Ten Top Mistakes People Make When Incorporating a Business
Mistakes in forming a corporation are not just irritating. They can also be expensive and time consuming to repair, assuming that the mistake is of the reparable kind. Here is my top ten list of the major mistakes people make when incorporating:
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! I have provided a cursory review of the various tax differences between the primary business entity forms in the menu to the left. However, this review only covers general tax considerations; business and legal considerations also must be taken into account.
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. Don’t put yourself in the position of having to reprint and rebrand your entire business because nobody checked for a prior conflicting use of the name.
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 do business. Companies promoting Delaware and Nevada corporations rarely explain this.
Choosing the wrong tax status. Sole proprietorship, partnership (LLC), 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 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. Incorporation duties do 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 a CPA form the incorporation. Forming a corporation is the practice of law. CPAs are 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 background to file your corporate tax return?
Using a legal document center to incorporate. If using a CPA 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.
What is the ONE smartest incorporation decision you can make? Hire a qualified, experienced and pragmatic attorney to complete your incorporation for you. Contact Robert W. Olson, Jr., APC, in California, Texas or Tennessee, or by an attorney in your state (see a list of qualified and experienced out of state attorneys here).
