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39 Comments

When is the right time to incorporate?

Is there even “a right time” to incorporate a startup? Before first paying customer?

I know services like Stripe Atlas, Gust Launch, and others can make the process quicker, but there’s still upkeep and taxes to deal with so it’s no small decision.

Who else has incorporated their startup? At what point did you do it and how did you go about it?

  1. 9

    Hey Arjun here I've helped 1000s+ of entrepreneurs incorporate + launch a US business through doola so here are the top reasons why we've seen founders incorporate:

    1. If you want to hear this in someone's own words, check out this video from Kari, a founder we helped! https://www.youtube.com/watch?v=rx7hKko5JWY&t=6s

    2. You need to sell to US customers: US customers will either require or strongly prefer paying in $USD to a US Bank Account or via a US payment processor. More on how to set this up here: https://www.doola.com/blog/how-to-set-up-a-us-llc-and-us-bank-account-as-a-non-us-resident-remotely-from-anywhere-2021-update

    3. You are required to have a US EIN: Ie some vendors require a W9 = US Taxpayer Identification number = an EIN! More on EINs here: https://www.doola.com/how-long-will-it-take-to-get-an-ein

    4. You need to separate personal from business: It is a bad idea to have business expenses done on a personal card, and vice versa. Keeping things separate allows you to have better separation between personal and business, which is key for taxes as you can then ensure all business expenses are indeed logged as business expenses (and you can gain any tax benefits from this as well.

    5. You need liability protection: In the name "limited liability company" is... limited liability! That's one of the top reasons why people form in the first place. This is so that, if you or the business is sued, you are not held personally liable and there is a protection/wall between your assets and the companies assets.

    6. You are looking for tax benefits / business expense benefits or savings: as a non-us resident (disclaimer: not a CPA or lawyer) it is possible to form a US company and only have an informational filing requirement in the US + you pay taxes normally in country you live in. More on that here but there can be tax or business expense benefits from this structure: https://www.doola.com/blog/us-tax-filing-requirements-for-my-us-company

    7. You get a business bank account: This allows you to work with US payment processors like stripe and its a massive sign of social proof + trust for global businesses!

    So in summary, if you need any of the above, the right time to get started is actually 4-6 weeks before you need one of the above because that is how long it can take a non-US resident, for example, to go from formation to EIN/Bank Account! More on the full timelines we see here: https://www.doola.com/process

    Lastly, this can be a complicated topic and I know many folks still would like to chat things through 1:1 with someone so feel free to schedule a free consultation online at https://www.doola.com/ where myself or someone on the team can answer any questions!

    1. 2

      Oh wow, I didn't know you guys are on IndieHackers. I did a research for the best way to incorporate for bootstrappers and creating a "Wyoming LLC" was the best incorporation method.

      Then I looked through options to help me incorporate and Doola seemed like the best solution because you also help people with taxes/accounting/tips/support after they incorporate.

      So a big thumbs up for what you do.

      1. 1

        Yup we've also seen for bootstrappers + non-US residents a Wyoming LLC is the most popular choice! https://www.doola.com/blog/wyoming-llc-pros-and-cons

        Thx for the kind words 🙏

  2. 4

    I'm often wondering the same and in the past, I've asked the same question a few times on different blogs (also on HN) and got very different answers.
    Personally, I've decided that I will incorporate it when my app will start to generate decent revenue so that I can start to consider scaling it up (my threshold it's around 500MRR). I think it doesn't make sense to do it before tbh, especially if you don't it if it will work. It's however a personal decision, and I guess it depends a lot on whether it's B2C/B2B.
    An advice I can maybe give is though that I bought a legal insurance subscription in case anything should happen (~20€ per month). Not sure if it will do much in case of "real" issues, but I asked the insurance provider and they said they would cover me as an individual if my revenue generated by this is <17k per year. Hopefully, I won't have to verify this though :)

    PS. I live in Germany - things might be very different in other countries

    1. 1

      Interesting, I hadn’t heard of that kind of thing before. I’ll look into it. Thanks!

      I had incorporated my previous startup idea really early and, while I don’t regret gaining that experience, it was a bit premature and I ended up shutting it down. Still had to deal with all the personal and business taxes though. I haven’t incorporated my current startup and don’t want to make that decision too early again.

