Business Formation Done Right: Why Your Structure Matters More Than You Think

Part 4 of our "Proactive Legal Planning" Series

"I just used an online service to set up my LLC. It was cheap and easy." 

"My friend said I should be an LLC, so I filed the paperwork myself."

 "I'm just getting started, so I don't need anything fancy yet."

I hear these statements constantly from entrepreneurs, and then I end up helping them deal with expensive problems months or years later – problems that could have been completely avoided with proper business formation from the start.

Here's the truth: How you structure your business isn't just paperwork. It affects your taxes, liability protection, funding options, and exit strategy. Getting it wrong at the beginning can cost you tens of thousands of dollars to fix later – if it can be fixed at all.

Why Business Formation Matters

Think of business formation like building a house. You can throw up walls quickly without a solid foundation, or you can take the time to build it right from the start.  Your business entity structure determines:

• How much you pay in taxes 

• Whether your personal assets are protected 

• How easily you can bring in partners or investors

• What happens if you want to sell the business

• Your personal liability for business debts

• How you can pay yourself and employees

The Most Common Business Formation Mistakes

1.  Choosing the Wrong Entity Type.  Most people default to forming an LLC, but is it isn't always the right choice.  For example, perhaps you are starting a company, and you are planning on seeking investment from venture capital firms.  You may end up having to convert that LLC into a C-Corporation to get that investment.  This conversion will be expensive and full of complications and potential pitfalls.  Make sure you choose the right entity for your situation at the beginning!

   
   

2. Using Generic Online Templates Without Customization.  There are lots of online services that cheap business formation, but they aren't a substitute for a lawyer.  Their do-it-your-self templates could cause serious problems down the road.  For example, you and a friend are going to be equal partners in a relatively simple business that doesn't require much investment; so you use a cheap and easy online service to create an LLC.  Two years later, the company is extremely valuable; you want to sell but your partner doesn't.  But the simple cheap LLC formation service documents didn't include any language about what to do when there is a deadlock.  Now you are stuck in a nasty and expensive litigation battle that not only cost you $100k but it also cost you your friendship.

   
   

3. Forgetting About Compliance.  Forming the entity is just the beginning. Every business has ongoing compliance requirements that many people are unaware of.  If you don't have a plan for ongoing compliance and corporate governance and documentation you could find yourself in a difficult situation down the line.  Things like annual reports, resolutions, and meeting minutes, and FinCEN Beneficial Ownership Information (BOI) reporting are a must to keep your company protected and out of trouble.

   
   

4. Ignoring Tax Optimization Opportunities.  Entity choice and structure can save or cost you thousands in taxes annually.  Without an attorney who will coordinate with your tax professional, the wrong entity choice could cost you dearly when it comes to liabilities like double taxation or self-employment taxes.

   
   

5. Not Planning for Growth or Changes.  Where you are today is only part of the picture.  Truly analyzing potential future growth, exit options and potential challenges is vital for a fully informed entity choice.  Online forms are no substitute for experienced legal guidance who can help walk you through questions like: what about potential future investors? How will you add or remove future partners? What if someone wants to sell their interest or you want to sell the whole business? What if you need unequal contributions over time?

Don't let your business formation be an afterthought. Schedule a consultation with an experienced Litix attorney to discuss your business goals and needs and lay the proper foundation from day one!