How necessary is it to have a lawyer incorporate you?
28 comments
If all you want to do is incorporate and you are going to be the sole shareholder, you can do it via an Internet service. Lawyers are useful if you need anything more complex than this e.g., agreements for the initial shareholders, stock options agreements, etc.
If all you're doing is creating a corporation for legal protection, then do it yourself.
One word of advice though, think through how many shares you want to issue. If you're going to offer stock options, then issue a huge number - like 10 million. If you don't think you'll need options, then go for just a few.
If you pick too few now, you'll need to hire a laywer in the future to help you with a stock split or share issue to increase the number of shares.
Also, one other word: if you're just incorporating for yourself and don't plan on getting any venture funding in the foreseeable future, incorporate as an LLC so you can pass the tax losses from your company on to your personal taxes.
If all you're doing is creating a corporation for legal protection, then do it yourself.
One word of advice though, think through how many shares you want to issue. If you're going to offer stock options, then issue a huge number - like 10 million. If you don't think you'll need options, then go for just a few.
If you pick too few now, you'll need to hire a laywer in the future to help you with a stock split or share issue to increase the number of shares.
Also, one other word: if you're just incorporating for yourself and don't plan on getting any venture funding in the foreseeable future, incorporate as an LLC so you can pass the tax losses from your company on to your personal taxes.
Don't issue 10 million shares just yet. Otherwise, I agree with the rest of lindsayrgwatt advice.
Since you're incorporating in Delaware, keep in mind that Delaware taxes are calculated based on the number of shares you authorize. You could end up paying tens of thousands of dollars in taxes (http://www.corp.delaware.gov/frtaxcalc.shtml).
I used incorporate.com and they cost about $200 or so for a Delaware corporation, and I would recommend them. If you're the sole owner then there is not much to worry about. After you incorporate, you can have your "accountant" look at the documents and tell you if you're missing something. They usually know how these things work. You don't necessarily need an attorney at this early stage.
Since you're incorporating in Delaware, keep in mind that Delaware taxes are calculated based on the number of shares you authorize. You could end up paying tens of thousands of dollars in taxes (http://www.corp.delaware.gov/frtaxcalc.shtml).
I used incorporate.com and they cost about $200 or so for a Delaware corporation, and I would recommend them. If you're the sole owner then there is not much to worry about. After you incorporate, you can have your "accountant" look at the documents and tell you if you're missing something. They usually know how these things work. You don't necessarily need an attorney at this early stage.
Any recommendations for an internet service to register an LLC? I'd google, but that kind of search tends to come back with diluted results.
Peanut, you've hit on something of importance, that I was mis-valuing before: do I need his money?
Upon further reflection, I probably don't need it. And when I reach the stage where I do need it, I probably want to get it from a real angel investor. Even if that didn't work out, I still have better places to get funding than this guy.
Guess I'll just have to pay a lawyer who specializes in tech startups.
This really clarifies the decision. Thanks!
Upon further reflection, I probably don't need it. And when I reach the stage where I do need it, I probably want to get it from a real angel investor. Even if that didn't work out, I still have better places to get funding than this guy.
Guess I'll just have to pay a lawyer who specializes in tech startups.
This really clarifies the decision. Thanks!
glad i could help =)
So, I need to incorporate my startup. After some research I'm pretty sure I want to be a Delaware C Corporation so I can sell later.
A friend of mine, a corporate lawyer, is interested in funding my startup and providing the initial legal services, but there are a few big catches: this guy is extremely difficult to deal with (history of mental illness) and doesn't seem to know much about the issues surrounding startups. I had to explain to him why I want to be a C corp, and I'd think he should already understand that.
My intuition obviously tells me to avoid this guy if I can help it, but here's the real problem: I'm a complete bootstrap startup and I have to pay the bills in San Francisco. If my friend doesn't incorporate me, I'll have to use one of those incorporation websites - I can't afford to actually pay a lawyer to do it. Am I insane to even consider this option?
A friend of mine, a corporate lawyer, is interested in funding my startup and providing the initial legal services, but there are a few big catches: this guy is extremely difficult to deal with (history of mental illness) and doesn't seem to know much about the issues surrounding startups. I had to explain to him why I want to be a C corp, and I'd think he should already understand that.
My intuition obviously tells me to avoid this guy if I can help it, but here's the real problem: I'm a complete bootstrap startup and I have to pay the bills in San Francisco. If my friend doesn't incorporate me, I'll have to use one of those incorporation websites - I can't afford to actually pay a lawyer to do it. Am I insane to even consider this option?
