Why incorporating my startup was my worst mistake

Corporations are not particularly hard or expensive to start, maintain, or dissolve - <i>but</i> you need to be at a stage of life where a thousand dollars here or there is not a major burden. If you are not yet at that stage, that is a different story and there is no doubt that forming or dissolving an entity such as this will normally set you back a thousand or two on either side. In that case, you should tread cautiously unless you can raise some funds (even if it friends-and-family money) to be able to handle such costs without too much pain.<p>As a lawyer, I would have to say that you should do it by the book and dissolve the entity. I have, however, had a variety of clients over the years who left a Delaware corporation to die without dissolving it and they have not had trailing personal liabilities as a result of the accrued corporate franchise taxes (of course, it is a different matter if the corporation earned a net profit and has an obligation to file income taxes - in that case, failure to file can cause serious problems for the corporation and for its management).<p>The $89K tax bill is typical of any Delaware corporation that has large numbers of authorized shares, even with a low par value. This often proves a shock to unsuspecting founders who file a do-it-yourself entity without understanding the issues. However, in almost all cases involving an early stage startup, you can deal with this easily by using the alternative valuation method tied to value of assets in the company. Use of the alternative method usually reduces the franchise tax to a very low level. It is easy to find out how to use the alternative method (forms and instructions are available online through the Delaware Secretary of State).<p>It seems that you needed to set up the entity in order to try to manage the issues with your co-founder and so the choice to set up a corporation was not really a mistake. The choice to set it up in Delaware for a simple situation can be a mistake, in my judgment, but I am probably in the minority among startup lawyers on this issue in believing that a home-state incorporation in the interests of keeping things simple can be and often is the best choice for founders (see <a href="http://grellas.com/faq_business_startup_002.html" rel="nofollow">http://grellas.com/faq_business_startup_002.html</a>). It is no disgrace for a Silicon Valley startup to incorporate in California, even for a public company (no less than Apple itself is a California corporation). Had you done a home-state incorporation, you would have avoided the hassles with the $89K tax bill, as most states besides Delaware states have a fixed, low amount that you pay every year as a minimum franchise tax (in California, $800).<p>Incorporation is definitely not for everyone. When and if to incorporate can be tricky questions. I also have outlined a few of the factors to guide that decision as well (<a href="http://grellas.com/faq_business_startup_007.html" rel="nofollow">http://grellas.com/faq_business_startup_007.html</a>).<p>There are a good number of early-stage startups that really can't easily afford professional fees and so the answer is not to use a lawyer in all cases to incorporate. But, even if you can't afford a lawyer, it is always worth consulting with one for strategic advice on incorporating before you do so. Such a first consultation is dirt cheap in most cases, and sometimes free. The modest amount paid is well worth it just to be alerted to the main issues and pitfalls involved in setting up an entity. Thus, while it was probably not a mistake in itself to set up your corporation, it likely was a big mistake to do so without some guidance of this type (I had made this comment in connection with your original piece as well - <a href="http://news.ycombinator.com/item?id=1924719" rel="nofollow">http://news.ycombinator.com/item?id=1924719</a>).<p>Sorry to hear about the business failure. I know the HN community often stresses what a valuable learning experience this can be but there is no denying that it is a very painful affair by any measure.

Oh, come on guys, if you think these are troubles related to incorporating a business, you should really try to do it in Croatia.<p>For starters, all companies need to be registered at the Court of Commerce, and each new company needs to have a name approved by a judge. Second, you're legally bound to have a name either in Croatian, Latin or Ancient Greek (or presumably another "dead" language, if you can prove it); and even if you do, a judge has to OK it (a friend of mine has recently been through about 30 names and still hasn't been approved; the whole process of approving a name can take days).<p>Then you have to physically go (yourself, or your lawyer) to 3 or 4 offices to file various registration papers; all in all it can take a better part of the month to incorporate. And to top it all, even if your company does nothing, has no income or expenses, it has some monthly dues to the state from day one, simply because it exists.

It sounds like Franchise Tax associated with annual returns is payable by the corporation, not you personally.<p>From 8 Delaware Code §503: "All corporations accepting the provisions of the Constitution of this State and coming under Chapter 1 of this title, and all corporations which have heretofore filed or may hereafter file a certificate of incorporation under said chapter, shall pay ...". <a href="http://delcode.delaware.gov/title8/c005/index.shtml" rel="nofollow">http://delcode.delaware.gov/title8/c005/index.shtml</a><p>It is 8 Delaware Code §277 (<a href="http://delcode.delaware.gov/title8/c001/sc10/index.shtml" rel="nofollow">http://delcode.delaware.gov/title8/c001/sc10/index.shtml</a>) which says that Franchise taxes have to be paid <i>by the corporation</i> before the Corporation can be dissolved.<p>It sounds like the corporation is behind on franchise tax, and so is therefore insolvent - it has liabilities exceeding the assets.<p>If the corporation simply doesn't pay the franchise taxes for a year, the charter will be repealed (see 8 Del C. § 511, <a href="http://delcode.delaware.gov/title8/c005/index.shtml" rel="nofollow">http://delcode.delaware.gov/title8/c005/index.shtml</a>). Expect to lose all assets owned by the corporation, including any code.<p>IANAL, but I suggest you get advice from a lawyer or accountant about this.

