Legal Question in Business Law in New York

Re: Must you incorporate before launching a startup?

You don't have to incorporate. But, as in the case of any operating business, it is the smart thing to do to protect yourself from any claims or creditors. This is particularly true in operating a website where there are often claims of infringement of intellectual property or ideas.

Feel free to contact me if you have any further questions.

Kind regards,

Peter Moulinos

Re: Must you incorporate before launching a startup?

As a preceding respondent has already recommended, you are not required to incorporate before launching a startup, but incorporating does provide you with the benefit of limited liability. However, you could also gain limited liability by starting your venture as a limited liability company i.e., LLC, instead of as a corporation.

There is no definitive answer as to which is the better means of obtaining legal liability since that decision depends upon the specific circumstances of the business owner(s). The following may be some factors worthy of your consideration.

One disadvantage of the corporation as oposed to the LLC could be in New York State tax implications. If your business does not do well as may happen with an Internet business, even if you make no profits and incur no losses, you are still liable for the annual New York State franchise tax of $800 for corporations whereas there is no such franchise tax on the LLC. Therefore an unsuccessful sole single owner business which is an LLC which does no business might not be taxed.

However, the taxation of an LLC can be complex, depending upon how many owners are involved and there are scenarios where the tax implication of operating as an LLC could be costlier than the taxation of a corporation.

The one time start-up filing fees in forming an LLC are about $115 more expensive than those for forming a corporation, approximately $250 versus $135. (This assumes that you are incorporating as a New York State corporation or LLC, not in another ste, e.g., Delaware, which could be an option with adavntages as well as disadvantages worthy of consideration).

Other factors meriting consideration:

Unlike the case with corporation which have a long history of case law which permits risk assessment and avoidance of circumstances of corporate "piercing the veil" where the owners lose limited liability and become personally liable due to their disregard of legal technicalities in operating a corporation, the limited liability company form is so comparatively new that there is comparatively little court case decisions to teach owner(s) of the LLC how to avoid losing the limited liability protection of the LLC and thereby becoming personally liable.

Moreover, even without disregard of legal technicalities, even if the LLC is operated with scrupulous care to satify all legal formalities and requirements, if you are e.g., a New York LLC which conducts business in other states as well, then some of those other states may not recognize the LLC form of business organization and may not recognize the limited liability protection of your LLC's members.

Re: Must you incorporate before launching a startup?

I agree with Peter and Larry. However, unless you have partners, rather than just employees, the LLC is better. A one-man LLC only files using Schedule "C" of his personal 1040 return. It is only when there are 2 or more members that a LLC has to file its own entity return. I suggest, for the small cost involved, forming the LLC before you launch the new business. Consider the costs a form of insurance against possible liability claims. Last thing, certain types of claims allow the claimant to "pierce" the entity, so just having a LLC might not give you complete creditor protection, in those instances. A quick example of this is you driving a car that is owned by someone else and you have an accident. Both the owner of the car and the driver can be sued. When you can afford it, I recommend buying an excess liability insurance policy (this presumes you already have some liability insurance like auto or homeowners). The premiums are reasonable for the protection afforded. You should consider this also if you are going to sell products, not just services.