Setting up Shop

When I decided to found a business, I had no idea how much reading it would involve. My stack of books is huge and growing – subjects include programming, business plan writing, sales and business structures. This is in addition to following industry blogs and competitors to keep up with what is going on.

The main thing on my mind this week is setting up our company to be official. The most important thing is establishing agreements with Josh, my cofounder, up front. While it’s tempting to dive right into the product, important topics like funding and equity should be established as early as possible. After sifting through many books on the topic, my recommendations are:

Business Structures: Forming a Corporation, LLC, Partnership, or Sole Proprietorship (Entrepreneur Magazine’s Legal Guide)
by Michael Spadaccini

First, this book clearly lays out options for organizing a company (corporation, LLC, partnership). Then, it has chapters for each option with more details on setup and operation.

Form Your Own Limited Liability Company
by Anthony Mancuso

This is an oustanding book – clearly written while at the same time the most detailed. Across the board, the recommendation for young companies is to form an LLC (limited liability corporation). This has the tax benefits of a partnership (revenue is not taxed twice like in a corporation) without the liability risks. It starts by explaining the benefits of an LLC versus other options. It has a chapter describing taxes under an LLC. And it walks you through filling out the paperwork and creating an operating agreement – complete with the forms for each state (tear out forms in the appendix and also forms on CD-ROM).

Where I’m stuck is that for the first 6 months, we will have no revenue and will not be taking investments. Our product will only launch at the end of this period. An LLC is filed with the state, so then it requires filing a tax return, which requires hiring an accountant, etc. To me, this seems premature, so maybe a partnership is all that we need (what is our liability risk without revenue or a product?).

I have had no luck finding case studies from other internet startups. How have successful startups managed this process? I have been to multiple startup conferences and have not found this topic addressed. Great topic for anyone presenting in the future.

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3 Responses to Setting up Shop

  1. Dave Goldberg says:

    Aaron,

    I don’t have specific examples, but don’t let the need for an accountant stop you from forming an LLC. I don’t think an accountant will charge very much, especially if the work is basic (as it sounds like it would be), and with the potential for much more work down the road if he/she can establish a good relationship with you.

    I think you’re right, you don’t want to overlook the administrative details. If you go down the partnership road now, you will find it harder and harder to change structures later.

  2. pinpincreations says:

    Thankyou, this was really helpful reading! I want to start a business when i leave university and had no idea how to get started, but this has been a real insight x

    • afranklin says:

      Glad it was helpful. I’ve learned a lot since this post and hope to add more details soon. The hardest part is almost everyone will give you different advice. Good luck with the business.

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