Avoid These 5 Mistakes When Forming Your New Business in Powell, Ohio
For individual entrepreneurs, structuring your business other than doing business as a sole proprietor may be a wise decision to protect your assets. With the proliferation of do it yourself options available on the internet, you may be tempted to go it alone. Before moving forward with any business structure, consider your options, obtain the assistance of competent, experienced advisors, and be certain to avoid costly mistakes in structuring your business, the most common of which are explained below.
Structuring Your Business Without Legal Advice
The laws of each state govern how to create a corporation, limited liability company, limited partnership, and other entities. These laws determine how the owners control the entity, the rights of the owners, the rights of creditors to the entity’s and owner’s assets if things go bad, and other significant matters. The laws that apply to corporations, limited liability companies, limited partnerships and other entities vary the relationships between the owner, the entity and creditors significantly. These laws vary from state to state. Describe all details of your business operations with a competent, experienced attorney before you structure your business. Together you can decide which form of business is best or if multiple forms provide the best structure for your operations and protection.
Structuring Your Business Without CPA Advice
The laws of the state in which the business is created and does business controls the rights of the owners, creditors and operations. The United State Internal Revenue Code governs how the business and the business owner are taxed on income, expenses, distributions, loans, capital contributions, capital withdrawals, gains and losses. The differences to the business owner between taxation as a Subchapter “S” corporation, a traditional “C” corporation, a partnership, or a “Schedule C” disregarded entity are substantial. Which decision is best for you depends on what you are doing, how you are doing it, and what your long term intentions are. You and your attorney should describe all details of your business operations with a competent, experienced CPA to assure your structure gives you the best advantages.
False Unlimited Liability Protection
The Enron and WorldCom meltdowns are examples of faulty thinking by business persons that their unlawful activities under the guise of a corporation will protect them from personal liability. Most people enter business for legitimate purposes. Even well-intentioned law abiding business persons can put their personal assets at risk from their business ventures. Every few months a legal periodical includes an article advising lawyers “how to pierce the veil” of corporations and limited liability companies. Piercing the veil means a creditor may disregard the corporation or limited liability form and make a claim against the owner’s personal assets to satisfy the creditor’s claims. Piercing the veil goes to one of the central reasons for using an entity. Structuring your business in the right way with attorney and CPA advice is not enough if you do not do the things to maintain the integrity of that structure. Discuss with your attorney how to maintain the integrity of the structure.
Starting Without The End in Mind
To begin with the end in mind is creating the path to success. Run the numbers, check your assumptions, run the numbers again. Are you getting a better return on your investment than if you buried the investment in a mayonnaise jar in the back yard? The risk you assume in creating your business is much higher. Expect a reasonable return for that greater risk. Once you are confident in your numbers, your business plan, and that your plan achieves the end in mind, challenge your assumptions and your numbers. Describe your plan, the numbers and your assumptions to your trusted advisors, your attorney and CPA. They will help you see any flaws in your logic, your assumptions and your numbers or reaffirm that your plan leads toward your end.
Lack of Sufficient Capital
Chasing your tail is a tough way to start business. If you lack sufficient capital to start now, develop a plan to gain the capital. Once you have the capital to start the business, then you can start with the end in mind.
Properly structuring your business can provide benefits to the small business owner. Properly structuring requires proper planning. If you have questions about structuring your business or which business entity is a fit for you, please contact Ison Law today!