll see a lot of information show up about you and the two British companies you've been involved in.
Ugh, that's horrible how accessible people's personal information is.
New York State has it right:
How can I find the names of officers and directors of a corporation or other business entity?
The Department of State does not require or maintain information regarding the names and addresses of officers or directors of corporations, the members or managers of a limited liability company, the limited partners of a limited partnership or the partners in a limited liability partnership. These records are internal records maintained by the corporation, limited liability company, limited partnership or limited liability partnership.
Actually, I find Duedil an extremely helpful service, and I think the increased transparency is a very positive thing.
If you start a business, you're not just a private person - you are the Director of a "legal person" who could be up to all sorts of stuff, including many bad things. You are entrusted with limited liability, lower taxes, and all sorts of other goodies, but there is a tradeoff.
The net effect of increased transparency is that it's much easier to tell when a business is dodgy. For example, Duedil allows me, when doing the due diligence on a possible client or supplier, to check the trading history of the owner. If, for example, I can see that the Director of that business has previously run 10 different businesses with similar names over the last 10 years, that might save me from a very, very costly mistake.
Transparency in the business world promotes trust. Trust is fundamentally necessary for a healthy business environment.
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'm genuinely curious about the ip transfer aspect. Could you expand on what IP did you transfer, how was it transferred and how much did that transfer cost?
I'm asking because I might be in the same situation in the future so I would like to know what exactly is involved in changing from an individual to a company when the product has already been developed by an individual.
The IP was the software I had created (web app + marketing websites), and bundled in with that was the customer list. Basically any intangibles.
In Canada it was done through a Section 85 election and there was some corresponding paperwork (T2057 + T2 tax return) But I needed to involve an accountant and a tax lawyer to make sure that the new company was structured properly to take advantage of the lifetime capital gains exemption, plus the lawyer's time to help me get specific wording in the sale contract to make sure I qualified for the exemption.
Cost wise it was probably an extra 15-20 hours of professional time.
Feel free to contact me directly (email in profile) if you want more details.
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.
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.
It's because he uses Tumblr. I repeatedly have this problem with my own and other tumblr blogs (the only pattern I have noticed is that they all use custom domains) and the only way to get around it is to refresh a few times and then it'll let you through. It's incredibly annoying, not sure if it's my ISP (who do you use?) or a problem with Tumblr.
Comcast Business.
I built my personal blog on Rails and use Heroku so hopefully people won't have an issue like that (Once I get around to actually posting something!)
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.
I would agree for freelancing but not so much for side-projects, though this depends upon your state.
If you form an LLC in California (my state of residence) you are now on the hook for paying at least $800/yr in taxes even if the LLC never earns a dime of revenue. The theoretical amount of legal protection you get from an LLC here is not worth the cost, IMO, for simple non-profitable side-projects.
The "it's cheap to form an LLC" mantra is common, but not always correct. In NYC it costs well over $1,000, and can easily approach $1,500, because of "publication" requirements.
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--
If you've got "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" you've probably already made it. The scenario where that happens while it's still just an idea you're treating as a hobby seems pretty implausible.
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.
Registering a company here in Australia costs enough that you usually need some traction first (it tended to be at least $1k in government fees, and ballpark $3k if you used an accountant, although I see now there are services for ~$500).
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.
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?