Thoughts On Incorporation

For whom the taxman calls, all cash dissolves.

In the silicon valley startup scene, it is a cardinal rule to incorporate your business as a c-corp. Carolynn Levy gave an excellent overview of the legal mechanics for startups at YCombinator. Arguably, the flexibility around equity makes a c-corp structure worthwhile, but as an early-phase entrepreneur, I asked myself if I really needed outside capital and whether I’d want to take it. It is tempting to accept venture capital to ease cash flow worries. Indeed, it helps to hire talented people to build an awesome product much faster. But, I felt, that venture capital isn’t the right choice for my business and my particular ambitions at this stage. As a founder, it is crucial to weigh your existing runway, the freedom that comes with it, and the products you can (reasonably) ship and sell before you reach to end of it against the influx of outside capital tied to terms and conditions.

After doing my typical due diligence on the various different business structures available from b-corp, c-corp, s-corp, limited liability company, and limited liability partnership, I eventually landed on the LLC structure. Vacation and short-term rental management is arguably a service-oriented business. It isn’t capital intensive, requires a large workforce, or must scale expeditiously. The type of product offered by Cedar Bay Group revolves around account management, which has been done before, scaled before, and failed before. Hence it is predictable. It is secondary in nature. Product-market fit or rather service-market fit is arguably easier to test at a vacation rental management startup by generating a lead, selling a client on your idea, and taking a cut from the gross-booking value that is reflected in your bank account. This can be done in a heartbeat without any technology or equipment.

Maybe this all circles back to sales is king. Preserving cash flow by generating sales early on is a prime objective. I have a strong preference to be frugal, yet as efficient as I need to be, but nothing more. An LLC allows pass-through taxation which means the company’s profit and losses pass through each member’s individual tax return. Its liability protection is sufficient for an early-stage startup. Low cost, a minimal administrative effort to maintain, and ease of setup are other benefactors that influenced my decision to form an LLC. To form the LLC, I used Northwest Registered Agents. It was a flawless, fast experience in addition to secure personal privacy that is unavailable if formed without a registered agent.

Whatever your thoughts on incorporation are it is reasonable to talk to a lawyer or accountant beforehand. Choose the most optimal structure based on facts rooted in reality, not based on wishful thinking about the future.

This post originated on my substack Codifying Chaos.

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