It seems like your gut is telling you not to do it, and I agree.
Run. Run far away from this guy.
Now for the rational explanation: What is he offering besides money? It's nice that he is willing to give you money, but does he have any contacts or experience or skills that might put you in a better position? Doing something just because you are cash strapped is a horrible idea.
There was a good convo here a while back for lawyers with software start up experience: http://news.ycombinator.com/comments?id=16419 pg uses WSPR in SF and Goodwin Procter in MA.
Run. Run far away from this guy.
Now for the rational explanation: What is he offering besides money? It's nice that he is willing to give you money, but does he have any contacts or experience or skills that might put you in a better position? Doing something just because you are cash strapped is a horrible idea.
There was a good convo here a while back for lawyers with software start up experience: http://news.ycombinator.com/comments?id=16419 pg uses WSPR in SF and Goodwin Procter in MA.
Thanks for that link, yubrew.
You're right - I know dealing with this guy is a bad idea and I'm not going to do it. What I'm really trying to figure out here is what my options are.
You're right - I know dealing with this guy is a bad idea and I'm not going to do it. What I'm really trying to figure out here is what my options are.
If you're based in California and do most of your business in CA, it might make sense incorporate in California instead of Delaware. CA has in the last few years made its laws more business friendly, and if you incorporate in CA you'll avoid having to pay certain taxes and fees twice (once for each state). There are a few other benefits DE has, but probably none of them will be useful at your early-mid stage company. Definitely worth looking in to.
I recently created DedaSys as an LLC in Oregon for the grand total of $55. I will probably have to do more research and spend more of my own time to make sure things are done properly, and that I don't miss anything, and I'm sure I'll have an accountant do the taxes. However, I actually didn't mind the research, being the kind of person who likes to know how things work. I'll probably spend some of the money saved on books (or, even better, maybe I'll check some books out of the library when I'm home this summer).
Remember, you can always transform an LLC into a C corporation at a later date. To me it made sense to start small, and only spend that money when I'm sure I need it.
Remember, you can always transform an LLC into a C corporation at a later date. To me it made sense to start small, and only spend that money when I'm sure I need it.
FWIW, I've sold two LLCs (one to private buyers and one two a VC backed dotcom). Worked fine. Both had sub ~$500 in legal setup fees.
As you say, it's easy to move from LLC to C. Start it easy and quick (but do your trademark homework) and see if you can build a successful product. Statistically speaking, you probably can't, in which case you haven't wasted dollars on lawyers.
If you start to feel like your product is taking off (or has potential to), get off your butt and invest in some real legal help to get your ducks in a row.
Of course, if YC will help you do it right out of the gates-- that's dandy.
As you say, it's easy to move from LLC to C. Start it easy and quick (but do your trademark homework) and see if you can build a successful product. Statistically speaking, you probably can't, in which case you haven't wasted dollars on lawyers.
If you start to feel like your product is taking off (or has potential to), get off your butt and invest in some real legal help to get your ducks in a row.
Of course, if YC will help you do it right out of the gates-- that's dandy.
"Remember, you can always transform an LLC into a C corporation at a later date."
Sure, but the process is not easy nor cheap! It will cost you more to convert LLC to a C than by forming C right away.
What you should have done is form an S and then convert it to C later on. Converting S to C is a matter of filing one form and you don't even need an accountant/lawyer to do it.
Sure, but the process is not easy nor cheap! It will cost you more to convert LLC to a C than by forming C right away.
What you should have done is form an S and then convert it to C later on. Converting S to C is a matter of filing one form and you don't even need an accountant/lawyer to do it.
With S-corporations,
"Shareholders must be U.S. citizens or residents, and must be natural persons"
Since I live in Europe, the potential to find and add a co-founder or two who is not a US citizen is there, and an LLC would still work for that, afaik. Or at least it may be a possibility, whereas I'm sure it isn't with an S-corp.
"Shareholders must be U.S. citizens or residents, and must be natural persons"
Since I live in Europe, the potential to find and add a co-founder or two who is not a US citizen is there, and an LLC would still work for that, afaik. Or at least it may be a possibility, whereas I'm sure it isn't with an S-corp.
Why did you form a US company then? VC money?! You should have formed a local one.
Cost of an LLC in Oregon: $55
Cost of an SrL in Italy: north of 3000 Euro
Cost of something similar in Austria, where we recently moved, and I don't speak the language yet: much closer to the Italian one than the Oregon one.
It would be insane for me to throw that kind of money away when I can just do it at 'home', and any businesses I do are likely to be internet based.
