Skip to content

... for small business and startup owners

Top 8 Business Incorporation Mistakes to Avoid

The world of business is one of the most divergent areas as every time a new technology rises it brings more convenience. New technology aims at how entrepreneurs will run their business easily.

What is Business Incorporation?

Business Incorporation is a process of forming a corporate entity or business which structure a business that determines how you are supposed to run your business, how to pay your taxes and the ease of access with which you can merge with others in order to cut out the competition.  Common business structures are LLC, C Corporation, and S Corporation.

Business Incorporation

Many entrepreneurs incorporated their business, but later on, regretted as they did it without knowing if the structure they chose was the right one to select or not. Moreover, there are many who have incorporated their businesses in a wrong manner which eventually led to a nonrecoverable failure. Therefore, it is very important to do focus on the right way to open a business. 

If you are incorporating a business, then it is a good way to protect yourself. It creates a distinct legal entity that is separate from its owners. As opposed to a partnership or sole proprietorship, incorporation restricts each owners’ personal liability for any business debts. No personal assets will be able to protect valuables like your car or home. 

Common Mistakes to Avoid

It is complicated to incorporate a business as the process is not easy. You can easily make a mistake that can cost you thousands. Also, it will be very time consuming to solve these issues later on. 

To avoid these mistakes, we have researched and found some common mistakes that one should avoid while incorporating their business and how you can avoid it:

Not Naming Businesses

Naming a business is a very important part as it provides added protection in terms of legal rights. It will also help you to build your business name and your brand. You will require to provide the same name when you want to start new branches nationwide. Doing this will give you immediate dominance in the market. 

You may feel that this is something not important, but in actual, it is a very crucial thing. Many people wanted to incorporate without even thinking about the name of the incorporation. If you ever find yourself in this situation, then you need not panic. You can still run the cooperation after being provided with a number that will serve as its legal identifier. It can be used as a trading name when you want to run the corporation, but when you want to conduct official business affairs, you will be required to use the legal identifier number. 

Writing the Wrong Description of Your Business

You need to know about the structure of the corporation in terms of the types of shares before you think about how the corporation will benefit you as a shareholder. Also, you will need to know about the voting rights of the shareholders and also how they will be paid. The articles of incorporation need to clarify the shares and all other features that can bring up conflict in the future. 

If you neglect the items outlined above, then you will need to do modifications every now and then. This will definitely cost you more and more. If you want to avoid any additional fees, then you should take your time and know what you actually want. You can leave room for flexibility like an unlimited number of shareholders and a range of directors who can encourage growth. 

Never Skip Payroll Taxes

This is one of the main things that one corporation falls into, especially when they jump-start their business. In the beginning, we know that it is not easy to make ends meet, but it does not mean that you don’t pay the due taxes. Many people have done it before, but when they are caught, many times the government won’t respect the limited liability that they wanted to enjoy when they formed the corporation. 

In this case, they will look after the shareholder’s personal assets to pay off the past due to tax debt. Thus, it is recommended to avoid this temptation and enjoy the fruits of incorporation. 

There are several myths related to payroll taxes. Let’s discuss them in detail:

Myth 1: To Save on Payroll Taxes, You Can Easily Transform Employees to Independent Contractors.

Reality: If you want to expand your business, then you probably want to hire employees that can help you. Becoming an employer and expanding your staff will entail you with many responsibilities, including payroll taxes. There are many myths related to these taxes. 

It takes less time to employ an independent contractor than to have an employee on a team. This is because the cost of payroll taxes is applied only for employees, and it also includes benefits and insurance. You cannot reclassify a worker as an independent contractor who has been working as your employee. Various government agencies and IRS are looking for just such actions. 

Business Incorporation

The work is free from the direction and the control of the hirer in connection with performing the work. The worker is mostly engaged in an independently established trade, business or occupation of the same nature as the work performed for hiring the entity. The worker performs work outside of the usual course of hiring organization’s business.

Myth 2: All Tax- Free Benefits Are Exempt from Payroll Taxes.

Reality: Receiving tax- free margin advantages means that the workers do not have to give income tax on what they earn. However, it does not imply that organizations are free for payroll taxes.

For example, 401(k) contributions which are made by employees through salary reductions are subjected to the Federal Insurance Contributions Act tax.  The adoption assistance is exempt from income tax withholding as the benefit is free from tax to employees but is still subjected to the Federal Unemployment Tax Act (FUTA) and the Federal Insurance Contributions Act (FICA) tax. 

Myth 3: Your Quarterly Employer Tax Return Can Help You Pay Employment Taxes.

Reality: Generally, you should always deposit federal income taxes withheld and both the employer and employee share of FICA (Federal Insurance Contributions Act) using the Electronic Federal Tax Payment System (EFTPS) with the U.S. Treasury. Not only this, deposits are required for FUTA tax for the quarter within which the amount of tax due is more than $500. 

