What risks are incurred when selling your own software without a corporation?

Question

I plan on starting a simple micro ISV selling some dot.net and classic ASP components. I'm talking $50 components here, not anything major.

However, I don't want to go through the hassle and expense of incorporating because, after all, this can fail miserably anyways like everything else I do.

Plan is to put up a website, buy adwords, and sell/distribute with Paypal as a payment capture mechanism, all done under my own name, with funds going to my own personal bank account.

What kind of risks am I looking at? Has anyone started with this approach? Thanks in advance.

FYI i'll be doing business in California / United States.

Answer 1

Lack of limited liability. If you get sued, etc., you can lose more than you invested in the business.

Answer 2

While it is good to be aware of different options, I would strongly recommend you pay $100 or so and speak to an attorney who deals with small business law before making any decisions.

Your biggest concern is liability - if your software were in some way to result in data loss or any other type of problem you would be personally liable for damages.

Simply forming a corporation is not enough to insulate yourself from liability. If your corporation is proven to be flimsy (known as piercing the corporate veil) then you could still be held liable. And even if you can prove your innocence the legal costs could be exorbitant.

A second concern outside of liability is that if something were to go wrong with your business you could be left personally responsible for any resulting bill. Even if you have no assets this could result in black marks on your credit history that would haunt for you years to come.

There is also the matter of accounting/tax/deductions to consider. If you are generating outside income, even a few thousand dollars a year, you need to report this as additional income and pay tax on it. (On a brighter note, this does mean you can then claim many hardware/software/property items as deductions). Having all of these payments to/from a second entity can make this a whole lot easier and will reduce the cost of having a third-party prepare your taxes (which is something I'd recommend, it's usually far more cost effective).

Many people choose to do business as a second entity for these and other reasons. In the US your choices include, but are not limited to;

• A sole proprietorship
• An LLC
• S-Corp
• C-Corp

As you move down the list the amount of work and money required to setup and run these entities increases.

One simple option would be to form an LLC and if necessary purchase additional liability insurance in the name of your LLC. This leaves your insurance company responsible for challenging the legitimacy of any claims for damages and yourself isolated for any expenses incurred as part of doing business.

You should also consider possible how your business may change in the future. Would you ever want to bring in a partner or outside investment? Employ other people or rent premises? One day sell the business to others? Some of these may affect your final decision.

While it is good to be aware of different options, I would strongly recommend you pay $100 or so and speak to an attorney who deals with small business law before making any decisions.

Answer 3

One very bad thing about organizing in that manner is if you get sued, they could go after your personal assets and leave you totally broke. It may be better to consult with a lawyer that specializes in business law to see what the best approach to this situation would be.

Answer 4

I am not a lawyer.

An umbrella policy would work for most situations I can think of for $50 applications...

I have an umbrella policy for other reasons - they are cheap enough and worth it - especially if you own assets that may make you a target in this litigious world.

Add EULA and disclaimers to your software. Avoid medical and control software domains...

You are very UNLIKELY to be sued if you have no assets.

Answer 5

One risk is getting sued.

Unfortunately, nothing can completely protect you from someone using the legal system against you. It is good practice to setup a business structure that protects you from personal liability, but anyone can sue you for anything, legitimate or not.

You should at least get liability insurance. It can cover some of the costs if you lose in court.

But the very best possible thing you can do to avoid liability pitfalls is keep your customers happy. Build the best product you can, listen to your customers, and let them know that you are doing whatever you can to serve them. If someone is truly ticked at you and wants to sue, do whatever you can to win their favor and stay out of the court system.

Answer 6

If you live in the US, your local Bar Association should be able to recommend a lawyer to talk to. Do not rely on advice from random StackOverflow participants when serious money may be at stake.

Also, find out how much hassle incorporating will be. Lots of people seem to do it.

Finally, I don't think your attitude is useful. If you're going to go into business, plan for success. If you expect it to fail, it almost certainly will. Either do your best to make it work, or don't go through the bother and expense.

Answer 7

Additional to all the other good comments here:

All California corporations pay a minimum of $825 a year in state taxes.. even if you lose money. If you expect to make modest sales, this constant drain is real punishment.