Cost of an SrL in Italy: north of 3000 Euro
Cost of something similar in Austria, where we recently moved, and I don't speak the language yet: much closer to the Italian one than the Oregon one.
It would be insane for me to throw that kind of money away when I can just do it at 'home', and any businesses I do are likely to be internet based.
If you are anywhere in the EU you can probably start a British limited company, even if helpful government officials say you should register with the local overpriced companies registry. In The Netherlands there are several law firms that specialize in this, and they charge about EUR 500. I imagine lawyers in other EU countries have figured out the same trick by now. One thing to keep in mind is that you may expose your company to being sued in the UK, but you probably should be avoiding getting sued anyway.
Yep, thought about that too, but in the end, it's still an order of magnitude more expensive, involves a country I'm less familiar with than the one I'm from, and I just wanted to get something set up for Squeezed Books without thinking the choice through any more (I've been considering it for several months).
You can also consider setting up a single proprietorship or an unlimited partnership for the time being. That's a lot cheaper in Holland, and I imagine also in most European countries. The only big problem is that you cannot borrow money without being personally liable, and you cannot sell shares, but if you just need a "business" for the time being for tax purposes and to order stuff from places that will only sell to businesses (more common in Europe than in the US), it will do fine. In fact, I once set up a single proprietorship for the sole purpose of being able to buy food for cheap at a restaurant supply store, and it cost me about half of the Oregon LLC referred to earlier, and was done in a half an hour at the Chamber of Commerce, without lawyers involved.
I'd like to thank everyone who has responded to my question - you all rock.
The verdict: I will not be going with my friend the lawyer, but rather look into some sort of fee-deferral arrangement with a firm that specializes in this type of thing.
The verdict: I will not be going with my friend the lawyer, but rather look into some sort of fee-deferral arrangement with a firm that specializes in this type of thing.
i think if yc startups are being set up by lawyers vs. incorp service than you might consider going that route.
There are a ton of variables involved for each situation, but if your going for the angel to VC path, paying for a lawyer with experience in web/tech startup financing is a good idea.
Many top law firms will defer the fees, and it looks good to an investor when you have decent lawyer backing you up.
Many top law firms will defer the fees, and it looks good to an investor when you have decent lawyer backing you up.
Thinking that getting a good lawyer will get you investment is fallacy. The only thing that gets you an investor is showing traction and having a business model (at some point in the future, at least.)
That said, having a good lawyer is important just for legal reasons and because the lawyer can foresee complex situations (founders splitting up and so on) that you wouldn't.
That said, having a good lawyer is important just for legal reasons and because the lawyer can foresee complex situations (founders splitting up and so on) that you wouldn't.
your right, my comment was not intended as having a good lawyer gets you an investor. simply shows your going about things in a professional manner and not likely to have some dodgy legal snaffu derail you at the last minute.
Some advice about what not to do is a good way to put it.
Some advice about what not to do is a good way to put it.
This is the main reason I wanted to join YC, to limit lawyer expenses.
I know that many people say this, and pg often cites it as a major benefit of YC. That's why I'm wondering.
Yipes. Decreasing legal expenses is about 1% of the value of YC. By far the most important thing we do is work with people on their ideas. Then teaching how to present to investors, then introductions, technical advice, advice about negotiating deals, help in disputes between founders, the value of the other YC founders, help in recruiting...
Thanks for disabusing me of that notion - I don't mean to spread misinformation or anything.
Ditto. I misspoke. ("contributing motivator" would be more accurate than "_the_ main reason.")
Having legal counsel in the know is certainly just one of many pieces, it all depends on which ones you need (most). (And that in turns depends on what precisely you're going after.)
Having legal counsel in the know is certainly just one of many pieces, it all depends on which ones you need (most). (And that in turns depends on what precisely you're going after.)
dealing with competent lawyers is bad enough, do not subject yourself to what will amount to a miserable experiment in futility just because he's the only lawyer you know.
if you need money (first off ask yourself what you actually need money for), get someone with money who will let you do your thing
to set up the C-crop, you SHOULD use a lawyer. ask friends or friend's of friends for recommendations. get a lawyer who will charge a flat fee, ours is only charging us $750 to issue the stock/create the bylaws/etc. use a bigname incorporation service to actually incorporate you in delaware if you have not yet done so (we used www.ctadvantage.com, cost us like $900 but only because we were stupid and had started off as an LLC and then decided to switch to C-corp).
the mental-illness dude does not sound like he can help you with either money or legal matters and will be more trouble than he's worth. STAY AWAY FROM HIM
hope this helps