Making a mistake when starting your business can mean trouble later on. Here are the top 10 mistakes to avoid when incorporating a business:
Choosing the wrong business entity.
There are business, legal, and tax reasons that all must be considered before choosing a business entity. Sometimes, particular business entities are not permitted for certain occupations and businesses, or the apparent tax and limited liability benefits of the chosen entity are illusory. Sometimes the best business entity is the sole proprietorship, where you do not have to form a new business entity at all!
Choosing the wrong corporate name.
The name may already be taken, or there may be a conflict with common law rights of competitors, local or professional fictitious business name filings, state entity filings, or federal trademark filings. The name may also be an illegal corporate name for your profession. Don't put yourself in the position of having to reprint and rebrand your entire business because nobody checked for legality or a prior conflicting use of the name. Please see my legal guide "Safely Choosing a Tradename for your Business."
Choosing the wrong time to incorporate.
Filing your entity at the wrong time of year can cost you more taxes and/or an extra tax return. Use of a non-calendar tax year (if available) also impacts this decision. This can be a $2,000 mistake or more.
Choosing the wrong state of incorporation.
Paying taxes and filing fees in more than one state is not necessary if you do business in only one state, but is the result of incorporating in a state other than the one in which you conduct business. Companies promoting Delaware and Nevada corporations rarely explain this.
Choosing the wrong tax status.
Sole proprietorship, partnership (LLC/LLP), S corporation and C corporation are all available, and it is essential to consider the pros and cons of each one. Nobody wants to pay unnecessary taxes.
Failing to obtain professional tax advice.
No. 6 begets No. 5. Get your tax advice from a qualified and experienced tax attorney or CPA, not from your neighbor or the internet. Tax advice is specific to your particular personal and business situation, and general statements about tax preferences cannot be relied upon in individual cases.
Failing to complete (and obtain proof of) all your initial documents and filings.
Making all the right choices does not do you much good if all the documents and filings aren't completed. It's almost worse to complete all your documents and filings, but not to have proof of filing when the government loses it (it happens more than you think).
Failing to complete annual filings and minutes.
Incorporating a business does not end with the initial filings. Annual maintenance and proper business practices are necessary to keep your business entity in conformity with state and federal law.
Having an accountant form the corporation.
Forming a corporation is the practice of law. Accountants may be trained in tax matters, but not in legal matters, and invariably there are one or more necessary legal documents that are not completed and/or filed. Would you hire an attorney with no tax training to file your corporate tax return?
Using a legal document center for the incorporation.
If using an accountant to form your corporation is bad, using a legal document center is far worse. I have had to repair innumerable corporations formed through one of these companies, and every single time the cost to correct the problems is more expensive than if I had been hired at the start to form the corporation.
Disclaimer (Legal Stuff)
IMPORTANT: This Legal Guide is made available for educational purposes only. There is no attorney client privilege between you and the attorney author. This Legal Guide is not a substitute for competent legal advice from a licensed attorney that specializes in this area in your home state and with whom you have an attorney client relationship. Also, law changes frequently and varies from jurisdiction to jurisdiction. The information and materials provided are general in nature, and may not apply to a specific factual or legal circumstance described in the question. Copyright 2009 by Robert W. Olson, Jr. - all rights reserved.