Incorporating A Business: Avoid These 4 Mistakes

Starting a business can be pretty hectic, but one aspect that definitely deserves your attention is the process of forming a corporation. These are the four biggest mistakes people make when incorporating and how to avoid them so you don't end up paying dearly later. The information provided here is for general information only and should not be used as legal advice.

4 BIG Mistakes People Make When Incorporating

  1. Not incorporating. You don't want to be held personally liable for the activities of your business, so form a corporation in order to protect yourself.
  2. Picking a bad company name. You'll want to make sure your name isn't already in use, and that it'll be easy to get a domain name for doing business online.
  3. Picking the wrong state. There are reasons why businesses choose to incorporate in certain locations, but depending on your industry, it might not save you money.
  4. Picking the wrong type of corporation. Each type of corporation has benefits and drawbacks, so talk with an attorney to make sure you're selecting the type that's right for you.
Feature Sole Proprietorship LLC S-Corp C-Corp
Limits Liability
Formation and Compliance Fees
Pass-through Taxes
Double Taxation
Can Issue Stock
Non-Resident Aliens Can Own Shares
State Corporate Tax Rate Personal Income Tax Rate Sales Tax Rate
Alaska 9.4% 0% 0%
Delaware 0% Progressive 0%
Florida 5.5% 0% 6%
Nevada 0% 0% 6.85%
South Dakota 0% 0% 4.5%
Wyoming 0% 0% 4%

How Do I Create A Corporation?

When you've settled on the type of entity you wish to form, you'll need articles of incorporation. These differ for each state, so make sure you've got the correct documents. You may then have to set up payroll, quarterly tax filing, and other services depending on the type of entity you've chosen. Hiring an attorney and doing things right is the best way to avoid further headaches down the road.

The Fortune 500 Top 10

Rank Company 2018 Revenue
1 Walmart $500 billion
2 Exxon Mobil $244 billion
3 Berkshire Hathaway $242 billion
4 Apple $229 billion
5 UnitedHealth Group $201 billion
6 McKesson $198 billion
7 CVS Health $185 billion
8 Amazon.com $178 billion
9 AT&T $161 billion
10 General Motors $157 billion

Can I Change My Corporate Structure Later If My Business Changes?

The short answer is yes, it's possible to create a new entity down the line as your business grows. If you have an LLC but want to issue shares, you can convert your business to an S-corp or C-corp. When the time comes, an attorney can help you with those kinds of changes. But when you're first creating your corporation, it's best to think about what kind of structure you'll need in the next few years in terms of how much revenue you'll generate and how that will affect your tax payments. Creating a C-corp when you're the only shareholder may be more administrative paperwork than you're ready to take on for the time being.

US Companies With The Most Cash Stored Overseas

Company Reported Amount
Apple $230 billion
Microsoft $113 billion
Alphabet (Google) $92 billion
General Electric $83 billion
Cisco Systems $62 billion
Oracle $52 billion
Johnson & Johnson $42 billion
Facebook $32 billion
Amazon $26 billion
Coca-Cola $25 billion
Intel $24 billion
PepsiCo $16 billion
Visa $10 billion

Do I Have To File A Personal Tax Return And A Corporate Tax Return?

That depends on the type of business entity you have. If you're a sole proprietor or independent contractor, you can file everything on your personal tax return. If you're a shareholder of a C-corp, you'll need to pay corporate taxes on top of your personal income tax. Other entities are "pass-through" corporations, meaning if you're the sole owner, the profits will be passed on to you as personal income, but any profits invested in a retirement fund won't be taxed until they are withdrawn. It's best not to mess around with the IRS, so consult a professional before diving in.

In Depth

You probably don't own a Fortune 500 company yet, but you'll never get there if you don't make good choices. Here are the four biggest mistakes people make when incorporating a business.

Mistake #1: not incorporating. Creating a business entity is a way to avoid personal liability. The US has a long history of big lawsuits against corporations, some with huge judgments. Enron, Worldcom, and Pfizer are just a few of the companies that have had to shell out more than a billion dollars in settlements.

But the granddaddy of them all is the Tobacco Master Settlement Agreement of 1998, valued at $206 billion. The four biggest tobacco companies settled with the attorney generals of 46 states for decades of lawsuits, and had 25 years to pay up. Imagine if the heads of those companies had to fork over all that cash themselves.

The four biggest tobacco companies settled with the attorney generals of 46 states for decades of lawsuits, and had 25 years to pay up.

Hopefully you aren't doing some of the shady things these big corporations did. But you can protect yourself in the same ways. Incorporating ensures that you aren't on the hook for damages should your company face any lawsuits.

And if you're taking out a small business loan, you don't want to be held personally liable. Should things go poorly, if the loan is in your name, you could end up having to pay back that money while your business partners scamper away unharmed.

To learn more about starting a business the right way, check out our full guide on incorporation, which starts with the steps right beneath this video.

Mistake #2: picking a bad company name. There are a lot of people who probably should have consulted a few friends before buying expensive signs for their new businesses. And you should definitely make sure your new name sounds good in other languages, or else you'll be completely clueless as to why no one is visiting your new restaurant.

You also need to keep your website in mind. You don't want to have to pay a ton of money for a domain name because you picked something that isn't available. And it shouldn't be too hard to type, either, since people will have to navigate to your website.

Changing your name isn't uncommon, either. Amazon was originally called Cadabra, but that name was abandoned because people misheard it as "Cadaver," which sounds like a very different type of business. The name "Relentless" was also considered, although that name might have been better suited to Bed, Bath, and Beyond for their never-ending campaign of coupons.

Changing your name isn't uncommon, either.

Mistake #3: picking the wrong location. Corporations often maximize profits by choosing their locations wisely. Known as corporate inversion, companies that do business globally often incorporate in areas with low taxes so they can keep profits overseas. This process is, of course, highly controversial. We aren't lawyers, and this isn't legal advice, but maybe think twice about doing something that Barack Obama, Donald Trump, and the Russian government are all trying to fight.

However, if you've got an online business, the location of your home base matters. Different states have different rules, and you can save money by picking the right place to incorporate. Nevada is popular because of low filing fees and low taxes, while Florida has no individual income tax. Alaska lacks a sales tax, and Delaware has so many incentives that 50% of publicly-traded companies are headquartered there.

If you have a physical business, you will have to pay whatever taxes you owe in the state in which you're operating. Laws differ by state, so make sure you read our full guide. You can get started right below this video with our steplist for incorporating a business.

If you have a physical business, you will have to pay whatever taxes you owe in the state in which you're operating.

Mistake #4: picking the wrong type of corporation. There are several types of corporate entities available. Choosing the wrong one can mean paying more in taxes, which you definitely don't want to do. Also, certain types of corporations get more tax audits than others, so you can avoid dealing with the IRS.

The amount of money you make, the type of business, whether you have partners, and whether you're taking out a small business loan are all factors that will affect your decision. A lawyer or accountant can definitely help you figure out the difference, so get professional help if you're serious about doing things right.

You may want a sole proprietorship, an LLC, an S-Corp, or a C-corp. If you don't know what any of those things are, we've got you covered. Get started with our full guide, right beneath this video player.

If you don't know what any of those things are, we've got you covered.

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