4 ms·

Going live with an alpha release before incorporating -- and not losing my house.

9 points by ivankirigin 19y ago

In what situations is it reasonable to make a site live without Incorporating my company? What if I'm taking money from users? What if I'm not taking money but am taking private data like email addresses? I love the idea of pushing something out to users as soon as humanly possible, but I really don't like the idea of getting sued.

Locke 19y ago
Is your website about spreading libelous rumors about rich people / corporations? Are you putting up a webstore selling toys / food from China? Seriously, IANAL, but lots of (unincorporated) websites collect email addresses (right down to everyone's personal blogs). Lots of businesses operate as sole proprietorships without problems... I may be stupid, but I don't think limited liability protection for a startup is (usually) very important. At least not in the early days.
- run4yourlives 19y ago
  I'm with Locke here. What difference does it make? As long as you properly declare your income, and aren't in a position that you're going to get sued, you should be ok.
  - epi0Bauqu 19y ago
    How do you know you "aren't in a position that you're going to get sued?"
    - ivankirigin 19y ago
      Yah, the whole point is that living in this litigious society means anyone can sue for anything. Losing a house doesn't necessarily mean you lost a reasonable case. It means you lose in trying to fight. Essentially, I'm trying to spend as little on lawyers as possible.
      - epi0Bauqu 19y ago
        You don't have to spend anything on lawyers to create a legal entity with liability protection. It really is simple and quick.
    - run4yourlives 19y ago
      If you have to ask the question, you probably don't have to worry about it. :-)
mikesabat 19y ago
I wouldn't sweat the liability oo much either, but why not just incorporate. In most states it costs $150.
- epi0Bauqu 19y ago
  Agreed. Quite simply, why take the risk? It is such a low cost, and you get protected from liability arising from all sorts of low probability but high impact events, some of which you probably haven't even thought of.
  - drusenko 19y ago
    cost is a hell of a lot more than $150... unless you're planning on incorporating something that will end up providing no protection in court, anyway, and will hurt you big time if you end up going big.
    - epi0Bauqu 19y ago
      This is just not true. Suppose you file the basic incorporation documents provided by your state and you are the sole shareholder. How exactly will that provide you with "no protection in court" or "hurt you big time if you end up going big?"
      - davidw 19y ago
        You have to do some other things, like open up a bank account, and make sure company things are separate from personal things. But there are books (nolo.com has some for instance) that explain the steps necessary. I guess it's all about risks/rewards - I don't have a lot of assets to begin with, I'm not sure the company will go anywhere, so why blow thousands of dollars on expensive lawyers? Better to learn the details of the process myself. So I created an LLC in Oregon. On the other hand, if you're already wealthy, and want to create some kind of music sharing site... well, maybe some good lawyers are worth the money.
    - mikesabat 19y ago
nickb 19y ago
Not incorporating is just dumb. Just get at least a basic LLC.
- extantproject 19y ago
  I second that.
tuukkah 19y ago
"Don't incorporate, though, if you can avoid it. We're less likely to accept groups that are already incorporated, because it costs so much more to deal with existing documents than to start from scratch." http://ycombinator.com/faq.html http://ycombinator.com/faq.html
- davidw 19y ago
  Presumably he's part of the 99.9% of companies out there who aren't lucky enough to have YC as an option.
  - ivankirigin 19y ago
    We definitely have the option to do YC. Our application is in. This faq is certainly a reason for making this post and asking, as our release would come before the winter session starts and maybe before Oct. 11th, when application results come out. Is seems the consensus is to incorporate in some fashion just out of basic prudence before a release. So the question for PG and folks at YC is "you'd rather we no incorporate, but I think we need to, how should we do it?" Another thread mentioned opening the "standard" papers YC uses -- and PG mentioned the problem in papers that might be wrong or have holes for companies. I'd like to hear about any progress on that front.
    - rms 19y ago
      If you need to incorporate, YC won't hold it against you. It's less risky for them to invest in companies with customers anyways. But make sure you do it as a Delaware Class C Corporation, because otherwise YC will want you to convert and that's much more expensive than than doing it from a scratch. So don't incorporate as an LLC from your state, even if it might be cheaper.
- extantproject 19y ago
  I think this is saying that YC would rather not have to make legal changes to an existing company (i.e. it's more likely that you'll be funded by YC if you let them take care of the legal junk).
chaostheory 19y ago
hmmm I could be wrong because I'm not a lawyer (so you have to check this with a real lawyer), but I heard that even if you incorporate you're still somewhat liable as long as you're not a passive investor. For example, if you (yourself) accidently release all of your users' confidential data to the public; you're liable for the damages that stem from it
- epi0Bauqu 19y ago
  Sorry, but you are generally wrong. What I think you are talking about is called piercing the corporate veil: http://en.wikipedia.org/wiki/Piercing_the_corporate_veil http://en.wikipedia.org/wiki/Piercing_the_corporate_veil Under almost all regular circumstances, including the example you mention, you most likely wouldn't be held personally liable. You have to do something grossly negligent or something clearly in bad faith. An example would be committing fraud.
  - chaostheory 19y ago
    isn't that what I said?
rzwitserloot 19y ago
Just incorporate. Over here in europe you need 18k in the bank and it costs at least 1200 dollars in notary fees, and most people still do so. (Or alternatively you could get an english limited but this makes further legalese difficult as you need to conform to two different nation's laws). The biggest problem, as I understand it (at least over here) is that changing from non-incorporated to incorporated AFTER your company has built up significant value is a complete pain in the arse.
rfrey 19y ago
There have been a number of comments about how effective incorporation is at protecting you from suit, etc. They're all guesses: Sarbanes Oxley changes all the rules, and the old rules concerning the corporate veil no longer apply. (Anticipating an objection, no, SarbOx does not apply solely to public companies.) The problem is that nobody knows exactly what the new rules are. There is no case law yet surrounding SarbOx IT compliance that I'm aware of. That doesn't really matter, though. nickb said that not incorporating is "just dumb": if that's the case, there are an awful lot of really dumb entrepreneurs out there, and really dumb business advisors, too. The cost of incorporation is more than the couple of hundred bucks to file the paperwork: there's ongoing compliance which costs both money and mindshare. It's probably not worth it until you require the different tax regime or have a specific need for the limited liability. The bottom line is that you won't get sued until you have substantial revenue, and then you'll get sued no matter what you do. Lawsuits follow the money. Nobody is going to sue you to get your house because it would cost more in legal fees than your house is worth. A website is different than a business with a storefront, which has to deal with the possibility of personal injury claims, and which invariably has an insurance policy to provide the honeypot for suits.
- epi0Bauqu 19y ago
  Can you give some specific examples how SarbOx "changes all the rules" for web startups like those that people are generally making on this forum? In other words, I think this is an extreme overstatement. For most situations that people here will be concerned with, the case law regarding corporate veils that has been developed over the past several hundred years will still apply. And regardless, you still want to be protected as much as possible, which results in the same advice of creating a legal entity with some sort of liability protection. Also, regarding getting sued. If you personally have a decent amount of money, you are a target for frivolous lawsuits regardless of how well your business is doing. And it doesn't cost that much to file a suit and fish for a settlement. Finally, regarding the fact that many people operate outside a corporate veil. They most likely do it because it is the path of least resistance. This doesn't make it right though. Like anything, it is a cost/benefit scenario. Since the costs are so low, and the benefits are so high (protection from low probability but high impact events), it just makes sense in many cases where you are trying to build a big business, like most people on this forum.
goofygrin 19y ago
What about something like an umbrella policy? Would that cover a sole proprietership (sp)?
- epi0Bauqu 19y ago
  Generally umbrella policies do not cover businesses of any kind. They are more for personal injury protection and intended to be an "umbrella" over your home and car insurance policies.

