Separating Fact from Fiction Regarding the Risks of Incorporating Your Business
Don’t let the so-called risks of incorporating your busines stop you from taking your small business to the next level. While nothing comes without risk, the benefits of becoming a corporation or an LLC are far too great to ignore.
The number one goal of incorporating is to create a clear separation between the business and the owner. However, making mistakes in the paperwork or rushing through the process may leave this distinction cloudy at best.
Here are the top risks and how you can avoid them:
Risk 1: The Alter-Ego Blunder
Reducing personal liability is the main benefit of incorporating a business. Even if the owner is the sole employee, there has to be a firm boundary between where their life stops and the company begins. Too many business owners, unfortunately, end up forming an alter-ego, also known as piercing the corporate veil. But what does this mean?
Not putting enough distance between the owner and the cooperation may create legal confusion. For example, if your company has assets listed under your personal name, who’s to say the company isn’t just your alter-ego? Even a court won’t be able to identify the difference. If someone ever tries to sue the business, you may find yourself liable instead. You can avoid this risk by making sure you keep everything separate, including bank accounts, credit cards, and expenses. Never mix business with pleasure!
Risk 2: Choosing the Wrong Business Structure
Whenever you decide to incorporate, you’ll have to choose a business structure for your company. Think long and hard before you tick just any box. The structure you select will determine your tax liability and how your company conducts business. But the wrong structure could end up costing your company a lot of money—you could even lose everything!
The IRS recognizes these five business structures:
- Limited Liability Corporation (LLC)
- S Corporation
- General partnership
- Sole proprietorship
You need to have a clear business plan before you pick a structure. After all, if you incorporate as an LLC but the IRS determines you’re acting as a sole-proprietorship, you’ll lose your legal protections. This risk is huge, and speaking with a tax professional is the best way to reduce it.
Risk 3: Forgetting to Write an Exit Strategy
If you want to incorporate, you probably want to stay in business for the long haul. However, that doesn’t mean you shouldn’t come up with an exit strategy. You’ll need this vital document if you ever want to go public, merge, or sell. An exit plan will also protect you if any of your members decide to leave, whether voluntarily or involuntarily.
This risk is easy to avoid. Simply remember to get an exit strategy in writing when you fill out the incorporating paperwork. Since it’s not easy to know what goes into a rock-solid exit plan, it’s always wise to talk with an expert.
Worried About LLC Risks? We Can Help!
Deciding to incorporate is a huge step. It’s exciting to take your business to the next level, but it can also be an overwhelming, somewhat scary process. Instead of sailing these uncharted waters alone, let Incompass Tax, Estate & Business Solutions guide you. With our years of experience, we know how to incorporate your company the right way. Schedule an appointment with our experts if you want to reduce the risks of incorporating your business.