If you’re a young entrepreneur with the next big idea, you will likely want to form a company to sell your product or service. Unfortunately, many creative minds have failed as businessmen because they were unprepared when starting a business. Below, you’ll find common mistakes to avoid when starting a business. Keeping these in mind when forming a company will allow you to separate yourself from other entrepreneurs in your industry.
Choosing The Wrong Structural Option
When starting a business, you’ll quickly find that there are numerous structural options from which you can choose. The three most common are a C Corporation, S Corporation, and Limited Liability Company. These entities have some discernible differences. New business owners will want to put an abundance of time and effort into researching these three entity types and determining which is the best option.
LLCs are usually best suited for small businesses and freelancers. This entity is arguably the simplest to form, as it requires the least paperwork. An LLC also provides owners with pass-through taxation. This means that any income that owners earn is only taxed once.
C Corporations could be the best option for those who wish to sell merchandise, own stores and hire employees. There is no pass-through taxation with a C Corp. C Corps are able, and perhaps even required, to issue shares. This is not the case with LLCs.
S Corporations are a hybrid choice. They exist as a Corporation but also provide pass-through taxation. Electing an S Corp designation has less to do with the business’ structure and more to do with how it’s taxed.
Failure To Handle Business Finances Properly
Many young business owners make the mistake of mixing their personal finances with their business finances. This is especially the case for freelancers or those business owners who operate the company solely by themselves. To prevent this mistake from happening, owners will first need to contact the Internal Revenue Service to secure an Employer Identification Number.
The IRS provides one of these numbers to every organization in the United States. The number will allow your business to file taxes. More importantly, it will let you open a business bank account. Most banks will not open a business bank account unless you provide your company’s EIN.
Owners will find a business bank account beneficial when it comes to tracking expenses and paying taxes. Using your business account strictly for company transactions allows you to trace your revenue stream. Additionally, a business bank account is significantly more professional than a personal bank account. Using a business account will enable you to gain credibility with clients and customers.
Failure To Obtain Business Licenses
When starting a business, you’ll file registration paperwork with the Secretary of State’s office. However, the administrative requirements are not complete upon doing so. Entrepreneurs will also need to secure licenses and permits. These exist at the federal, local, and state levels. Permits can depend significantly on the state and industry in which you conduct business. Even those working remotely may need to acquire a work-from-home license.
Business licenses do not cost much to obtain. However, failure to do so could result in hefty fines and fees. Owners will also want to pay careful attention to the expiration date for any license or permit they acquire. These certifications could expire annually, and it’s critical that a company remain compliant.
Not Following Up After Registration
In addition to business licenses, there are other administrative duties that new companies must complete along the way. Too often, business owners lose track of these deadlines. If not addressed in an appropriate amount of time, some states can dissolve your company.
One of the most critical documents that owners must submit is an Annual Report. A majority of states require this form each year, although others may opt for:
- A Biennial Report, due every other year
- A Decennial Report, due every decade
- No report at all
Another standard piece that business owners forget is the “Doing Business As” name. States do not allow entities to share names. When starting a business, you may need to register under a different name than you wish to do business. For instance, you could form your company as “Mary Jones’ Personal LLC” for legal purposes but operate as “Mary Jones’ Ice Cream Stand” for marketing purposes. Doing so is ok, so long as you complete the proper paperwork.
Not only will remaining compliant keep your company operational, but it will also help protect the corporate shield. If your company were ever to be sued, and the plaintiff can demonstrate that you did not take the proper steps to keep your business in good standing, you may not be protected under the law.
Not Investing Time In The Registered Agent Search
Every company is required to have a registered agent. Each state needs the registered agent to be either an individual who is a resident of the state or a third-party company who is authorized to conduct business in the state. A registered agent is responsible for accepting all legal correspondence on behalf of the company and forwarding it to the appropriate owners.
The agent must exist at the registered address during regular business hours. As you could imagine, an agent could play an integral role in a company’s success. Too many business owners treat the registered agent as a formality, failing to recognize the benefits behind investing in a quality agent.
One of the most significant benefits of a quality registered agent is expansion. For instance, imagine you are a business owner looking to expand from Pennsylvania into New Jersey. However, you do not have anyone in New Jersey who is willing to serve as a registered agent.
So, you elect to hire a third-party company to serve in this capacity for you. The third-party company now has your information on file and can assist whenever you seek to expand into other states. Third-party companies are reliable, trustworthy, and professional. They can help your company grow, ensuring that you do not miss vital information or notices. Investing in a quality registered agent is well worth the cost.