Order of Operations?

[WARIV]

Good day all. First time poster here.

Background: I have a business idea. It's a simple and cheap product. It's also something I can do whilst maintaining my current job. The risk is low IMO; as there is no immediate need for financing outside of my own income. It is a niche market within a major industry, with few competitors and plenty of room for a new entity in the market. It's been my hobby for several years and I have perfected my version of the product. The goal is not to become rich, but slowly transition from a life in a cubicle to becoming my own boss.

Problem: I have the entrepreneurial spirit....I just have never taken "the leap" before. It's a daunting task the first time through.

Question: Is it bad practice to Incorporate before I am actually ready to do business? For some reason I have this overarching subconscious thought that everything needs to be done and ready at once. I can't shake it, and I don't think its true. But I think this idea of completeness has held me back in the past.

So is there any reason I should NOT Incorporate now, request EIN, and setup accounts? Even though I know I wont be ready to launch for say 6 months? There are other task that need to be completed, such as permits and inspections. Those will definitely need to be conducted as the entity, correct? What are some general issues to be concerned about with a temporarily inactive business?

Thanks for any clarification.

[tallen]

Define "temporarily inactive."

Even if your product is not ready to be sold yet, you may well still be actively engaged in business activities -- as you say, permits, inspections, etc... If you are spending money on deductible, amortizable, or depreciable expenses, you are in business! Even if you are not spending anything yet, but you are entering into contracts that commit you to spend in the future, you are in business!

In general, I would say that if you are sure that a corporate form of business entity is what you want or need, and you know that you are going to move ahead with your business idea (at some pace, however slow), the first thing to do would be to establish that corporation before you start spending money or entering into contracts. It just makes things easier.

[vangogh]

Welcome to the forum WARIV.


It's a daunting task the first time through.

It feels that way, but I promise it's not as daunting as it seems. It's just new. Take one thing at a time and do your best to figure it out and then move on to the next thing. It's ok if you make a few mistakes along the way. I know I made mistakes and I think everyone else here would say they did too. Learn something from each one and they won't be mistakes.

I'd also ask what "temporarily inactive" means and I'll add are you sure you need to incorporate. If yes to the latter what kind of corporation? Are you thinking LLC or S-Corp or C-Corp. I think in the case of an LLC there's no downside to setting up before you're ready. In the case of the S or C corp I think you might be paying corporate taxes regardless of whether or not your open for business. Don't hold me to that, since this isn't my area of expertise, but I think that's how the S and C corps work. The IRS does understand that businesses aren't usually making money on day one so there are allowances for not making anything or even losing money at first. Just something to look into depending on which corporate entity you want to form.

Having said that I don't think there's any reason not to set up now. It sounds like temporary is 6 months or so and I agree with tallen that you should set up the corporation before you spend money or enter into contracts.

[turboguy]

With an S corp the taxes are passed through to the shareholders so starting one now should not add any taxes.

[WARIV]

Define "temporarily inactive."

Even if your product is not ready to be sold yet, you may well still be actively engaged in business activities -- as you say, permits, inspections, etc... If you are spending money on deductible, amortizable, or depreciable expenses, you are in business! Even if you are not spending anything yet, but you are entering into contracts that commit you to spend in the future, you are in business!

In general, I would say that if you are sure that a corporate form of business entity is what you want or need, and you know that you are going to move ahead with your business idea (at some pace, however slow), the first thing to do would be to establish that corporation before you start spending money or entering into contracts. It just makes things easier.

Thank you all for the warm welcome. Also, thank you each for your insight. I feel tallen put it in perspective pretty well here. When I said "Temporarily Inactive" I was referring to the aspect of not actively taking orders and shipping product to the customers (No revenue stream), but rather handling the initial administrative aspects of the business.

To answer some other questions. I was planning on going the LLC route. From my research it gives me the control I need currently, and the ability to adapt if the future dictates. (Employees, etc). I know the S-Corp also does this. But the LLC seems flexible enough while remaining simplistic in regards to taxes as the sole member. I am in no way an expert on this stuff though.

I'm going to spend a few more weeks doing my Due Diligence and then I think it's time to take the plunge. I'll be scouring these forums in the interim. There is a lot of good info here it seems.

[Fulcrum]

Depending on your product, is there a serious liability that you will be exposed to in the event of a failure? If not, and you don't have assets that need protecting, you may be able to start as a proprietor and grow into a different structure.

I started as a proprietor, with a DBA, and will be meeting with my accountant next week to see if it makes sense to incorporate from a tax perspective (borderline from an asset protection point of view).