      1. 1

        I do think that some revenue is also a good goal but it can sometimes be. a bit of a chicken and egg problem because sometimes, to get revenue you need a US bank account but to get the US bank account + payment processor, you need an EIN and to get the EIN you need a ... US company which means you have to incorporate!

  3. 4

    When you need to bill! Simple and clean.

    1. 3

      I like this! I like to say "when you have your first customer ready to pay you in $USD, then you can get your LLC -> EIN -> Bank Account -> Payment Processor!"

      Psychologically though, having the company can help to close that first sale too because then customers think "I'm dealing with an official LLC business here" vs "a freelancer"

    2. 1

      Second this. Would add "delay have to bill" as much as possible with "free credits" or some other way to really validate the market first.

      1. 1

        100% any way to validate is great, but nothing replaces that first cold hard payment 💪

  4. 3

    As a solo founder of a deceased small company, I did it as soon as I had a paying business customer, because I needed to invoice them, and they could only purchase from a legal entity rather than an individual.

    Whether you have co-founders/employees or not should also be taken into account because you might need to have some legal binding.

    1. 1

      Love this one, first paying customer (asking to pay or about to) -> form company! I highlighted some of the other top reasons I've seen above too

  5. 2

    I've done this before for a consulting business, a real estate investing vehicle and to incorporate ideas. The first two generated costs and revenues from day one while the last one went nowhere. My recommendation is that until you have some decent revenue that's imminent ($1,000+), don't waste time, energy and costs going through the process. The set-up fees alone can run into the hundreds of dollars and the annual tax filing fees (if doing it through an accountant) also cost much more than personal tax filings.

  6. 2

    A simple answer is when you have 500 USD to burn (I did stripe atlas, it was the best!) and at the end of tax season. Which I think is min April.

    This way you have the max amount of time (1 year) to figure out everything you'll need for tax season.

    1. 1

      Hey commented above but tax year runs from Jan to Dec in US so best time to do would be Jan 1st (worst being Dec 31st bc you owe filings for that previous year!)

      1. 1

        Oh snap! You're right, I must have been thinking Income Tax season. So just like @arjunmahadevan said Jan 1st is best Date. Basically whatever date is furthest away from your tax filing date :3

  7. 2

    I do that when I need a bill. However, it would be wise to incorporate it earlier if you are searching for an investment and you need data.

    1. 1

      Correct, if you need to send an invoice or collect payments, a US company is required to get a US EIN which is required to get a US bank account! More on that process here for other's who are curious!

      https://www.doola.com/process

  8. 2

    I always incorporate as soon as I have revenue. Best to play it safe. And it's pretty easy to do, so why not?

    1. 1

      The “why not” for me is dealing with all the personal and business taxes. For a Delaware C-Corp with a number of shares issued to myself, it’d involve some personal tax implications plus minimum one year of income and franchise taxes for the business. All said and done, I think it’s a $1k-2k investment at least.

      Could be a good motivating factor once done and ideally needs to be happen anyway if successful. However, I incorporated my previous startup idea way early and ended up shutting it down, so I’m more hesitant this time around.

      1. 1

        Hey, check out https://www.doola.com/, we actually include the US tax filings + state filings to take this off founders' plates.

        Curious what you think!

        1. 1

          Curious to know if you have an affiliate program?

          1. 1

            hey tried to dm you on twitter but DMs were closed, can you shoot me an email at arjun at doola dot com or dm me? https://www.twitter.com/arjunmahadevan

  9. 2

    Not exactly my area of expertise, but here's my $.02 having gone through this with my accountant.

    The way you structure your business carries implications and benefits for taxes, ultimately it depends on what your goals for the business are (and how much money you are making/investment you expect to seek).

    You don't have to wait to make the decision on whether/how to incorporate to legally have a business that makes money. A DBA ($35-$65 depending on your state) allows you to open a bank account for your business and collect revenue. This makes you a sole proprietorship which means your business income is your income and can be declared in your taxes.

    An LLC ($50-$500 depending on your state) limits your personal liability and can effectively function as a sole proprietorship depending on how you structure it/if you have a partner.

