Before the Entity

Two people build something together. No entity exists yet, and no customer has paid.

A pre-formation ledger is a planning record only. It creates no entity, ownership, membership, compensation right, intellectual-property transfer, liability protection, or authority to act for anyone else. What it does record is what nobody can reconstruct later from memory: who contributed what, in what order, on what dates.

One rule shapes the phase: the entity forms before a customer pays.

Customer money is the point where waiting stops saving anything.

• The paperwork may already exist. People sharing revenue from a joint venture may be treated as a partnership for tax purposes without any agreement, with filings to match. Delaying formation does not avoid those obligations; it only goes without the liability protection and the clean records an entity provides.
• Money needs somewhere to land. An account in an individual’s name is that individual’s account, whatever the nickname says. Revenue held there becomes a question about whose income it is.
• Customers need a counterparty. A contract, an invoice, or a purchase order needs someone to sign it, and it should not be one member personally.

So before accepting the first customer payment, form the entity, with qualified professionals choosing its type and jurisdiction. If a customer has already paid, stop and get that review before accepting more.

Until then the venture has no money of its own. When a member pays for something the work needs — a domain, a subscription, a contractor — record it in the cash ledger as an expense. It adds to that member’s balance, which the team resolves after formation by reimbursing it or converting it into a Funding Block. See the Funding Blocks guide.

The first customer payment ends it at the latest. Agree now on who is watching for the things that can end it sooner.

• A customer needs a real counterparty — a negotiated contract, a security review, an insurance certificate, or procurement at a company that cannot buy from an individual.
• Cash goes in expecting equity. See the Funding Blocks guide.
• The liability profile changes — customer data, moving money for others, a physical product, anything regulated.
• Anyone is hired.
• The ledger asymmetry stops being tolerable — a contributor’s accrued units are large enough that “it is all in one person’s name” is a real risk to them.

Only the framework can see that last one, because it is stated in ledger terms. Publish the hypothetical final allocation after every accepted block and it announces itself.

No elaborate documents. One written record, because the method depends on both people describing the same arrangement a year later.

1. That the entity forms before the first customer payment.
2. That each contributor assigns the intellectual property in what they built to the entity when it forms.
3. That contributions are recorded in the member ledger and convert at formation, subject to review.
4. That what each member spends on the work is recorded as it happens, and resolved after formation.
5. What happens if the work stops before formation.

Item 2 is the one people skip and the one that hurts most. Before an entity exists, each person owns what they personally created; without a written assignment, a team that separates leaves a jointly held codebase neither person can ship. No ledger fixes that afterward.

At formation, both the pre-formation ledger and each member’s cash balance need review. Those blocks were sized and accepted by the same small group that benefited from them, with no outside check — examine them line by line, with everyone whose interests are affected present, before the governing documents adopt them. Expect some to be resized.

Do not rely on Fairly Exact alone to:

• determine whether a contributor is correctly classified;
• determine anyone’s tax obligations, filings, or deadlines, including whether the venture is already treated as a partnership;
• decide which entity is appropriate, or where to form it;
• create an intellectual-property assignment, or establish that one is effective; or
• establish that any pre-formation record binds anyone.

The framework supplies the arithmetic and the record. The rest requires qualified professionals for the specific people, transactions, and jurisdictions involved.