Myth 4: If You Outsource to a Payroll Service Provider, Then it Can Help You Get Relief from Liability.

Reality: Many businesses use an outside payroll service provider to manage the chore of computing payroll taxes, filing employment tax returns, withholding them from employees’ paychecks, and remitting payroll taxes to the  government. Now the big question is, what will happen if a payroll provider misses to pay your money to the government? Also, what will happen if it fails to timely file employment tax returns? 

Unfortunately, you are still waiting for these obligations. You may have a lawsuit for breach of contract, theft, or other bad actions. 

You can even file a complaint if you ever find that your payroll service provider is using some fraudulent activities concerning the deposit of your taxes or the filing of your returns. But it will not relieve you of your responsibilities to the government.

Myth 5: Incorporating Relieves You of Responsibility for Unpaid Employment Taxes.

Reality: You may think that if you have formed a limited liability company (LLC), then you may have complete personal liability protection. But in actual, you don’t. If you are responsible for accounting for, withholding, or depositing withheld employee taxes (their share of FICA and their income tax withholding) and you fail to do so, then you can be held personally liable for all these taxes including interest. This is known as a trust fund recovery penalty and it can be applied to business owners if they have corporations or LLCs. 

Additionally, you may also have state-level employment taxes to consider. You can find out more about federal employment taxes from the IRS. You can check with your state tax or revenue department to learn about your responsibilities on the state and local levels.

Not Having the Shareholder’s Agreement

When most entrepreneurs want to incorporate their business, the only thing that comes in their mind is growth. They forget about minor issues like shareholder’s agreement. You may think that it is a petty issue, but it can bring conflicts in the future. 

No one can predict the future of the shareholders, and thus, it is essential for the articles of incorporation to mention what will happen when any shareholder dies, wants to withdraw and many others. The law is silent on these matters; therefore, it is important for you to outline the by-laws in the articles of incorporation for future purpose. 

Not Checking the Records of Corporation

According to the law, if the corporation fails to file the financial records two years consecutively, then the incorporation is free to dissolve the corporation in question. It means that in case if it is dissolved, then the shareholders will have to incur extra costs so that it can be incorporated once again. If at any case you fail to file your corporation’s annual declaration may cause the removal of the corporation’s name in government’s record. 

Incorporation Mistakes

Not Hiring the Right Employees

Startups should always focus on finding the right employees. Hiring the right ones is an integral part of your success in small business. Also, proper documentation is very important when you hire employees. This includes USCIS Form I-9, IRS Form W-4, noncompetes, benefit forms, offer letters, and employee handbook. You need to put lots of efforts and take time to prepare these documents when you start your company. It can help you save a lot of headaches later on and will provide your important business protections. 

Not Having a Standard Contract

You will not have lots of customers when you start a business. But as you want your business to grow, you should develop a standard contract to use with your customers. This will help you streamline things and will ensure that you protect yourself. You need to look at contracts that your competitors are using. Prepare a contract that is short and easy to understand. You can also have a word with a lawyer who will ensure that you create a contract in favor of your business and fair to your customers. 

Not Having a Business Lawyer

There will be various situations where you need to answer legal questions, will need to have documents reviewed, have an idea about your rights, and lack knowledge regarding protecting your own rights. After starting your business, you need to have a lawyer who will be there to help you when you make important decisions and commit to various legal agreements. 

Why to Incorporate Your Business?

There are various advantages of incorporating your business:

  • Companies can raise capital through the sale of securities more easily
  • Companies have a trustworthy body of legal criteria to guide managers and owners
  • Companies can have an unlimited life
  • Companies can transfer ownership through the transfer of securities. 
  • Companies also get tax benefits under certain circumstances. One thing here to notice is that the corporations may be subjected to “double taxation” on profits. In order to avoid it, many business owners elect to operate their companies under subchapter S of the internal code. This is also known as an S corporation and it allows income to pass through to the individual shareholders. 

How may IncParadise Help You?

Above are the 8 common mistakes that many entrepreneurs commit whenever they incorporate their business. Doing a small mistake can be avoided in the beginning, but later, it can cost you a big amount and is also time consuming. Some of these mistakes are very obvious to be forgotten, but many business people commit these mistakes. Now, as you are aware of these mistakes, you will not go down the same road.

The errors mentioned above are too easy to forget since many of us only focus on making more profits that a company will bring in. We never focus on smaller things that can make business run smoothly in future. These points are very important as avoiding them in the beginning will break your business. 

Before you incorporate your business, make sure that the above errors do not appear anywhere in your performance. But still if you want any help regarding incorporating and registering your business in the US, then head over IncParadise. We will help you to guide through every process of setting up a business.

Get more helpful tips

Like what you're reading? Get fresh tips to start & grow your company.