Incorporating Your Startup
In the comments on my Startup Technology Stack post, Joe asked the following questions:
1. What are your top 5 tips for incorporation for someone who is new to the process?
2. What would be your top 10 “need to knows” or advice before starting your own company?
Great questions. I’m not sure I have 5 tips about incorporation and 10 need to knows, but I’ll give it a shot. This post will answer the first question regarding incorporation.
There is a lot of good information on the web about the various types of entities available to you. Some of the specifics depend on the state you live in but the general principles of LLCs, S Corps, C Corps, etc. are similar in all 50 states. Each type of corporation has its advantages and its disadvantages and you could make a case for any of them. I think the most common mistake is to just start a business without creating the corporation (regardless of the corporation type). You can do this and you will be treated as either a sole proprietorship or a partnership (if you are partnering with someone). Without a corporation you have no good liability protection and generally very few tax advantages. Resist the temptation to get started without spending the money to create your corporation.
In general, I prefer the LLC structure because it’s simple and governed almost exclusively by your operating agreement. Profits and losses flow through to your personal tax return. I would probably choose an S Corporation (or create an LLC and opt to be taxed as an S Corporation) if I wanted to pay myself a wage and take distributions. And I would choose a C Corporation if I was seeking outside investment.
A couple things to keep in mind:
1. Generally, I would start simple and move to something more complex as the situation demands. You can start as an LLC, make an S election if you need to and later convert to a C corporation as your situation changes. You may lose some carry forward losses in a transition, but it’s usually not the end of the world.
2. You should really consult with an accountant or an attorney as you make this decision because your individual situation may vary. There are a lot of variables and you should be able to get the consulting and filing done for about $300 – $500. In the grand scheme of things, this is a relatively small price to pay for protection and potential tax advantages.
And again, whatever you decide, decide to incorporate if you want to build a business. And open a separate checking account, for heaven’s sake.