Forming an LLC or incorporating is now easier than ever, and many business owners navigate the process on their own. Despite the apparent simplicity of the process, many small business owners make common mistakes that can have a potentially large impacts on the business.
Here are a few common missteps that you should take care to avoid.
1. Choosing the wrong business structure
The entity you choose will impact the taxes your business owes, the type of employee benefits you may offer, the paperwork you will deal with and a great deal more. There are three common business structures to choose from: an LLC (limited liability company), S corporation or C corporation. All three will protect your personal assets from liability, but that is where the similarities end.
Forming an LLC is a good option for most small businesses that want liability protection but as little paperwork and formality as possible. An S Corporation is a pass-through entity, just like an LLC, so it is not subject to double taxation. Creating an S Corp requires meeting specific guidelines, however. Finally, a C Corporation must file its own tax return and is best for companies that want to reinvest profit back into the company or obtain funding from venture capitalists.
2. Choosing to incorporate in Delaware or Nevada automatically
It's true that a Delaware LLC or a Nevada LLC can offer a great advantage, as both states have the most developed, pro-business statues in the United States. They also have no state corporate income tax, or personal income tax and low filing fees.
This does not mean you should assume that Nevada or Delaware is the best place to incorporate or form an LLC, however. If you have a small business with less than 5 shareholders, it will make more sense to just incorporate in the state in which you have a physical presence. This will save you the cost and hassle of operating out of state, opening a business bank account, appointing a registered agent and paying fees to operate as a foreign entity.
3. Hiring a lawyer to file and send your incorporation forms
It's not actually necessary to pay for a lawyer to form an LLC or corporation. An online corporation service company can help you create your business entity for less cost and ensure the necessary paperwork is completed to the state's requirements. The only thing you cannot get from a corporation service company is legal advice, so keep this in mind if you have a complex situation.
4. Not keeping your company in compliance
Your work does not end when you incorporate, and you may lose your liability protection if you fail to remain in compliance. If you are ever sued, a plaintiff may attempt to show your LLC or corporation has not been maintained to the exact letter of the law. If successful, your corporate shield can be pierced and your personal assets will be at risk.
Keeping your LLC or corporation in compliance involves keeping your business and personal expenses completely separate, sending in an annual statement or report, filing for foreign qualification if you will operate in any other state and sending in the Articles of Amendment for any important changes you make to your business.
The Bottom Line
It's easy to make a seemingly small misstep when you incorporate your business, but it can come back to bite you. Don't let these pitfalls scare you away from incorporating or forming an LLC, however, as doing so gives your business
Here are a few common missteps that you should take care to avoid.
1. Choosing the wrong business structure
The entity you choose will impact the taxes your business owes, the type of employee benefits you may offer, the paperwork you will deal with and a great deal more. There are three common business structures to choose from: an LLC (limited liability company), S corporation or C corporation. All three will protect your personal assets from liability, but that is where the similarities end.
Forming an LLC is a good option for most small businesses that want liability protection but as little paperwork and formality as possible. An S Corporation is a pass-through entity, just like an LLC, so it is not subject to double taxation. Creating an S Corp requires meeting specific guidelines, however. Finally, a C Corporation must file its own tax return and is best for companies that want to reinvest profit back into the company or obtain funding from venture capitalists.
2. Choosing to incorporate in Delaware or Nevada automatically
It's true that a Delaware LLC or a Nevada LLC can offer a great advantage, as both states have the most developed, pro-business statues in the United States. They also have no state corporate income tax, or personal income tax and low filing fees.
This does not mean you should assume that Nevada or Delaware is the best place to incorporate or form an LLC, however. If you have a small business with less than 5 shareholders, it will make more sense to just incorporate in the state in which you have a physical presence. This will save you the cost and hassle of operating out of state, opening a business bank account, appointing a registered agent and paying fees to operate as a foreign entity.
3. Hiring a lawyer to file and send your incorporation forms
It's not actually necessary to pay for a lawyer to form an LLC or corporation. An online corporation service company can help you create your business entity for less cost and ensure the necessary paperwork is completed to the state's requirements. The only thing you cannot get from a corporation service company is legal advice, so keep this in mind if you have a complex situation.
4. Not keeping your company in compliance
Your work does not end when you incorporate, and you may lose your liability protection if you fail to remain in compliance. If you are ever sued, a plaintiff may attempt to show your LLC or corporation has not been maintained to the exact letter of the law. If successful, your corporate shield can be pierced and your personal assets will be at risk.
Keeping your LLC or corporation in compliance involves keeping your business and personal expenses completely separate, sending in an annual statement or report, filing for foreign qualification if you will operate in any other state and sending in the Articles of Amendment for any important changes you make to your business.
The Bottom Line
It's easy to make a seemingly small misstep when you incorporate your business, but it can come back to bite you. Don't let these pitfalls scare you away from incorporating or forming an LLC, however, as doing so gives your business