5 ms·

Don’t register your idea as a company

62 points by iisbum 14y ago

sparknlaunch 14y ago
A lot of good points in this article. The main elements that stand out are: An idea isn't everything. You don't just think up an idea and incorporate. You need to build a genuine business model that warrants going through the incorporation pain. Get serious. Only start the paperwork if you are committed to pursuing the idea into a business.
derefr 14y ago
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-- is it time to register as a company?
- lmm 14y ago
  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.
kenrikm 14y ago
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.
- citricsquid 14y ago
  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.
  - simondlr 14y ago
    Happens to me too on Tumblr. Also sometimes some pictures just won't load. Rather annoying, as I've started to really enjoy Tumblr lately.
  - kenrikm 14y ago
    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!)
GigabyteCoin 14y ago
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.
- nopassrecover 14y ago
  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).
  - its_so_on 14y ago
    And yet, look at all of the Australian Twitters and Flickrs out there.
- deleted 14y ago
  [deleted]
lifeisstillgood 14y ago
The best comment was something like Think of it not as a startup but an experiment. 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.
kintamanimatt 14y ago
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?
- StavrosK 14y ago
  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.
  - kintamanimatt 14y ago
    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.
namityadav 14y ago
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.
yason 14y ago
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.
larrys 14y ago
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.
adventureful 14y ago
1) When you need to take advantage of the liability shield. 2) When you take on investors, who will typically want a C corp or at least a LLC structure. 3) When you have good reason to bring assets or income under a company umbrella (for any number of potential legal or tax reasons).
X-Istence 14y ago
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.
sayemm 14y ago
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 http://legalzoom.com, but it covers you personally if your product/services ever gets into any trouble and provides tax advantages too.
- georgemcbay 14y ago
  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.
- burntwater 14y ago
  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.
swalberg 14y ago
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.
- kkowalczyk 14y ago
  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.
  - swalberg 14y ago
    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.
bradpineau 14y ago
“Don’t incorporate a hobby. Incorporate when you are serious about making your startup a business.”
atomical 14y ago
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.
rdl 14y ago
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.

62 points by iisbum 14y ago

A lot of good points in this article. The main elements that stand out are: An idea isn't everything. You don't just think up an idea and incorporate. You need to build a genuine business model that warrants going through the incorporation pain. Get serious. Only start the paperwork if you are committed to pursuing the idea into a business.

derefr 14y ago

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-- is it time to register as a company?

lmm 14y ago
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.

kenrikm 14y ago

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.

citricsquid 14y ago
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.
- simondlr 14y ago
  Happens to me too on Tumblr. Also sometimes some pictures just won't load. Rather annoying, as I've started to really enjoy Tumblr lately.
- kenrikm 14y ago
  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!)

GigabyteCoin 14y ago

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.

nopassrecover 14y ago
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).
- its_so_on 14y ago
  And yet, look at all of the Australian Twitters and Flickrs out there.
deleted 14y ago
[deleted]

lifeisstillgood 14y ago

The best comment was something like Think of it not as a startup but an experiment. 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.

kintamanimatt 14y ago

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?

StavrosK 14y ago
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.
- kintamanimatt 14y ago
  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.

namityadav 14y ago

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.

yason 14y ago

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.

larrys 14y ago

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.

adventureful 14y ago

1) When you need to take advantage of the liability shield. 2) When you take on investors, who will typically want a C corp or at least a LLC structure. 3) When you have good reason to bring assets or income under a company umbrella (for any number of potential legal or tax reasons).

X-Istence 14y ago

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.

sayemm 14y ago

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 http://legalzoom.com, but it covers you personally if your product/services ever gets into any trouble and provides tax advantages too.

georgemcbay 14y ago
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.
burntwater 14y ago
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.

swalberg 14y ago

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.

kkowalczyk 14y ago
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.
- swalberg 14y ago
  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.

bradpineau 14y ago

“Don’t incorporate a hobby. Incorporate when you are serious about making your startup a business.”

atomical 14y ago

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.

rdl 14y ago

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.