7 Mistakes to Avoid When Incorporating Your Business

by ExpertEntrepreneur

Want to incorporate your business? Before you do, make sure you avoid these 7 common mistakes that can end up hurting you.

Forming an LLC or incorporating your business is actually rather straightforward in most states, although it can still be easy to make mistakes that have a huge impact on your business. If you aren't an expert in business law, it's usually a good idea to consult with a corporate service company before you get started. Even minor errors during this process can end up hurting you, so make sure you avoid these miss-steps before you incorporate.

Image: jannoon028/FreeDigitalPhotos.Net

Mistake 1: Selecting the Wrong Structure

The structure you choose when you incorporate has major ramifications and determines how you'll be taxed. The simplest structure is the limited liability company, or LLC, and this option is very popular with small businesses. With an LLC, you'll get liability protection and the ability to flow your net profit through the shareholders. There is also less paperwork to deal with. A S Corporation may be treated like a partnership for taxes and net profits flow to individual owners. While this business structure is more flexible, it's also more difficult to qualify for.

Finally, a C Corporation is usually best for large companies with a lot of shareholders. This type of business is subject to double taxation on profits, although profits are taxed at a lower rate.

Mistake 2: Incorporating in the Wrong State

Most business owners believe Delaware and Nevada are always the best states to form an LLC or incorporate because these states have pro-business statutes and low fees. Still, incorporating in Delaware or Nevada may not be the best move for you. If you have a very small business with 4 or less shareholders, it might be best to just incorporate in the state where you operate.

Mistake 3: Carelessly Filling Out the Paperwork

Okay, so you've carefully chosen the best business entity and state of incorporation. Now, don't make the simple mistake of failing to read over your paperwork before you submit! It's amazing how many people misspell the business name or address when filing to incorporate. While you can most likely change these details later, expect to pay a fee.

Mistake 4: Failing to Stay Compliant

If your corporation or LLC falls behind in compliance, you'll have serious problems and your personal assets may be at risk of seizure. Keeping your business in compliance after incorporation requires keeping business and personal expenses completely separate, sending reports and statements in on time and filing tax returns and information returns on a regular basis. This is one of the most difficult parts of incorporating your business! To learn more about the penalties you may incur and your responsibilities, contact a corporation services company like USA Corporate Services.

Mistake 5: Making Yourself the Registered Agent

Before you name yourself as the company's registered agent, make sure you know the agent's responsibilities. As the registered agent, you must remain available during all business hours to receive documents. This means you can be in serious trouble if you leave the business for even 10 minutes during business hours! It's usually a much safer bet to just hire a company that offers registered agent services to receive legal paperwork on your behalf.

Mistake 6: Attempting to Incorporate without a Business License

Before you start filling out the paperwork to incorporate, make sure you have the necessary local, state or federal license to operate. Most of these business licenses are very affordable although you will be facing huge fines if you operate without them.

Mistake 7: Thinking You Have Unlimited Liability Protection

While incorporating a business does offer you some type of liability protection to keep your personal assets separate from the business, this does not mean you are completely protected in all cases. If you fail to keep your company compliant, or you engage in fraud or unlawful acts, you will be held accountable and your assets are at risk!

Helpful Resources to Learn More About LLCs and Incorporation

Limited Liability Company - IRS.gov
Learn more about how the IRS defines and taxes an LLC.

What is an LLC?
Here's an overview of a limited liability corporation, complete with advantages and disadvantages.

How to Incorporate in Delaware - Delaware Division of Corporations
Step-by-step guide to incorporating in Delaware, courtesy of the Delaware Division of Corporations.

Incorporation (Business) - Wikipedia.org
A guide to understanding business incorporation.

Updated: 12/03/2012, ExpertEntrepreneur
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Mira on 12/04/2012

This was interesting. It doesn't apply to me but it was nice to read about it.

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