"Don't incorporate, though, if you can avoid it. Especially as an LLC. It's much more complicated for us to deal with existing paperwork than to start from scratch."
And as a personal note, I've found the same logistically - tinker together with friends on a project, see how you gel together, then worry about forming a company later.
There's also a contract that might help if one of you originally came up with the idea and recruited the other - you can create one that says basically that all the ideas and work belong to one person, the idea originator, but that they all transfer to whatever company you guys form if you actually get around to forming one.
I have zero legal experience, so take it for what it's worth, this isn't advice either way.
I was giving YC of an example of how to approach pre-seed funding startups - if you don't have revenue or funding, and angels or incubators offer to deal with the paperwork in forming your company as a condition of receiving their money, then all that matters in the beginning is rapid iterations to test out both the idea and team chemistry. Anything else is a distraction.
It's good advice for 3 people with an idea and an application to YC. It definitely makes it easier for YC to set you up; we're in the process of converting from an LLC, and it is a huge pain in the ass.
It is one of the poorer pieces of advice on this site for someone who actually wants to run a company, and I wish YC would clarify it. To actually run a business, you need a incorporate for tax reasons, so you can invoice and be invoiced, so you can make binding, valid equity grants, and so your vendors, partners, and customers can't sue you for your house.
It will take you 2-3 hours, spread over 2 weeks, to set yourself up with an LLC and an EIN. It's not one of the Great Distractions you face starting up.
It's just a fundamentally different structure - LLCs were invented in the 80s, so the conversion is a huge PITA. If you want the benefits of incorporation, you should strongly consider incorporating as an S-corp (if you qualify: must be US citizens, no more than 75 shareholders, all of whom must be natural persons).
To change from an S-corp to a C-corp is just one piece of paper. You're already a corporation, not an LLC, and you get the flow-through benefits and limited liability.
I've heard this from other people too, but as an owner of both LLC's and Corps in the past, why is it so difficult? Just sell one company's assets to a new company.
If everyone is on board for the 'new' structure, then this should be trivial. If you have investors, you grant them new shares equivalent to their old LLC member %.
LLC"s have huge advantages too, if you dont plan to raise money, or only do it from a few people. The fact that you can allocate losses and gains regardless of ownership % means that you can allocate tax losses to an investor who may only own 20%. Them taking a tax loss is effective to them not paying more taxes, so it is a form of benefit for them.
The paperwork issues are a red herring. The same things will bite you in the ass any time you convert from any structure to any other structure; it's just a coordination problem.
There are minor tax benefits to an LLC, and there's a major simplicity benefit. The driver (for us) to move to S-Corp is to safely grant equity.
There is no reason to overthink any of this. Just do what's easiest. But don't run a sole proprietorship just because an entry in the YC FAQ says you're easier to fund without incorporating. News flash: YC isn't investing in you anyways; by all available evidence, your odds of being accepted are low, probably lower than your odds of just succeeding with the company.
Just remember, if you boot one of the guys with whom you are tinkering, and end up with a massive success, and that guy sues you, a significant number of people will always assume you were a selfish asshole who screwed the guy over. Journalists are likely to leap onto the story, and social news sites such as HN eat up the tale of the wronged "entrepreneur." (Who might even be one of those preppy douchebags at your college who spent more time acting pretentious and preparing for a failed bid at Olympic rowing glory than working on creating economic/social value, but I digress).
Legal contracts aren't warm and fuzzy, but they keep everyone honest; as you can gather from the scenario I outline above, this isn't even about money -- in the Internet age, reputational risk is everything. You never know when/why you might get spit upon, or by whom.
Comments
From the Ycombinator FAQ:
"Don't incorporate, though, if you can avoid it. Especially as an LLC. It's much more complicated for us to deal with existing paperwork than to start from scratch."
And as a personal note, I've found the same logistically - tinker together with friends on a project, see how you gel together, then worry about forming a company later.
There's also a contract that might help if one of you originally came up with the idea and recruited the other - you can create one that says basically that all the ideas and work belong to one person, the idea originator, but that they all transfer to whatever company you guys form if you actually get around to forming one.
I have zero legal experience, so take it for what it's worth, this isn't advice either way.
That FAQ is for people who want to apply to YC! I don't see that in the guy's message, above.
I was giving YC of an example of how to approach pre-seed funding startups - if you don't have revenue or funding, and angels or incubators offer to deal with the paperwork in forming your company as a condition of receiving their money, then all that matters in the beginning is rapid iterations to test out both the idea and team chemistry. Anything else is a distraction.
It's good advice for 3 people with an idea and an application to YC. It definitely makes it easier for YC to set you up; we're in the process of converting from an LLC, and it is a huge pain in the ass.
It is one of the poorer pieces of advice on this site for someone who actually wants to run a company, and I wish YC would clarify it. To actually run a business, you need a incorporate for tax reasons, so you can invoice and be invoiced, so you can make binding, valid equity grants, and so your vendors, partners, and customers can't sue you for your house.
It will take you 2-3 hours, spread over 2 weeks, to set yourself up with an LLC and an EIN. It's not one of the Great Distractions you face starting up.
> converting from an LLC, and it is a huge pain in the ass.
Yeah, how so?
It's just a fundamentally different structure - LLCs were invented in the 80s, so the conversion is a huge PITA. If you want the benefits of incorporation, you should strongly consider incorporating as an S-corp (if you qualify: must be US citizens, no more than 75 shareholders, all of whom must be natural persons).
To change from an S-corp to a C-corp is just one piece of paper. You're already a corporation, not an LLC, and you get the flow-through benefits and limited liability.
I've heard this from other people too, but as an owner of both LLC's and Corps in the past, why is it so difficult? Just sell one company's assets to a new company.
If everyone is on board for the 'new' structure, then this should be trivial. If you have investors, you grant them new shares equivalent to their old LLC member %.
LLC"s have huge advantages too, if you dont plan to raise money, or only do it from a few people. The fact that you can allocate losses and gains regardless of ownership % means that you can allocate tax losses to an investor who may only own 20%. Them taking a tax loss is effective to them not paying more taxes, so it is a form of benefit for them.
The paperwork issues are a red herring. The same things will bite you in the ass any time you convert from any structure to any other structure; it's just a coordination problem.
There are minor tax benefits to an LLC, and there's a major simplicity benefit. The driver (for us) to move to S-Corp is to safely grant equity.
There is no reason to overthink any of this. Just do what's easiest. But don't run a sole proprietorship just because an entry in the YC FAQ says you're easier to fund without incorporating. News flash: YC isn't investing in you anyways; by all available evidence, your odds of being accepted are low, probably lower than your odds of just succeeding with the company.
Davidw is right, I'm not going for YC.
I guess we will 'tinker' until the point of release.
Thanks
Just remember, if you boot one of the guys with whom you are tinkering, and end up with a massive success, and that guy sues you, a significant number of people will always assume you were a selfish asshole who screwed the guy over. Journalists are likely to leap onto the story, and social news sites such as HN eat up the tale of the wronged "entrepreneur." (Who might even be one of those preppy douchebags at your college who spent more time acting pretentious and preparing for a failed bid at Olympic rowing glory than working on creating economic/social value, but I digress).
Legal contracts aren't warm and fuzzy, but they keep everyone honest; as you can gather from the scenario I outline above, this isn't even about money -- in the Internet age, reputational risk is everything. You never know when/why you might get spit upon, or by whom.