You really should update your original "How I Incorporated My Startup" article <a href="http://heyhamza.com/33994010" rel="nofollow">http://heyhamza.com/33994010</a> to admit you got in over your head. It really changes the whole lesson of the first article. I see you've added disclaimers, but you need to also link back to the potential $89,000 mistake.

Incorrect: Your worst mistake was not talking to a lawyer and an account before doing your incorporation. The value of these professionals isn't their ability to file paperwork but to give you advice that's customized to your situation. Too many geeks think they can reverse engineer what goes into passing the bar or getting a CPA, but the reality is that the smart ones really know enough to know what they don't know...

It's a shame these things aren't more straightforward. This is a somewhat detached and subjective view of the US but it <i>seems to me</i> that US regulations are designed to nickel and dime you at every turn. If you incorporate here in the UK, don't trade, and dissolve, you owe diddly squat and any taxes you do pay are reasonably simple and well known.<p>I'm far from a defender of the UK in most cases - especially tax <i>rates</i> - but as a business person in the UK, I at least don't feel like the government or regulations are out to trick me and that I need an expert or a lawyer by my side for every decision I make.

I'm going through this exact same issue right now. I created a C-Corp in DE naively thinking that thats what everyone did and I expected to pay no more than the minimum ($75 or so) in franchise taxes at the beginning. Apparently, since the state needed more revenue, they passed a law that dramatically increased the minimum to $400. I was shocked when i realized this and called the state repeatedly to make sure that there wasn't a mistake. I paid $400 back in Feb and I'll pay another $400 soon so that I can dissolve the C-corp. I now have an LLC in Texas (my home state) which more than satisfies my needs, for now.<p>Talk about an expensive mistake.

I don't think incorporation was the mistake here, but rather incorporating with no help and without knowing what you're really doing is. I recently incorporated using harvard business services, for $300 I had everything taken care of for me and had all the paperwork in 2 days, well worth the money.

I made a similar mistake myself, forming an LLC in Massachusetts. I did IT consulting for the SoHo and home market. It was around $550/year to keep the LLC in business ($500 plus filing fees), ~$50 to register with the town you're based for four years, and something like $250 to dissolve the LLC with the state. Every state has different fees; some are quite high, and others very low, pending on the type of business created.<p>I did it mainly to limit liability, among other reasons. However a little while after forming, I spoke to a lawyer and he said that it basically doesn't limit you from being sued personally. You "can" attempt to deflect personal lawsuits with the LCC (easiest if you keep its finances/files/bank-account separated from your personal stuff, which I did), but it's no guarantee.<p>He basically advised me that forming the LLC was a waist of money in my situation, and I would have been better off simply as a sole-proprietor (e.g. DBA - doing-business-as). From the IRS's perspective, I was treated as a sole-proprietor for tax purposes (they don't recognize LLC's for single individuals). Of course by then, it was too late to easily dissolve the LLC and "switch" it to a DBA, so it was money wasted.<p>What annoyed me the most is the same problem Hamza had in the article. You have to pay money to dissolve a business! Really? REALLY?!? Obviously the business failed, or is being abandoned, because it didn't make enough money. Charging a "death tax" on a business seems pretty harsh. I understand if there's a filing fee of $20 or $30, but anything higher than that is ridiculous. Delaware wanting $1,600 from Hamza is downright insane. Perhaps there's more work involved dissolving a C-Corp than an LLC, but still, $1,600 is ridiculous.<p>Charging a business death-tax reduces seed capital needed to form a new business. Second, it reflects badly on the state, reducing the likelihood of incorporating in it again. Lastly, why not ignore paying the fee altogether, declare bankruptcy, and waste the time/money of the court system dealing with it all? I'm not sure about the legal implementations of that, but it might be a valid option if the C-Corp has no assets left. AFAIK you cannot ask shareholders to pay for it since they're legally shielded from the debts of a C-Corp.

Someone never learned what "limited liability" means.<p>The whole point of a corporation is that you aren't personally liable for its debts! You just paid $400 for no reason!

the company is bankrupt and can't pay its taxes. File ch11. I don't know why you think you have to pay this, it isn't money you owe (the whole point of setting up the business, isn't it?)

This is the poster child for using <a href="http://foundrs.com" rel="nofollow">http://foundrs.com</a> : virtually incorporate with your co-founders, see how far it goes, when it gets serious convert into a real corporation.<p>Benefits: no corporate taxes, no accountant to pay. Vesting is automatic (4 years, monthly, just like founder stocks in a Silicon Valley startup). And it's legally binding (thank you copyright law, for once you were useful).

