Consequences Of Choosing The Wrong Business Entity
Here is a list of 4 of the most harmful consequences of choosing the wrong business entity.
TaxationWhen choosing a business entity for your new company, one of the first things you must consider is tax treatment, as different business entities have different rules regarding taxes. Knowing what is required from you and your business in regards to taxes is crucial.
For example, when it comes to entities registered under subchapter S of the Internal Revenue Code, commonly known as “S-Corporations,” profits and losses go directly to the partners, and they must report them on their individual tax returns. Essentially, this means the business’s taxes are not paid through the business itself but through its owners. This is known as “pass-through” taxation.
On the other hand, if a business is registered as a C-corporation, the company is responsible for paying taxes on its income. Then, after business taxes are paid, once the shareholders receive income from the profits, they will be required to pay taxes on their individual income. This is known as “double taxation.”
Membership LimitationsIf your goal is to seek venture capital investment, choosing the correct business entity is indescribably critical. If you form an S-Corporation, for example, you will not be allowed to own equity or have more than one hundred shareholders or any foreign owners. Choosing the wrong corporate structure can significantly limit your options in regards to membership and outside investment.
Personal LiabilityPersonal liability is a major concern among business owners all over the country. Many business owners could simply operate as a sole proprietorship and accept payment for their services personally; however, they choose not to because they are highly concerned about insulating themselves from personal liability. Choosing the wrong business entity can expose business owners to personal liability. When it comes to forming a business in Florida, it is important to seek guidance to establish a business entity that protects you.
Legal Fees and ExpansesIf you think you might have chosen the wrong business entity for your company but you are not sure if you did, do not worry – you will soon discover your mistake. This will occur in the form of a lawsuit filed against your company or an employee or partner stealing valuable resources, among other issues that may arise. No matter how it happens, once you find out that you have chosen the incorrect business structure, you will have to get legal help to solve the problem – and it will not be cheap.