5 Common Mistakes When Starting a Business
Let’s go over the 5 common mistakes when starting a business. Starting a business today comes with many relevant issues that you need to take into consideration, but which you may not be aware of: the different entity types and their respective tax advantages—liability, asset, and name protection—federal and state filing requirements, indemnification and covenant not to sue, corresponding agreements, leases, and contracts, along corporate formalities and records. Below are the 5 common mistakes when starting a business and how to avoid them.
Common Mistake #1: Choosing a Non-Lawyer Agency to Incorporate
Most entrepreneurs know that you should use a corporate business attorney to incorporate—however, some will use a third-party agency or turn it into a do-it-yourself project, in which you’ll get the articles of incorporation and little else. The problem is that you need a lot more than that. Assuming that you know which entity type is the best choice for the legal, business, tax, credit, liability, and asset protection outcomes that you want, there are other things to take into consideration that will help you avoid legal and business pitfalls, and come out on top among your competitors. What most people don’t know is that a business formation law firm like Spiegel & Utrera, P.A. will customize your articles of incorporation, corporate records book, bylaws, minutes, stock certificates and more—while giving you legal, business, credit, and tax advice based on your needs—all for a similar cost of doing it with a non-lawyer party.
In fact, for only $29.95 more than the required state-specific filing fee—Spiegel and Utrera, P.A. will not only customize your articles of incorporation, but you’ll get a complete incorporation package with free legal and business advice from our attorneys. It includes filing your paperwork with the state, a custom corporate records book and seal, corporate minutes, bylaws, ownership register, banking resolution, stock certificates, and a preliminary business name search. All of this gets backed with a 110% lowest price guarantee. Now you might be thinking: How do you even make money offering so much for such a low price? Well, we don’t. We want to build a business relationship with our clients first and provide an incredible service at an impossible price; this is how we’ll earn your business in the future when you need further legal or business-related services for your Corporation or LLC. Click here to incorporate or form an LLC online. You’ll get a free corporate kit plus legal, business, credit, and tax advice from our attorneys.
Common Mistake #2: Choosing the Wrong Type of Business Entity
Another common mistake that people make when incorporating is choosing the wrong type of business entity, which stems from a limited understanding of what the different tax, business, and legal implications of their choice can mean for their corporation. Typically when people incorporate on their own, they do it unaware of the difference between a C Corporation, S Corporation, Non-Profit, or LLC—and even most non-lawyer agencies that help people incorporate can’t give them the legal advice they need to make the right choice of entity type, which is massively important.
A good lawyer will advise options, advantages, and benefits that you (and likely your competitors) didn’t know were there while showing you where the pitfalls are. Many variables will affect this information, such as the location of your business, the type of business and industry you’re in, and the services and products you’re offering, and this information will affect your choice of business entity.
Let me give you a quick 101: First off—as most people know, the point of incorporating is to protect yourself from personal liability, guard your assets against claims and creditors, and defend your wealth from avoidable taxes. All corporations and companies share those qualities, but the extend to which a corporate entity can do that for your business depends on its type and structure. For example, the types of Corporations include S Corps, C Corps, and Non-Profits; S Corp owners have their business and personal income taxed only once on their individual income tax return, while C Corps yield to the double-taxation of having to do both personal and business income tax returns separately, and Non-Profits have the prospect (under certain requirements) of being tax-exempt.
Each type of corporation gives you a different tax advantage, and they all provide limited liability protection, but one is not better than the other; that will depend on which one is better for your current and future business needs. Keep in mind that any entity type is better than being a sole-proprietorship, which has no liability protection. What about Limited Liability Companies instead of Corporations? They provide personal liability and asset protection as well, with members instead of shareholders—being taxed as an S Corp if it has only one member, or as a C Corp if it has multiple members. Depending on the many factors surrounding your business, an LLC can provide you with fewer ownership restrictions, better capacity for asset protection, and bigger potential for tax deductions, when compared to corporations. No matter what, you want an entity structure that will open the right doors for you now, without closing the right doors to you later.