    A lot of folks jump to incorporating because they feel they should (sometimes, but not always, for good reason), but if your goal is to legally make and report income there are other ways to do it that are a bit easier to manage.

    1. 1

      big +1 to limited liability here!

  10. 1

    The right time to incorporate is after your business has some kind of validation and definitely after you have got your 1st 50/100 paying customers. This is also a small sample size but enough to set up a basic entity and run it as a side business.

    A sole proprietorship, as the name suggests, is an unincorporated business structure where the business is owned by one person. There is no legal distinction between the business owner and the business; the owner is personally liable for the obligations and liabilities of the business.

    A limited liability company is a formal business structure (created as per state law) where the business is legally distinct from the owner(s). An LLC combines the perks of a corporation (protection against personal liability) and a partnership (pass-through taxation). Since the business has a separate legal existence, the members are not personally liable for the debts and obligations of the business.

    So when your business becomes a legit side business, convert it to an LLC, protect yourself and take advantages of the LLC entity type.

    Checkout this article on Sole Proprietorship vs LLC vs C-Corp which will help you in your journey - https://www.doola.com/blog/sole-proprietorship-vs-llc-vs-corporation

  11. 1

    I have been building tech companies since 2004. https://manojranaweera.me/who-is-manoj-ranaweera. Most of these companies were incorporated. Some were shut down quickly. Some were never incorporated.

    I would suggest incorporation before the first customer. Or if you are still uncertain about your business, after you hit a certain customer milestone.

    Incorporation brings credibility to your organisation. It provides a legal framework for all your stakeholders, from customers to suppliers and the talent you deploy. It also demonstrates that you are serious about your venture. These are all positive signals to the market.

    The cost of incorporation varies from country to country. In the UK, you can incorporate for nothing via Tide Bank, or through a third party for less than £20 with an office address, etc.

    In Germany, I believe this costs around 25,000 Euros. Crazy! We are looking at investing into the first Nigerian Tech startup https://skilledup.life/apply-for-funding. The cost of incorporation there is high and needs the services of a lawyer.

    The UK truly is a heaven for setting up businesses.

  12. 1

    So if you're asking yourself, “When should I incorporate?” the answer is likely as soon as possible. By incorporating immediately you get immediate benefits of limited liability, for example, but January may be a good option because it can save you time when it comes to paperwork.

    1. 1

      January is best time of year (although very busy) because if you forming December, the tax year in US runs from Jan to Dec so you owe state + IRS tax filings for that year even if you were to have formed on Dec 31st 😩

      More on tax filing requirements here! https://www.doola.com/blog/us-tax-filing-requirements-for-my-us-company

  13. 1

    When you need to start dealing with money

    1. 2

      +1 I say before first payment = start dealing with money!

  14. 1

    I operate as a sole proprietor. I can still have a separate business account, deal with USD (thanks Transferwise) and so on.

    I'll consider incorporation once I am ready to have greater separation between myself and my business. Where I live this comes with some benefits in terms of taxation as I'll be able to only pay myself a small salary and keep most of the money in the business.

    1. 1

      The liability protection factor is another factor to keep in mind!

  15. 2

    This comment was deleted a year ago.

    1. 1

      Declare or in cases where it's important to separate business from personal, having a US Business bank account is a must!

      1. 1

        This comment was deleted a year ago.

        1. 1

          Hey to clarify here: it's a must for certain businesses who have customers or prospective customers who only want to transact in the $USD!

          It sounds like in this case your NA customers are okay paying in EUR/pounds or doing a bank transfer?

          We've seen and heard from customers though that having a US bank account opens up new doors (and the company helps too for perception + trust from prospective customers in the US)

          but "must" != to required, as you clearly have a business and US customers 😄

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            This comment was deleted a year ago.

            1. 1

              oh nice so you have UK stripe set up?

              1. 1

                This comment was deleted a year ago.

                1. 1

                  "With stripe you can be based in any country and charge in any currency."

                  You charge in USD and Stripe converts it to GBP before sending it to your bank, right?

                  1. 2

                    This comment was deleted a year ago.

                    1. 1

                      Yeah, their exchange rate is not the best from my experience. I'm using Wise and a UK based account. USD to GBP to TRY. Losing a good chunk through conversion.

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