4 Things to Avoid When Forming Your Business Entity
- Not understanding the tax consequences.
It is important for you to understand the pros and cons related to the different types of business entities. If you do not already understand them, check out (include link to previous newsletter).
- Not Establishing a Formal Business Entity.
If your business is a sole proprietorship, you and your business are one and the same. That means that your personal assets are at risk if your business is sued or can’t pay its debts.
If you form a business entity such as a corporation, LLC, or limited liability partnership (LLP), your business becomes legally separate from you. If there is a judgment against your business, you may lose the money you have invested in it, but you won’t lose your house, car, or personal bank account. Not forming a business entity can be a big mistake if you have partners or have a solo business with significant financial obligations or legal exposure.
- Assuming Your Personal Assets Are Not At Risk.
One of the main reasons for forming a business entity is to protect your personal assets in the event that there’s a lawsuit or judgment against your business. A business entity does offer important safeguards, but it won’t protect you against everything.
A business entity won’t protect you if you are sued and accused of being negligent or intentionally doing something wrong. It won’t help you if your business suffers because of a fire or storm. That’s why it’s important to have business insurance in addition to forming a business entity.
- Not having an agreement between you and your business partners.
In the early days of a business, the owners tend to get along with each other and assume that, no matter what, they will be able to work things out. But it’s a mistake to think that things will always be that way. Businesses evolve, and so do their owners’ goals, visions, and relationships with one another. Eventually, there will be conflict and, without an agreement between the owners, that conflict can be very expensive and emotionally draining.