It may be okay to be a sole proprietor, but don’t be the sole person forming your business. Here are the top 3 reasons why:
- Tax Treatment: Did you know that there are tax implications involved when filing your business with the State? Savvy entrepreneurs may already understand that a C-Corporation is subject to double taxation whereas an LLC is not, but did you know that an LLC can be taxed 4 different ways? That’s right, an LLC can be taxed as a Sole Proprietorship, Partnership, S-Corporation or even a C-Corporation. Making some innocent mistakes while going through the business formation process alone could end up costing you to file additional IRS tax returns for your business resulting in approximately $500 in unnecessary tax preparation fees.
- Compliance with your Bank: Your bank has very strict account opening procedures that you must adhere to when establishing your business checking account. If you form your LLC or Corporation alone, you will likely make crucial mistakes that will disallow you from establishing your bank account. There are specifics as it relates to owner titles, addresses, and even your personal name. Making a mistake typically costs you an average of $35 in state fees and weeks of your time amending the documents to be in compliance with your bank. Many times your bank will ask for an operating agreement or meeting minutes for clarification, and if you don’t have one, you’ll need to prepare it or seek the guidance of an attorney – and that is not cheap.
- Legal: Whether you’re establishing a high risk business or not you may want to seek the advice of a competent business attorney. Why? Because he or she can establish an operating agreement or bylaws for your business entity that clearly defines what will occur when certain events take place. For example, what happens when there is a disagreement with other owners? Additionally, a business attorney can advise you on how best to protect the “Corporate Veil” of your LLC or Corporation which can act as a shield to protect your personal assets. This would include maintaining separate business and personal bank accounts, utilizing your company name on all marketing materials, holding annual meetings and recording meeting minutes to name a few.
In summary, don’t go it alone when forming a business entity. Odds are you’ll make an error that will cost you more time and money than you were trying to save to begin with.
About the author: Navi Maraj is a Certified Public Accountant in the State of Florida and is the President of FileYourBusiness.com, Inc. FileYourBusiness.com is a website dedicated to educating entrepreneurs about legal entity types and their respective tax treatment. Additionally, Florida entrepreneurs can utilize FileYourBusiness.com to form their business.
Disclaimer: The content of this article is not to be considered legal or tax advice and is provided for informational purposes only.