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?
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.
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.
You can start a business without forming a legal entity. You don't even need to get an EIN number, because your SS# can be used for that purpose. When you start a business and its just you running it, you are a sole proprietor. If you hire employees you will need to get an EIN number. Depending on the state you may need to get a sales tax form.
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.
Lynn ...That's the beauty of the Internet. It allows you to do a lot of research about your marketplace before you get started.
Start by searching Google for 'Your product' market size.
Next form a focus group of your own. If you have a neighborhood association or belong to a church group, etc. invite them to a coffee and dessert at your home or some neutral location, show them what you envision of your product, and ask them a series of products. This may cost you a few hundred dollars to pull off.
You can also take photos of your products and use a product like SurveyMonkey and its audience and run a survey nationally to gauge market interest. All before thinking about any of the other items involved. Hiring a SurveyMonkey panel and running a survey is going to run about $2000.
However, if you want to write off the cost of this research as a business expense then you need Conrad's advice and register as a sole proprietorship.
I also agree with Jerry. You don't have to develop a legal entity until you feel you need to separate personal liability, but you do need to get an EIN and state sales tax ID.
I did several times successfully. Kept the day job. Got situated without burning through money.
Yes, you can get a few paying customers. You already are a legal entity with a Social Security Number.
Given that you're doing an online business in knitting, I sense you can operate as a sole proprietor for some time without incorporating. Form a Limited Liability Corp or Corporation when you add a full time employee or your accountant tells you that it is tax advantaged to do so.
For now, focus on testing your concept and getting your website built-out. That's a full-time job right there. Learn how to make money first. There will be ample time to figure out how to protect it.
The prior comments are on track - but remember that you need to do some research because the rules vary in each state. In Virginia, for instance, you can have a single-member LLC (meaning you) using either an EIN or your SSAN; if you use the SSAN the IRS doesn't recognize such a structure it treats it as a sole proprietorship, meaning everything flows back to your personal tax return and there is no double taxation.
Now don't jump immediately to the zero-cost solution. A sole proprietorship by itself conveys NO liability protection. Don't assume that just because it is impossible for someone to hurt themselves using your product (e.g.if it is a service) - guess again. Even for a service you need errors and omissions insurance or professional liability insurance, and the protection of a corporate entity is just another form of insurance. For the $100 or so that it takes to start up, and $50/yr or so to sustain, you can't afford not to.
I wonder how many of the respondents are lawyers? The proper answer is, it depends. The law regarding incorporation and sole proprietorships is state specific. You haven't even mentioned the nature of your proposed business or the amount of risk involved. In general, a corporation is a separate entity and creditors or people with claims against your business would not be able to access your personal assets if you were incorporated.
The person telling you not to "believe an attorney" is misguided. The decision to incorporate, form an LLC, an S corporation, etc. should be made with the advice of your accountant and your lawyer. There are plenty of businesses where it is just fine to operate as a sole proprietor because the risk is low and the tax consequences do not make incorporating worthwhile.
No one should be giving you advice without more information.
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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.
Sure you can get a few paying customers before you establish legal entity, e.g. you can test your products in social media (towards any law in any country it is legally without legal entity for short feedback period) to aannounce it and later to estimate feedback, it is very quickly and wide range of cicistomers mass or even you can choose your Interesting customers' sector.
Good luck to you and your business!
Business is basically an exchange of demand-supply. If you can fulfil a demand and customers are willing to pay value of your product/service, you certainly can earn as an individual and not as a business entity. However, starting the business with a proper legal entity, tax codes, bank account, logo etc. conveys seriousness and professionalism of the entrepreneur.
Wishing you the very best!
I am not a lawyer and am not giving an official response. Sometimes layman's terms are useful with questions like these, however, so here is my opinion:
You are always empowered to earn income on your own, you just file Schedule C to claim the income on your taxes.
You can also file a DBA (Doing Business As) to have an official separate name. You are not a separate entity, it is the same as claiming business income as an individual.
The only reason typically to form an LLC (Limited Liability) or Corporation is to take advantage of various tax breaks and benefits afforded official businesses or to avoid having a business disaster affect you personally (as in if you were sued or bankrupt and wanted to limit the extent to which you could be held liable personally).