Has anyone stopped to consider what the real risk of being sued (and losing) is for your average startup website?<p>Is incorporation premature optimization?

IANAL and this is probably bad advice, but...<p>You can let the company fall into bad standing.<p>I have heard of the various risks with doing that, and I've never understood how those risks go away with dissolution.<p>If the company is shutdown and not making money, then failure to file annual reports and tax returns is irrelevant because you will have no income to be taxed or fined against. You would have annual state filing fees that would go unpaid, but you would never be personally liable for them. And I can't imagine how you would be personally liable for the actions or inactions of a corporation that conducted no business.

It cost me about $1000 recently to dissolve a Delaware Corporation.

This article should be entitled, "Why failing to hire an attorney was my worst mistake." It's easy to think that some googling and reading statutes will get you where you need to be, but there are very real pitfalls and tax traps out there that attorneys are far better equipped to help you avoid.<p>If you're not serious enough about your new business to pay for professional advice - you're not serious enough to start it.

I don't think incorporating was a mistake, I incorporated a c-corp last year and read that getting 5K shares was the maximum while remaining at a minimum franchise tax. From my understanding, the initial amount of shares is not a big deal as this can be changed later (emitting new shares, blah blah blah).<p>I created the corp as an experiment and will see how it goes.

Wow. Incorporating in Australia is a breeze by comparison. AFAIK, a four page form and ~$400. With an annual fee of $212.

1) This is why we tell our clients, right on our online order form that increasing shares will increase the cost. If they still insist on increasing the # of shares, we'll call and explain to them that you can file a low # of shares now and file "Articles of Amendment" to change it to a higher # later when you are better capitalized. Besides, most VC's are going to amend your original articles of incorporation <i>anyway</i> to create multiple classes of stock, etc. so it's really not worth it to authorize too many shares.<p>Finally, I've posted this link to our site before: <a href="http://www.mynewcompany.com/annual-report.htm" rel="nofollow">http://www.mynewcompany.com/annual-report.htm</a><p>Bookmark it, and then you can check a) when and if you have an annual fee due for your company/state and b) what the filing fee is.

I've been here with several things in life. While winging it has been the source of some "winning" in my life, it has also been the source of many losses.<p>I'm more of a creative mind/sales guy. I'm an okay web designer, with very minimal programming skills. I tried to develop a tech driven start up and handle everything on my own including the programming. I worked so long &#38; hard trying to take care of things I wasn't skilled enough to do that I was too exhausted to maximize on my talents.<p>So, I would say focusing on your strengths is a key to success. Marcus Buckingham has nice insights on strengths. Check him out.<p>-Cheers

I'm surprised that nobody is horrified by how deceiving this is. Its definitly a way for delaware to make money. May be it's just the way law is, you can't use your own judgement on if something is fair or not.<p>Bringing it back to a computer metaphor would be : Of course you should have done backup, everybody knows that ! You now need to pay 89000$ whether or not you need your data on that drive. You should have consulted an enginineer before buying a computer of course !<p>See... small mistake, disproportionous response.<p>At least think that you did nothing wrong, it's just that the law is unfair.

Regarding the amount owed, from my lawyer when I did this two years ago: Please note that there are two methods to determine the tax – the authorized share method and the assumed par value capital method (both methods are detailed on the website).  DO NOT sure the authorized share method as this will calculate a tax balance of over $75,000.00.   Do use the assumed par value capital method as this will calculate the balance at roughly the $75.00-125.00 range.

When someone sues you, you'll better understand why having a corp, LLC, etc. is important.

Unless he signed and recorded something saying otherwise he is not personally responsible for the debt of anyone else, including the Corp, and the state is trying to levy a tax on ignorance.

for a corp with no assets, i would've refused to pay and not bothered with the annual reports. after a number of years that stuff just goes off the books.<p>you might get some nasty letters. yawn.

I hope you filed Form 1120 also

Why did he have to pay?

To anyone thinking about incorporating: unless you have a <i>very good</i> reason for doing so -- by which I mean solid legal and accounting advice, and money to pay associated costs -- do not bother incorporating outside your home state.<p>As others have said, DE has a great, business-optimized court system. But if you don't live in DE, you're instantly at a huge legal disadvantage if anything comes up. Meanwhile, you'll be stuck paying:<p>* annual corporate filing fees (WY), minimum franchise taxes (DE), licensing fees (NV), income taxes (many states), etc. in the state in which you've incorporated.<p>* foreign corporation fees/taxes and income taxes in your state of residence.<p>* foreign corporation fees/taxes and income taxes in any other state where you do conduct significant business beyond sales.<p>* registered agent fees in the state in which you've incorporated.<p>* possibly mail forwarding fees, depending on what you're trying to do.<p>(I incorporated in Wyoming last year, then realized how dumb that was, dissolved the corporation, and re-incorporated in my home state this year)