9 points by ivankirigin 19y ago

Locke 19y ago

Is your website about spreading libelous rumors about rich people / corporations? Are you putting up a webstore selling toys / food from China? Seriously, IANAL, but lots of (unincorporated) websites collect email addresses (right down to everyone's personal blogs). Lots of businesses operate as sole proprietorships without problems... I may be stupid, but I don't think limited liability protection for a startup is (usually) very important. At least not in the early days.

run4yourlives 19y ago
I'm with Locke here. What difference does it make? As long as you properly declare your income, and aren't in a position that you're going to get sued, you should be ok.
- epi0Bauqu 19y ago
  How do you know you "aren't in a position that you're going to get sued?"
  - ivankirigin 19y ago
    Yah, the whole point is that living in this litigious society means anyone can sue for anything. Losing a house doesn't necessarily mean you lost a reasonable case. It means you lose in trying to fight. Essentially, I'm trying to spend as little on lawyers as possible.
    - epi0Bauqu 19y ago
      You don't have to spend anything on lawyers to create a legal entity with liability protection. It really is simple and quick.
  - run4yourlives 19y ago
    If you have to ask the question, you probably don't have to worry about it. :-)

mikesabat 19y ago

I wouldn't sweat the liability oo much either, but why not just incorporate. In most states it costs $150.

epi0Bauqu 19y ago
Agreed. Quite simply, why take the risk? It is such a low cost, and you get protected from liability arising from all sorts of low probability but high impact events, some of which you probably haven't even thought of.
- drusenko 19y ago
  cost is a hell of a lot more than $150... unless you're planning on incorporating something that will end up providing no protection in court, anyway, and will hurt you big time if you end up going big.
  - epi0Bauqu 19y ago
    This is just not true. Suppose you file the basic incorporation documents provided by your state and you are the sole shareholder. How exactly will that provide you with "no protection in court" or "hurt you big time if you end up going big?"
    - davidw 19y ago
      You have to do some other things, like open up a bank account, and make sure company things are separate from personal things. But there are books (nolo.com has some for instance) that explain the steps necessary. I guess it's all about risks/rewards - I don't have a lot of assets to begin with, I'm not sure the company will go anywhere, so why blow thousands of dollars on expensive lawyers? Better to learn the details of the process myself. So I created an LLC in Oregon. On the other hand, if you're already wealthy, and want to create some kind of music sharing site... well, maybe some good lawyers are worth the money.
  - mikesabat 19y ago

nickb 19y ago

Not incorporating is just dumb. Just get at least a basic LLC.

