Entity Formation | Form Your Business in the United States

6 Common Mistakes to Avoid When Choosing an Entity

Once you’ve decided what business to start, what you want to call it, and other basic decisions—it’s time for the more technical decisions. What business entity should you open? Most startups prefer just to open a sole proprietorship, but it is best always to be armed with background on all the entities to arrive at the wisest decision.

The business entities are partnership, corporation (S-corporation or C-corporation), and limited liability corporation.

Good thing many entrepreneurs have already opened businesses and made mistakes so that you—a prospective business owner—will know what mistakes to avoid when choosing an entity.

Choosing LLC will save taxes

This is probably the most common misconception about limited liability corporation (LLC). LLC will not help you save taxes. It is, however, designed to provide asset protection. You can, however, choose to have your business taxed as a partnership, S-corporation or C-corporation—but it will not save you taxes.

Thinking that a formal entity is not needed

It is true that registering a business entity is another layer to starting a business. In other words, it’s a hassle. But good things always come with a price. People think that having a sole proprietorship is enough because it’s easier than forming a business entity. But financially, this is a huge risk. Having a sole proprietorship means that your personal finances will be integrated with your business finances. This would be a big mistake especially if the business is sued or legally in debt.

Thinking that a business entity solves all the problems

Okay, just because there is a piece of advice to choose a formal entity doesn’t mean you can just think that this can already save you from all the risks of starting a business. Choosing a business entity will protect your personal assets and some other things—but it doesn’t protect you from everything. A business entity will not be able to protect you from legal issues and disaster risks.

C-corporations are better for small businesses

There have been many claims that most of the Fortune 500 companies are C-corporations because they enjoy more deductions. However, there are some C-corporation deductions will not fit the characteristics of small business. Hence, the small business owners will not be able to benefit from it.

Registering corporation in Nevada or Wyoming

Entrepreneur magazine considers this the biggest scam in business: to have business registered Nevada or Wyoming to have assets better protected. There are some benefits to registering in these states, but these are often overrated. Every state has its perks, just take advantage of those rather than get out of state.

Not getting professional help

All the mistakes above will most likely be avoided if we seek the counsel of business and legal experts. Professional help is one of the best investments an entrepreneur should make to set things right at the start. This is essential because one mistake might cause a domino effect of mistakes.


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