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I'm a sole-founder working on a consumer web startup in my spare time. I've done a fair amount of reading on LLCs, but I still don't have a clear idea of when I should start the process.

The web app hasn't been launched yet and while I have high hopes for it, there is a possibility it won't take off like I expect. I'd like to avoid spending a lot of money until I know I have a better idea of its trajectory, but I also don't want to get myself into a bad situation.

A friend of mine in a similar spot recently spent $5K on a lawyer who helped him incorporate, write a Terms of Service, and a Privacy Policy. I plan on launching a few apps per year until one takes off, and spending a few grand per app seems a bit excessive.

I'm not asking for legal advice; I'm just hoping to get a better idea of what factors I should consider before setting up that initial appointment with a lawyer.

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2 Answers

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There are three main reasons to incorporate:

  • Ease of hiring
  • Liability protection
  • Tax benefits

It doesn't sounds like hiring lots of employees is something in your plans at this point, so let's forget about that for a bit.

There are two types of liability: liability for debts and claims, and liability for injury and reckless harm. Incorporating protects against the former (to some extent) but not the latter. So, for instance, if your web app formats all your users' hard drives, you're probably liable for damages. However, if you enter a contract for web hosting and run out of money before its end, the hosting company can only go after funds belonging to the business, not your personal funds.

The main tax benefit usually associated with corporations is that they are taxed as separate entities, and the portion of their revenues that you do not take as taxes is not subjected to the self-employment tax. LLCs do NOT generally provide this benefit. However, in many states it is possible to form an LLC and elect to have it taxed as an S-Corp, which does provide these benefits. This tax benefit is unlikely to be terribly relevant to you until you're making a large amount of revenue.

As to the other reasons to have lawyers: I think the TOS and Privacy Policy can probably be crafted by a determined individual who reads through the TOS for some of the major sites (Facebook, Twitter, etc.).

My general impression is that, since you're the sole employee of your start-up, it's in a relatively low-capital industry, and you're not seeing revenue yet, there's no advantage to incorporating yet, and thus getting a lawyer now probably wouldn't benefit you. Note, I am not a lawyer, standard disclaimers apply, etc. :-)

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You might want to look at Legalzoom.com for INC/LLC

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