Can I get a few paying customers before forming a legal entity?
Before going through the time and expense of forming a legal entity, I would like to see how much demand their is for my goods. At what point do I need to form a legal entity?
I say no. It's like saying wait until the day before a fire to buy insurance.
A legal entity is not expensive.
Any work you take on with a client /customer is likely to implied terms and conditions. If the deliverable is not as expected, you may incur liabilities.
I suggest setting up a sole proprietorship before you get any customers. It's pretty painless and you can start writing off your expenses as you go along. Getting an EIN number from the IRS will also help you open a business bank account so you can start separating your business expenses.
You can always restructure your business when necessary and you should seek legal advice on that. Some types of businesses should never be a sole proprietorship because of your potential liability. So, once your ready to get clients restructure your business.
Ellen's answer is good from a marketing point of view. From a legal point of view, you need to form a legal entity at the time when you do not want to be personally liable and risk your personal assets for any loss or legal action in regard to your business.
You will know the point you need to form a legal entity when you have tested your goods in the market place. Here's what I mean:
Does the market want your goods?
Will people buy your goods?
Have you sold any of your goods?
At what price points did your sell your goods?
Did people ask for or ask if you had a product similar to the good they purchased? Did you fulfill that request?
Did you capture the data of the people who purchased: names, email, phone?
Are they willing to purchase again?
How did you accept payments: cash, check, money order, Paypal?
What amount of revenue did you generate in market testing your goods?
If you have more than one good, is your pricing right?
Did you structure your goods in a system making it easy for your market to buy?
Are your goods shipped?
Are your goods virtual, digital?
The key point is, do you have goods the market wants to buy.
If you answer yes to any of these questions, then determine the most amount of revenue you can generate in one quarter or half a year. If you meet that target, then think only.
Type of entity and why?
Best business model
Best revenue model.
There's much more but I would start with this simple market testing, validating you can commericalize your goods, monetize those goods then form an entity.
Hope this helps you, Lynn.