Common Mistake #3: Lacking Organizational Tools and Methods
The third common mistake on this list that people make when incorporating is lacking the tools and methods to keep their corporate records organized and updated. Many entrepreneurs get their articles of incorporation and overlook the importance of organizing a corporate records book with bylaws, minutes, stock certificates, and other documents that get asked for in legal and business matters. A corporate records book or binder (also known as a corporate kit) serves the purpose of helping you stay organized, which may help you avoid or defend against fines and penalties with the state, default judgments and legal action against you, and losses, such as that of your business license and assets—which can all stem from having missing, outdated, and unorganized corporate documents. The purpose of a corporate records book is to organize all of the corporation’s official documents, along with records of important actions taken by the corporation—such as issuing shares, purchasing real estate, other businesses, and obtaining various licenses. Having missing or outdated records and documents due to the lack of organizational tools and methods can be catastrophic for your corporation, and all possible steps should be made to keep them safe. Remember, when you incorporate with Spiegel and Utrera, P.A., the corporate records book and seal are included!
Common Mistake #4: Choosing the Wrong Registered Agent
The 4th common mistake that entrepreneurs make when incorporating is failing to choose the right registered agent service for their business needs. All corporations are legally required to appoint a registered agent when incorporating and selecting the right one can help you avoid privacy breaches, defaulted lawsuits, and bad standing with the state. For those of you that might be wondering, a registered agent is known as a statutory agent or agent for service of process—a party, entity, or person appointed to receive important state and court correspondences such as annual state filings, tax notices, court notices, and other articles of official documentation. The registered agent will collect the official mail or notifications, then timely process and communicate them to the business owner. State Government requires you to have someone as a point of contact available during regular business hours at a physical location to receive service of process and other official documents—and unfortunately, P.O. boxes don’t fulfill this requirement. Choosing just anyone as a registered agent without internal processes in place to efficiently forward all correspondence can lead to trouble with the state and other entities that could have been easily avoided. I’ll tell you a trade secret that a lot of people don’t know: You can use a law firm, like Spiegel and Utrera, P.A., as a registered agent for almost the same price (or lower) as a non-lawyer registered agent service, and it’ll come with the attorney-client privilege. The attorney-client privilege means that if you receive a subpoena to produce information about your corporation because of matters such as alimony, child support, bankruptcy, debt or tax collection, foreclosure, government enforcement action, criminal matters, or anything else—the attorney is duty-bound not to disclose any information about you to anyone. A non-lawyer registered agent cannot offer this valuable confidentiality and privacy protection. An attorney registered agent acts as a buffer and shield between you and anyone who would seek to sue your business. Here’s a link to Spiegel & Utrera’s General Counsel Club’s & Registered Agent Service. It includes the attorney-client privilege, unlimited legal, business, credit and tax advice for a super-affordable annual fee.
Common Mistake #5: Not Customizing Your Articles of Incorporation with Protective Agreements
One of the biggest mistakes when starting a business is not including special provisions and additional corporate agreements that customize their articles of incorporation with proactive and defensive properties. Incorporating by yourself without a lawyer will produce generic articles of incorporation that may not protect you in the future. We strongly recommend that you don’t take chances and that you guard yourself against liability. First, we recommend an indemnification and covenant not to sue agreement which shields the corporation’s directors and officers from the personal liability of any actions they take on behalf of the corporation. If a director or officer ever gets sued for actions taken on behalf of the corporation, these provisions require that the corporation be held responsible, instead of its directors and officers. If your corporation has more than one shareholder, we recommend that you enter into a Shareholder’s restrictive agreement—which outlines their duties and responsibilities to the corporation and each other. Another great agreement to add is the Shareholder Divorce Protection Provisions, which in the event of a shareholder filing for divorce, a notice is sent to the other shareholders offering them a right of first refusal—which allows them to purchase the shareholder’s shares of stock and avoids having their ex-spouse as a shareholder of the corporation. Normally, the fee to prepare such comprehensive agreements would be $1,500 or more. However, if you request these agreements when you incorporate with us, they will only cost a small fraction of that amount. Give us a call for a free attorney consultation at (800) 603-3900 to get a quote and advice on your business formation and agreements.