Forums: Discussions for entrepreneurs and small business.

[quote] i`m trying to find out if i need to incorporate first before i start putting money into the project... [/quote]

Well, I`m facing a similar situation myself. I`m at the point where I have to look at what type of business entities I could form. I`ve been reading up about Sole Proprietorships, LLC`s as well as Corporations. There`s the obvious truth that once the website is up and running, it goes without saying that it will have to run under the form of some business. However, I think it would be beneficial for me to tie my idea and venture with some form of business, even during the developement and early stages that I`m in.

From what I understand, a Sole Proprietorship isn`t much of anything, and all you really do is file for a name down at your local town offices. I even read that you don`t have to file for papers at all, and pretty much just say abra cadabra I`m a Sole Proprietor... and you are. This makes me leery of the whole idea. I want something that`s a little more legal and professional.

Basically, when I pitch my idea to others and have them sign NDA`s and such, I think it would be much better to tie it to a business entity, perhaps even essential? And of course, when I find a partner and we write up pre negotiated contracts relating to the stake in the venture, it just seems like there would have to be some legal business entity involved.

1. For example, `said party agrees not to disclose any information to outside sources that belong to [business entity].

or

2. `All work done by said party in relation to legal documents which outline the design of the website belong solely to [business entity], and any revenue generated by [business entity] will be split with said party in the following manner [...].  

With the first instance involving a NDA and the second instance involving pre-negotiated business contracts and both instances involving the business entity owned by me, and the documents pertainining to the design of the site associated with the business entity.

I`m also wondering if for whatever reason I chose a Sole Proprietorship to start out, if that could eventually be converted into a Corporation. Nothing I have read addresses this issue. Also, is there one business entity you guys would recommend over another in a situation like mine?

As you can tell, I`m clearly not very sure of any of this, and really do need some enlightening related to these issues. If anyone is more informed on the subject matter than me, I`d greatly appreciate any help given. Thank you all for your help with my endeavor.

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I want to know, if I can live with what I know. And only that.

Watson75-

A Sole proprietorship can easily be turned into a formal corporation at anytime. You just have to pay the filing fees and usually some lawyer fees unless of course you utilize an "Incorporation" company. That is a company that fills out all the necessary paperwork for you. In that case you will still probably want a lawyer to look over the documents.

As far as what  I personally would recommend for type of corporation. Well, that largely depends on if you plan on soliciting Venture Capital at some point. If you do then I would recommend a "C" corporation. If you do that, make sure that in your articles of incorporation that you authorize a substantial amount of shares of stock for your company (for example: 10M common stock and 2M preferred stock). This will give you some options for investors later on. If you don`t do this at the time of incorporation it will cost you another filing fee for an "amendment to articles of incorporation". I am going through this right now, so this information is from experience!

If you do not plan on soliciting investors at some point then I would suggest an "S" corporation. This gives you the same protection as a "C" corporation without much of the regulations and the possablility of "Double Taxation". An LLC is a popular choice as well, however, I personally feel that an LLC is not much better than a Sole Proprietor.

To answer calvins question as far as should you go ahead and put personal funds into the "venture" and then incorporate and possibly write off the expenses after incorporation. The Fact is when you incorporate, in your by-laws, there is a section that describes "Start-up costs". This would include anything that you have personally put into getting this venture off of the ground ( for example: Incorporation fees, Research and Development, Equipment that you have personally donated to the venture and so on). So to answer your question, it really doesn`t matter when you incorporate or when you start putting money into the venture, because as soon as you incorporate or start developing a product or website you have already put money into the venture and it will be reflected as a business expense sometime down the line anyway.

I hope that this was helpful. Best wishes to you both!

Ken~