extantproject 19y ago
I second that.

tuukkah 19y ago

"Don't incorporate, though, if you can avoid it. We're less likely to accept groups that are already incorporated, because it costs so much more to deal with existing documents than to start from scratch." http://ycombinator.com/faq.html http://ycombinator.com/faq.html

davidw 19y ago
Presumably he's part of the 99.9% of companies out there who aren't lucky enough to have YC as an option.
- ivankirigin 19y ago
  We definitely have the option to do YC. Our application is in. This faq is certainly a reason for making this post and asking, as our release would come before the winter session starts and maybe before Oct. 11th, when application results come out. Is seems the consensus is to incorporate in some fashion just out of basic prudence before a release. So the question for PG and folks at YC is "you'd rather we no incorporate, but I think we need to, how should we do it?" Another thread mentioned opening the "standard" papers YC uses -- and PG mentioned the problem in papers that might be wrong or have holes for companies. I'd like to hear about any progress on that front.
  - rms 19y ago
    If you need to incorporate, YC won't hold it against you. It's less risky for them to invest in companies with customers anyways. But make sure you do it as a Delaware Class C Corporation, because otherwise YC will want you to convert and that's much more expensive than than doing it from a scratch. So don't incorporate as an LLC from your state, even if it might be cheaper.
extantproject 19y ago
I think this is saying that YC would rather not have to make legal changes to an existing company (i.e. it's more likely that you'll be funded by YC if you let them take care of the legal junk).

chaostheory 19y ago

hmmm I could be wrong because I'm not a lawyer (so you have to check this with a real lawyer), but I heard that even if you incorporate you're still somewhat liable as long as you're not a passive investor. For example, if you (yourself) accidently release all of your users' confidential data to the public; you're liable for the damages that stem from it

epi0Bauqu 19y ago
Sorry, but you are generally wrong. What I think you are talking about is called piercing the corporate veil: http://en.wikipedia.org/wiki/Piercing_the_corporate_veil http://en.wikipedia.org/wiki/Piercing_the_corporate_veil Under almost all regular circumstances, including the example you mention, you most likely wouldn't be held personally liable. You have to do something grossly negligent or something clearly in bad faith. An example would be committing fraud.
- chaostheory 19y ago
  isn't that what I said?

rzwitserloot 19y ago

Just incorporate. Over here in europe you need 18k in the bank and it costs at least 1200 dollars in notary fees, and most people still do so. (Or alternatively you could get an english limited but this makes further legalese difficult as you need to conform to two different nation's laws). The biggest problem, as I understand it (at least over here) is that changing from non-incorporated to incorporated AFTER your company has built up significant value is a complete pain in the arse.

rfrey 19y ago

There have been a number of comments about how effective incorporation is at protecting you from suit, etc. They're all guesses: Sarbanes Oxley changes all the rules, and the old rules concerning the corporate veil no longer apply. (Anticipating an objection, no, SarbOx does not apply solely to public companies.) The problem is that nobody knows exactly what the new rules are. There is no case law yet surrounding SarbOx IT compliance that I'm aware of. That doesn't really matter, though. nickb said that not incorporating is "just dumb": if that's the case, there are an awful lot of really dumb entrepreneurs out there, and really dumb business advisors, too. The cost of incorporation is more than the couple of hundred bucks to file the paperwork: there's ongoing compliance which costs both money and mindshare. It's probably not worth it until you require the different tax regime or have a specific need for the limited liability. The bottom line is that you won't get sued until you have substantial revenue, and then you'll get sued no matter what you do. Lawsuits follow the money. Nobody is going to sue you to get your house because it would cost more in legal fees than your house is worth. A website is different than a business with a storefront, which has to deal with the possibility of personal injury claims, and which invariably has an insurance policy to provide the honeypot for suits.

epi0Bauqu 19y ago
Can you give some specific examples how SarbOx "changes all the rules" for web startups like those that people are generally making on this forum? In other words, I think this is an extreme overstatement. For most situations that people here will be concerned with, the case law regarding corporate veils that has been developed over the past several hundred years will still apply. And regardless, you still want to be protected as much as possible, which results in the same advice of creating a legal entity with some sort of liability protection. Also, regarding getting sued. If you personally have a decent amount of money, you are a target for frivolous lawsuits regardless of how well your business is doing. And it doesn't cost that much to file a suit and fish for a settlement. Finally, regarding the fact that many people operate outside a corporate veil. They most likely do it because it is the path of least resistance. This doesn't make it right though. Like anything, it is a cost/benefit scenario. Since the costs are so low, and the benefits are so high (protection from low probability but high impact events), it just makes sense in many cases where you are trying to build a big business, like most people on this forum.

goofygrin 19y ago

What about something like an umbrella policy? Would that cover a sole proprietership (sp)?

epi0Bauqu 19y ago
Generally umbrella policies do not cover businesses of any kind. They are more for personal injury protection and intended to be an "umbrella" over your home and car insurance policies.