This is my first foray into business of any kind and I’m really looking for the liability protection offered by being a registered business entity.
Since I don’t have any revenue yet should I then dip into my amount set aside for this business to pay for those? You said if I can’t afford that the business isn’t viable, so just trying to understand. Thank you!
What liability do you actually have?
How will a forming a business entity protect you from actual liabilities?
What additional liabilities will forming a business entity incur?
How does the ongoing cost of maintaining a business entity effect cash flow from the business?
I'd put it this way. Building an app isn't usually a path to forming a 'real' business. Most apps don't generate any cash flow. Very very few generate the few hundred dollars a year it costs to incorporate in California.
Forming a business entity is easier than finding a revenue model. And finding a revenue model infinitely more important.
Be in a hurry to make money.
Don't be in a hurry to spend it.
Cash on hand is critical.
You can always form a business entity later.
It is not urgent.
Who would sue you?
Why?
In my case since it is a social app where people can meet virtually and also in person, the biggest risk I’m afraid of is people doing bad things that are against the TOS and I’m on the hook.
I appreciate those questions to ask self.
I tried looking up how dating or events app do things and most of those seem to have very structured business entities around them (like IAC)
On the other hand, there's a lot of value to launching quickly, and IMO usually this benefit outweighs the risk of personal liability. I'd just try to make sure that your terms of service includes a limitation of liability / indemnity clause.
One underrated aspect of not incorporating is that it keeps your company feeling more like a "project" than a company. And I think it's worthwhile staying in this stage for as long as possible, because it gives you more permission to experiment with wild ideas and iterate in weird directions, even if, as in your case, you have a pretty solid idea of where you want to start already.
FWIW, I didn't bother incorporating my own startup until I'd secured terms for my first fundraising round.
Setting up a business entity is easier than finding customers. And less important. If you don't have customers, then setting up a business entity is "playing house." It feels like work, but doesn't change anything important.
Keep in mind that while YC companies incorporate early on the YC pipeline, there is a sound business reason for doing so. They incorporate so that they can get YC's investment.
In California, an LLC costs a few hundred dollars a year. If you don't have customers, that money is clearly not doing anything for you. And even if you do have customers, there are probably opportunities with greater return than incorporation.
Incorporation is potentially insurance against personal liability. It won't prevent someone from suing you. It just means in the six-sigma event that you wind up in court with a good lawyer, the case might be thrown out. "Might" because very small corporate entities are sometimes no better than a sole proprietorship in the eyes of the law.
But if you want to set up an LLC or S-corp, talk with your accountant and lawyer (probably your insurance agent too, just to cover the full team).
Having an accountant, lawyer, and insurance agent is a reasonable bellwether for enough of a going concern for incorporation. If you can't afford an accountant, lawyer, and insurance agent, that's a symptom of an unviable business. It's probably not worth doing.
Good luck.