The Ugly Truth about Incorporating Incorrectly

Did you know the risks of incorporating can be both high and costly if done incorrectly?

risks of incorporatingFiling to create an LLC is a relatively simple process; however, the risks of incorporating incorrectly are significant. A Limited Liability Corporation (LLC) is a business structure under which you can create a business. LLCs protect the business owners by limiting their liability in the event of legal action against the company. Owners of the company are referred to as “members” of the corporation. While there is no limit to the number of owners a company can have, there are restrictions on the types of companies that can file for LLC status.

Incorporating a Business: What You Need to Know

When incorporating a business, many people believe the process is a one-time deal. They fill out the proper paperwork, submit it to the correct office, and think they have completed the process. They may not realize ongoing compliance is crucial or that they must file articles of organization. These are common mistakes that can prove to be very costly if the LLC is involved in legal action in the future.

In the state of California, the majority of LLCs are improperly formed. Many have not filed articles of organization or articles of incorporation. Since the paperwork is relatively simple, it’s easy to overlook these crucial steps in the minutiae of getting your LLC up and running. The consequences of this oversight can be steep—both legally and financially.

Here are some of the consequences that can result if you make mistakes when incorporating your business:

  • risks of incorporatingThe LLC or corporation may be barred from defending itself in court.
  • Your business could be barred from bringing a damages suit should legal action be needed against another entity.
  • Contracts with other entities that are held by the company could be deemed invalid by the courts; this may allow those who owe the LLC financial obligations the opportunity to get out of those obligations.
  • As a business owner or member of the corporation, your personal assets and home may be subject to liability from creditors or judgments against the LLC.

If your LLC does not have the proper articles filed, determining liability will prove to be more difficult, since you are trying to follow protocols outlined in a nonexistent document. This can make legal fights even costlier.

Without the proper filing for a sole owner LLC, the IRS might reclassify it as a sole proprietorship or a partnership. This will not only cost you more in taxes, but you may also risk losing any fringe benefits the company had as an LLC. You may also be liable for employment taxes if your LLC is reclassified as a sole proprietorship or a partnership.

Both the IRS and the court system have ruled you must act like an LLC to be considered one. This means following the proper protocols and formalities. To avoid the aforementioned penalties –as well as additional state and federal penalties- you must submit the articles and any other required paperwork, and you must also comply with both annual mandates and mandates about day-to-day operations of the company.

Avoid Making the Common Mistakes of the Incorporation Process

Here at Incompass, we know keeping track of all the requirements for establishing an LLC can sometimes feel confusing and overwhelming. Our LLC and corporate compliance teams can assist you in correctly setting up and maintaining your LLC, as well as help you to reduce your chances of having an IRS tax audit, protecting your assets under both LLC and corporate law. Contact us today!

 

Categories: CORPORATIONS & LLCs.