After standing-up JumboMouse in June, I’ve been planning a post on why I did – and why any startup founder (or founder team) should have one as well. But first the disclaimers: I’m not a lawyer, accountant, financial advisor or any other type of service professional. My advice here should be sanity-checked with your own trusted advisors. So, caveat emptor or better said – sometimes you get what you pay for :-)
When most of us hear the word incubator, we think YCombinator or TechStars. Those are the versions where someone else does the organizing, but the principles are much the same when setting-up your own shop. They’re using the structure of an incubator to make many investments in many businesses, and effectively pooling the costs and resources needed to make those companies successful. That should sound amazingly familiar to a serial entrepreneur – we do the exact same thing just with our own projects and our own dollars. But the structure and organization provides some important benefits even for a single-member LLC like myself. Here are just a few:
1) Business Expenses Should Be Paid By The Business: This sounds like a no-brainer, but take your monthly household budget and run some example numbers for yourself. Most entrepreneurs I know can easily come up with a couple grand of server costs, domain registrations, business cell phone plans, automobile expenses, internet access, client meetings, etc. on a monthly basis. Your tax bracket drives the true savings, but paying these bills with post-tax money just isn’t smart. Get yourself in the habit of doing monthly expense reports. You’ll thank me at tax time.
2) Provide Structure To Your Ideas: Again, this sounds kind of elementary, but the importance here is delineating between real companies and junk-I’ve-been-thinking-about. As my buddy Rob Kischuk recently wrote, be prepared to provide meaningful updates on the big projects you’re working on – he used the word ‘momentum’. If you’re going to be serious about the startup game, be medieval about what you’re working on – and be realistic about what one human can do.
3) Incubators Incubate: Maybe most importantly, your incubator serves an important legal purpose both in pre- and post-formation of each company inside. While you’re early, it rarely makes sense to sink the thousands of dollars necessary to stand-up a separate company – but you need the basic legal protection offered by an LLC. While new LLCs are cheap and easy to set-up, they typically only last as long as seed stage capital when serving as the basis for an individual company. Your incorporation strategy will get more complex (and way more expensive) as your investors get bigger, so waiting makes good sense. And this benefits you as well. Personally, I’m a fan of keeping all my ownership interests (and any other outside revenue or equity) rolled-up in my incubator. For me, business stays business and personal stays personal on paper – even if they do collide at tax time.
So how hard is this process? Do you need to go hire a boatload of service providers and spend thousands to execute my plan? The answer is ‘it depends’, but here’s what I did, which is admittedly the low-and-fast version of the process. (Disclaimer, Disclaimer, Disclaimer).
1) Name The Company: This is hyper-subjective and I spit out a couple thousands words on the topic two weeks ago, but the short answer is find a name you love. And make sure the domain is available, and the name passes the corporation search in your home state.
Total spend: 20 minutes :: $0
2) Register The Domain: If it’s any of the standard domains, I personally prefer NameCheap but have been known to split my spend between 1&1 with the very occasional GoDaddy purchase (maybe the new PE owners will un-blackhat their horrendous sign-up process but at least I know their moronic CEO won’t be using my $10 to buy elephant bullets).
Total spend: 5 minutes :: $7.99
3) Register The Corporation: Go to your home state’s Secretary of State website. In Georgia, it’s all online and super convenient. The only odd deal was you have to pay $25 to ‘reserve’ your name, and then $100 to register the company. I’m sure it’s just some other ‘department’… And this part of the process will surely have state-level differences, so do your homework!
Total spend: 30 minutes :: $125
4) Secure An Employee Identification Number (EIN): After you’ve got your incorporation articles done and your registration number, head over to the IRS site to get your EIN – yep, that’s online too.
Total spend: 5 minutes :: $0
5) Set-Up A Business Mailing Address: This is an optional step, and is personal preference. I like the strategy for one simple reason: I have a PO box listed on all my public-facing WHOIS records. Checking mail another place than home is a pain, so think hard about what’s near your everyday travels – for me it was the good old USPS. And again, the majority of the process can be done online with just one final signature and the key delivery happening at the post office.
Total spend: 30 minutes :: $41/6 mo.
6) Open A Business Banking Account: This is also loaded with personal preference, but this time around I came across a product feature that didn’t exist but one I really wanted. Instead of a traditional business checking account, I was in search of a brokerage account with Visa debit card abilities. Apparently, this was a Herculean request that didn’t fly at either Schwab or Fidelity – although Chuck’s folks were more upfront with the fact they couldn’t do it. So I ended up going back to Bank of America, who I have a love-hate relationship with. All the right features, but I once walked out of one of their branches with six cashiers checks after closing all my personal accounts. At the same time, their small business banking has more than enough features for a guy like me. We’ll see how long we coexist this time…
Total spend: 4 hours :: $0 (still deciding between traditional business checks vs. QuickBooks printable ones).
So overall, except for the chaos surrounding a debit card on a business brokerage account, the whole process to stand-up an incubator took me under two hours and will total ~$225 after I order checks. That’s well worth the tax benefit you’ll derive after meeting with your accountant to define the ground rules for your business. And you’ll be legally protected on any pre-formation companies, along with having your equity ownership centralized in a single entity post-formation.
How do you have your business set-up?