Learn what pitfalls to avoid to get your business off to a great start

Starting a business can help you attain financial freedom and allow you to be your own boss. However, not everyone is willing to sacrifice and face the challenges that come with starting and running a business.

One of the first things you’ll need to do when starting a small business is make it a separate entity. This is where incorporation comes into play.

Incorporating a business is one of the best ways to protect yourself because it creates a legal entity that’s separate from its owner. 

Unlike sole proprietorships or partnerships, incorporation limits an owner’s personal liability against any business-related debts. This limitation means creditors can’t go after personal assets—like a car or home—if your company goes bankrupt.

What are common mistakes people make when starting a new small business?

Below are some of the top mistakes entrepreneurs make when incorporating their small businesses:

Incorporating while employed: Potential conflicts of interest

Creating a new business while still employed is one mistake most people make when incorporating their business without realizing it. 

If your current employer conducted proper due diligence when drafting your employment contract, it’s likely that you signed a non-compete agreement restricting your ability to start a competing business, especially if you offer similar products or services as your current employer.

Starting a new business without a thorough understanding of any agreements you have with your employer can be risky because it can open you up to lawsuits in the future. 

Be aware that your business will also be vulnerable if you use any resources, confidential information or intellectual property belonging to your current employer.

Using your employer’s phones, computers or internet to conduct any aspect of your business is also not advised.

Not paying attention to the differences between corporate entities

Understanding the differences between LLCs, C corps, and S corps is essential when incorporating your small business. 

The type of corporate structure you select will have both tax and ownership repercussions. You may find yourself in a situation where your income is taxed twice, or you could even lose control of your company to other investors.

It’s wise to work hand in hand with an experienced business lawyer throughout the incorporation process. This consultation will help you avoid unnecessary mistakes that could leave you vulnerable to potential lawsuits.

Incorporating in a different state to evade taxes

Do you live in a state like California, where corporate income tax is sky-high? 

Incorporating your small business in a different state to benefit from its zero percent tax rate may seem a great way to save money, but the law doesn’t consider where your business was established or incorporated.

When it comes to tax burden, the law only considers where the business owner lives and where the business operates. 

Although larger, more prominent corporations have more flexibility to pick and choose which state they’d like to incorporate their business in, small businesses should incorporate in the state where the business owner lives to avoid potential lawsuits and tax audits.

Choosing the wrong corporate name

You need to do research before incorporating your small business. This research will help ensure you don’t select a business name that’s already been incorporated locally or within another state.

A name can also conflict with the common law rights of other existing companies, federal trademark filings, professional fictitious business name filings or state entity filings. The chosen name may be an illegal corporate name for your profession, so research before selecting a name is a must.

You want to avoid any situation that could force you to rebrand your entire company simply because you didn’t check for any applicable legal issues with name usage.

Neglecting local business licenses

Incorporating a business doesn’t make it immune to local business regulations. Unfortunately, it often takes time before businesses realize they’re not in compliance with local municipality ordinances.

Failing to comply with local ordinances can cost your business thousands of dollars in fines, penalties and back taxes. Because of this, it’s a good idea to consult a local expert such as your local chamber of commerce, business development center, or an attorney specializing in corporate law.

Incorporating a business with insufficient capital

Incorporating helps protect personal assets from business liabilities. However, starting with insufficient capital can still hurt you financially. Some courts will find ways of bypassing the protection laws to hold a company owner personally liable in certain situations.

New businesses should consider hiring a professional accountant or bookkeeper to help them understand the minimum amount of assets, revenues, insurance and capital required to cover their liabilities properly. The minimum capital will vary greatly depending on the industry or business.

Failing to complete all of your initial filings and documentation

There is documentation involved when incorporating a business, and some of this documentation may take a lot of your time and resources. 

Although you may be able to start running some aspects of your business without certain documents, don’t be tempted to neglect filing all required documents before starting your operations. 

Taking shortcuts early on often creates unnecessary headaches down the road.

Incorporating with inadequate market research

A common mistake new entrepreneurs make when incorporating a business is not thoroughly researching the market to understand current customer needs, competition, and demand.

For companies to succeed, they must offer products that customers are interested in purchasing. If a product or service fulfills customers’ needs, such as food, water, shelter, convenience, or quality, it gives them a reason to purchase.

Appealing to customers’ demands is another way to encourage them to purchase. Offering unique innovations, customization options, excellent service, or great value will bring interest to a business.

Finally, entering an industry with too much competition can lead to a business struggling to find customers and grow. The automotive industry is an example of an industry with too much competition and brand loyalty to compete efficiently.

Not keeping company records

Some businesses do not keep quality records of their transactions, business decisions, and other essential details. 

Poor record-keeping can later cause significant financial and legal problems. Companies that can not maintain their records risk making poor investment and financial decisions. They also compromise the safety of the business and might fail to meet government regulations.

Trying to do everything by themselves

Incorporating and running a business by yourself can be incredibly taxing. Managing a company’s workload can be overwhelming for a single person, and the owner will directly cause all the business’s financial successes or failures. The company will also lack the collective experience and idea-sharing gained from recruiting different experts, making innovation and growth difficult.

Not choosing the correct registered agent

Choosing a qualified registered agent is vital for maintaining the legal documents sent to the company. This agent should be a trusted individual, preferably someone with experience with the company or a professional registered agent. An unprofessional registered agent might not notify a business owner of essential documents that they need to view immediately, leading to legal complications or lawsuits.

Not writing a shareholder’s agreement

A shareholder’s agreement is a document for companies with multiple owners. It sets rules for how to run the company and who owns what part of it. Shareholders’ agreements can make it easier to settle disagreements amongst shareholders and prevent legal disputes.

Confusion and arguments can affect the business’s profitability without clear documentation of business operation standards. Be sure to include important information in any shareholder agreements.

MaxFilings helps entrepreneurs across the US incorporate and satisfy their state’s requirements. 

You can begin forming your corporation now and return to finish any time.

Contact us today with any questions you have about incorporating your company.