When do I formalize my idea into a corporate entity?

10 thoughts on “When do I formalize my idea into a corporate entity?”

  1. Focus on building a great product and get the tech strong first. I would wait to incorporate till you get your founding group together. You can always clean up biz stuff when it gets real. Until then – code, code, code…

    Yes keep track of what you can so its easier to clean up when its time.}

  2. Like many questions, the answer depends on your goals. If your goal is to ultimately create a “real company” based on your idea, then it pays to plan ahead. For instance, if your friends are helping out, use a formal contract. If you’re successful, and they helped with no contracts, will they feel left out and come calling with claims of ownership? There’s no need to incorporate immediately, but before you go live (even in a private beta way), do so if only for the legal protections offered.

    I expect you can find a consulting lawyer to help with the setup, contracts, and so forth rather than a full-time employee.

    Good luck!}

  3. Find a good lawyer – they will help you figure most of these things out. Having a good lawyer is an amazing asset since they will help you avoid high costs down the road. Most lawyers that are familiar with startups will work on a deferred basis so that you don’t have to pay them until you have a major event (investment/sale).

    Some things to watch out for:

    * Informal contracts with friends can become threats of lawsuits if you do in fact sell quickly for a lot of money. While they are usually an annoyance they can hold up your deal and you’ll have to pay them off to make them go away.

    * Have a solid go-to-market plan. If you want to sell quickly, you have to show traction quickly and that will only happen if you have a good plan in place. Viral growth will happen, but not immediately – even MySpace had to seed the market. If you don’t have experience with marketing hire a PR firm or find a contract marketing firm to help.

    * Handle accounting yourself using Quickbooks. Very simple, just like Quicken. You only need an accountant at tax time.

    * Be ready to scale. This includes people (who will you hire), your product (what happens when I’m successful) and revenues.

    Good luck!}

  4. My main piece of advice is also about informal contracts with friends & family. Be very very VERY careful about going down this path. Everyone is friendly and helpful in the beginning, but should you be lucky enough to start building something of value you can count on people believing very strongly that they gave much more than they did. Be very very clear about what you are offering for work done and hold your equity close to your chest. Every % counts down the road. Being over generous in the beginning will bite you later.

    Good luck :)}

  5. I’d stick to what you’re good at and learn about the things that you’re not.

    Since you’re not familiar with the benefits of incorporating a business and setting up employment contracts, I would focus on your product and the programming so that the business doesn’t being the focus of your effort.

    Others have sugguested hiring a good lawyer. This is a great idea. Good accountants are also valuable. However, there are also lots of local small business groups who would be happy to put you in touch with someone who knows the right answers and can work with you.

    To briefly answer you question: Yes. Incorporate, setup real employment terms, make the business something physical. This will add a great deal of value to a potential buyer. Your product will make or break the business, but the way that you set the business up will make it attractive to a buyer.}

  6. Overall, I agree that you should prioritize coding and building a great product (don’t get bogged down in administrivia). However, I think you should spend a little time talking to an accountant and an attorney. You should be able to find a small business accountant and a small business attorney who will meet with you for only an hour. You certainly don’t need to hire a full-time lawyer. =)
    In terms of hiring people, I try to get as far as I can with contractors — I can’t afford full-time employees, anyway. I hire a web designer by the project, I’ve gotten a few hours of work from my accountant (who also does my personal taxes), and a few hours of work from my attorney, who has a small business practice. On top of that, I’ve hired more than a dozen freelancers on a contractor basis who are paid with cash.
    If you are hiring friends on a contract basis, I assume you are paying them with cash and not equity. Regardless, I agree with people that you should formalize the relationship. If you are paying them with cash, you will eventually need their 1099 information, anyway. Incorporating costs time and money, both to incorporate and to pay taxes each year (and possibly more). From my experience, I wouldn’t incorporate until I need to because:
    1) I need to distribute stock or options to investors or employees
    2) I might get sued for what I am building (let’s say you are tracking people’s medical records…)
    3) I am at the point where I am getting paid a significant amount (so you might as well have those checks made out to the corporation)
    4) I might sell the business in a year or so

    Good luck!}

  7. Hi Andrew,

    If there is a possibility of legal action against you (even a slight possibility), I would definitely form a legal entity to protect you and your assets. Make sure to keep yourself as an individual separate from your company.

    Another point, I’m not sure if you will be looking for investors in the future. Regardless, everyone knows that a successful exit usually means selling the company for a good value or going public. But, don’t make it public that your goal is to sell. Focus on building the company and running a successful business.

    I hope you find this useful…

    best regards,
    Aydin Mirzaee.}

  8. Thank you guys, I will

    Join a Local Small Business Group.
    Meet with a Lawyer for an Hour.
    Get Contracts with my Contractors.
    Keep track of my taxes myself, And get an account at tax time.
    Try to set myself up as whatever I can to protect myself legally, Whats the easiest? an LLC?}

  9. Andrew,

    Just wanted to add that its great to talk about your business with others. When you do talk to others, tell everyone about your problems, like you have here. You’d be surprised at the useful feedback that you’ll receive. As the CEO, take everything with a grain of salt, and in the end, its you that makes the decision. Hearing what other people think never hurts. Don’t be surprised that people will criticize 99% of the time rather than complement you on what you’ve done. Its human nature, criticizing is just really easy….

    hope this helps,
    Aydin.}

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