Common Mistakes You Should Avoid When Forming Your First Corporate Entity

By Allen Brown

Starting a new business can be so exciting that first-timers tend to forget important details. [MoneyBrighter can help with that.] It’s easy to see why. In the rush to finally get that business idea operating in real life, there are some common mistakes owners make.

Let’s run through them to ensure that you don’t.

Mistake 1: Forming the Wrong Type of Corporate Entity

The options available for corporate entity types each convey different advantages, and disadvantages, depending on your situation. The one you eventually select should have the benefits that fit your current and future goals, and, as nothing is perfect, you'll learn to live with any of the potential downsides. If you don’t want to be exposed to claims against your personal assets, or subject to high taxes, maybe a limited liability company, or LLC, might be right for you. If you plan to raise large sums of capital for future expansion, a corporation might be better.

You don’t want to start your business and then realize you used the wrong corporate entity for your needs

Mistake 2: You Didn’t Get the Correct Licenses to Start Your Corporate Entity

Many businesses require that you have special licenses to operate them. You need a license to become a hairdresser or operate a spa. You need a license to sell food at a restaurant or drinks at a bar. Even if you’ve chosen a corporate entity for your business, you still need the special licenses that the state mandates to operate your business. You risk closure and possible legal action if you fail to comply with this one.

Mistake 3: You Do Not Keep Your Documentation Up to Date

Many licenses need annual renewal. Most corporate entities have paperwork that needs to be filed at regular intervals, such as tax returns, if your business is to remain legally compliant. Failure to keep track of these can lead to issues in your daily operation or incur an audit.

Mistake 4: Failing to Get Proper Legal, Tax and Accounting Advice

This is a mistake that could cost you lots of money down the road. If you do not have clear agreements with partners, it could result in expensive legal disputes when you disagree over profits and liabilities. Or you may find yourself paying too much taxes because you chose to incorporate out of state.

There are people out there that can help you with tax filing through tools such as ATX Cloud Hosting using Cloud Desktop. If you need help applying, or filing, for your corporation, there are also companies to do that. Here’s what one business owner had to say about CorpNet’s offering, after using their service to incorporate his LLC. You may also need advice from a lawyer or accountant about your business set up. There are many responsibilities and deadlines to meet when you are a business owner. You want to make sure you get things right, the first time.

Mistake 5: You Do Not Keep Track of Where Your Documentation Is Stored

Documents for your business are like your birth certificate, identification card or passport. If you lose them, you’re going to have a difficult time proving who you are.

Similarly, if called on, you have to be able to prove your relationship to your business, the level of your assets or that you are incorporated. Misfiling or losing your documents could make this difficult, if not impossible.

Mistake 6: You’ve Incorporated In the Wrong State

Regulations change from state to state. Some have lower taxes than others, some have fewer documents to file, some have lower fees and shorter waiting times for incorporation. If you pick the wrong state, you could find yourself subject to increased taxes and a lengthier incorporation process than you might like.

Mistake 7: You Do Not Have a Registered Agent to Operate on Your Behalf

This one is particularly important if you have chosen to incorporate in a state different to the one you operate your business in, or if you’re a foreign entity and need someone to act on your behalf in the US, or any another country where you aren't a resident. A registered agent can file documents for you when you are not present, or serve as your business’ physical address.

Mistake 8: Misuse Your Corporation Status

While being an LLC or a corporation confers certain protections, you cannot break laws and believe there will be no consequence arising out of it.

Mistake 9: Deciding Not to Form Any Kind of Corporate Entity

It may be cheaper to continue as a sole proprietor, but there are challenges to this, including the risk that your assets will remain vulnerable if your business faces legal or financial challenges.