When to create the business entity?

If I'm moonlighting and building the product at night and on weekends - at what point does it make sense to establish a business entity (e.g. LLC, Inc, etc)?

Would this make sense to only happen once I start accepting payments from customers (product would obviously have to be launched) ?

It makes sense to establish a business entity when you want to accept payments from customers, attract investors, or split ownership of the company. There is also the added benefit of shifting tax liability over to the corporate entity.

It's critical to have protection of personal assets whenever you're running a business. Therefore, I would suggest that you incorporate immediately prior to launch. You will have to invest some time in determining what kind of business entity you want to become.

I would go ahead and establish the company, at least as far as setting up a tax ID number and an LLC, and file taxes which will likely show a loss. Might not be much, but anything that can reduce your AGI might be worth it. Keep in mind, however, that the expenditures for R&D may have to be categorized as assets rather than expenses.

There are multiple factors to be taken in consideration :

• economic : do you have lot of spendings? Generally speaking, you need a business entity to use it as costs to lower your taxable income base
• structure : are you working alone on the project? If yes, or if you expect having a partner soon, the business entity permits you to make the partnership official and also have a clear view on the "part of the project you owe"
• business : some business actors (wholesalers, marketing agencies,...) work only with "companies" (whatever the legal form is) and not with the individuals
• perenity : if something happens to you, the "business entity" can still exist (but this is maybe not interesting in your case)
• motivation : if your activity il legaly recognized, it may serve as some motivation to not to give up... As individual, it's quite easy to give up when some problems accumulates...
• trust : legal entity (even the smallest type of entity) is often more trusted by clients than an individual

In general, for the reason above and if the cost of setting up of the company is not to high and the administration part not to heavy (as yu speak about LLC, I assume you are in USA so it shouldn't be so hard), create the legal entity can be interesting even before first paiments come...