The short answer is Yes - you can operate as a sole proprietor - and wait to see if your business is sustainable before "incorporating". And you can also operate as a sole proprietor under a fictitious or business name - the same name you would use if you were to incorporate - so from a marketing standpoint - it would be a seamless transition from being a sole proprietor to being incorporated. My question to you is why do you want to incorporate? There are advantages and disadvantages - and you need to look into the pros and cons and decide what is best for you. As others have stated - the biggest reason most people incorporate a small business is to separate their personal assets from their business assets. But there maybe added accounting costs for incorporating - as some accountants will charge a higher fee for doing an LLC's taxes - and depending on where you live there might be tax consequences - which could be advantageous and possibly not - so you need to seek the council of an accountant and possibly a lawyer to help you assess your specific situation.
I agree with Karl & Jerry, Setting up a Legal entity is not expensive. You see building a Business is a Sequencing process and the first step in the Sequence, is setting up the proper entity. Next is obtaining the EIN so that every transaction (i.e. Bank Account, merchant account, contracts, J.V.'s, trademarks, Copy writes, etc) you enter into, is under the Corporate Structure and not your Name & Social Security Number. If you operate as a Sole Prop you personally assume any and all liability that could arise from a Contract Dispute to a Lawsuit, Audit ,etc. This is essentially creating the foundation in which you will build your infrastructure.
Building the "Brand" under the entity will allow you complete separation of your personal assets from your business assets/investments. It will also allow for far more tax deductions than operating as a Sole Prop. You don't want to get too far into business as a Sole Prop and then have to halt the operations so that you can go back and set up the proper structure. As Stephen Covey said in the book "7 Habits of Highly effective people", Begin with the end in mind, have a Clear vision of where you want to go and how you want to get there". You want to build a business not on top of Sand but a Solid Foundation.
People might tell you, get a good Insurance Policy and you will be fine. What they are not telling you is that Liability Insurance only goes so far. If you have a $2.0 Million policy and someone sues for $4.0 Million. Then you will need to personally come out of pocket to satisfy the $2.0 Million balance. By creating the entity the only risk is your investment into the company, not everything you have worked hard for up to this point. I hope this helps give you some ideas and place to start.
Once you have written up your business case is typically a good time to form a legal entity. Remember that before buying, a customer would like to have the comfort feel of dealing with an organisation and you would need the legal entity in order to set up a bank accept to receive payment into. So delaying the formation of the legal entity / setting up a bank account may actually make it more difficult to get your first customers. No one wants to be a guinea pig and having a legal entity / bank account in place would help convey the impression that you are an established business to your potential clients.
Your question seems to indicate that you have doubts about whether or not there is demand for your goods. A good way to get that out of the way is to engage in some market research up front.
The world today is fiercely competitive, and the internet is a double edged sword that helps a customer get the best deal, while at the same time enabling you to reach out to customers all over. So you need to have something that is innovative, or else very competitively priced to attract customers.
Yes. Always a good idea to market test before forming a legal entity. Don't believe any attorney on that one. Sole proprieter with SChedule C filing is fine, better in some ways.
Crazy to invest in somehting that is not proven with the overhead of a corproation unless you have some huge liability involved.
Consider a CEO or BUsiness Coach. They will save you 10X the cost by avoiding disasters and getting there much faster.
Nothing in life is flat or linear, everything is 3 dimensional. So I will put it in 3D...!
To answer your question Technically...No, you should not, just like Karl said it with the analogy of insurance!
Practically...you could give it a try to test the waters as Marina suggested of Social Media and few seem to agree with her!
And finally, to look at it in a Philosophical perspective...you should even think of a legal entity only if you have (good) paying customers; otherwise...why bother...?!? Business is meant for making profit; it's not just another tick-mark activity, I guess!
- make the web-showcase ( through google sites for example, it's free );
- assign indicative price for your goods there;
- ask prospects to define the price they are willing to buy with;
- collect the answers where margin is positive;
- estimate total quantity of customers, total margin for the period of time;
- register an entity.
Don't fear to start. Step by step. Good luck !
There wouldn't be business in the world in case all the entrepreneurs were considering some guaranties instead of start.
Richard Stern- Forming a legal entity provides liability protection. Furthermore, suggest you consider writing a Business Plan for the business.
The Plan will provide structure for the business and help you understand how the business will operate.