So you’ve launched a new business? Meow! Good for you!
Hopefully you already understand one of your primary decisions relates to your business entity: sole proprietor? LLC? S-Corp? C-Corp?
If you choose to incorporate, be aware that corporations require a bit more process than other structures. Therefore it is especially important to pay attention to the steps and requirements. Make sure you make thoughtful decisions and complete the steps correctly so you don’t end up with costly mistakes later.
Here are some mistakes you should avoid when incorporating:
1. Not naming your business effectively
What’s in a name? Everything! Your corporation is identified by its legal number (EIN or Tax ID). However, the name is just as important for contracts and agreements, marketing and sales, banking, hiring, and pretty much everything. This is your corporation’s “true identity”.
Make sure you (or your attorney) completes Business Name Check for your state of incorporation. You want to make sure your name is unique, and not the same as another legal entity already in existence.
Other questions to consider when naming your business: is your name easy to pronounce and spell? is it easy to understand what you do simply by seeing the name? could it be confused with a competitor with a similar name? can you get a website and other social media with your exact name or very similar?
2. Wrong Description of the Business
Corporations need a reasonably accurate description and NAICS code (North American Industry Classification System. For US economic statistical analysis, businesses should be categorized properly for the sake of accuracy. Depending on where your business is listed, there could be opportunities for marketing or incoming contracts that you would miss out if you were not in the right category. If you apply for loans or grants or bank accounts, your description must be accurate and sufficiently detailed to satisfy their compliance requirements. The SBA (Small Business Administration) also uses this information.
3. Not Owning the Shareholder’s Agreement
It’s a common mistake for founders to focus on simply launching and growing the business, but avoid other mission-critical details like a shareholder’s agreement. This can really cost you later (just like pushing off your bookkeeping! hint hint)
It’s imperative for your articles of incorporation to outline what happens when a shareholder dies, wants to withdraw and other scenarios. There are not any standard laws to govern these scenarios. You need to outline the by-laws in the articles of incorporation to cover anything that could happen in the future (and inevitably will). We recommend you work with an attorney even if you are trying to save money during your startup phase. The costs later will far outweigh the costs now.
4. Not Checking/Handing Over the Corporation Records
If a corporation fails to file its financial records two years consecutively, the Incorporation Act is free to dissolve the corporation in question. If the corporation is dissolved, the shareholders will have to incur extra costs in order to reincorporate. Failing to file your corporation’s annual declaration might also force the government to remove the corporation’s name in their register.
It’s an obvious mistake to avoid, but these things can happen. Two years goes fast, especially in “startup time”.
5. Don’t Skip Payroll Taxes
Granted, 2020 is an atypical year when it comes to payroll taxes. Even if the law is allowing for certain deferments this year, it is much wiser to stay the course and not pay the penalties later. When cash is tight, small business owners often try to find ways to trim costs or defer expenses. This is a very dangerous game to play. You might not have the money later, for starts. Or if you get caught doing something illegal, the penalties are high – including the possibility that the government can pursue a shareholder’s personal assets in order to pay off past tax debts.