TIP: 5 Business Entity Mistakes That Could Increase Your Legal Risk

Have you planned accordingly for the structure of your business? The right business entity will allow you to keep more of your income through proper taxation and also avoid legal issues that could threaten your assets.

Here are five common mistakes made by small business owners when forming their business entities—and ways to make sure you’re minimizing taxes and strengthening your legal protections by doing it right.

1. Using the incorrect legal entity. There are several types of entities that small business owners use. There are pros and cons to each, but many businesses have the incorrect entity. More than 22 million businesses operate as a sole proprietorship, which provides almost no legal protection or tax benefits. It’s critical to assess your needs and make sure you have the best entity for you and your business.
2. Forming your entity in another state. Often business owners are told by a friend, colleague, attorney or CPA that Delaware and Nevada are the best states for structuring your business if you’re looking for anonymity and legal protection. Unfortunately, this often creates a challenge getting a bank account or funding. There are specific ways to structure your business to allow for complete asset protection as well as maximum tax benefits without the drawbacks of out-of-state incorporation.
3. Putting multiple businesses under one entity. You may be doing your best to diversify your business interests and revenue streams. Unfortunately, many business owners put several different businesses they operate in the same entity. This is a major risk. Each business needs to have its own separate entity. But if the entities are structured correctly, you will still have just one tax return to file each year.
4. Cutting corners with entity documentation. Who do you think is best to create a legal entity structure? Would you have a tax accountant draft legal documents? Unfortunately, it’s becoming common to have a CPA or tax professional draft these legal documents or to use some website that offers barebones entity formation at a discount. When a business entity has been drafted with the minimum paperwork, it provides very little legal protection and no real tax benefits. This is a common issue that can be easily resolved by having a legal team that specializes in asset protection law draft and file your entity documents.
5. Doing nothing. Your business is growing—maybe faster than you expected. That is a great problem to have! However, you have to properly structure your business to legally protect yourself and get the maximum tax benefit.

This article is sponsored by Safeguard Business Advantage. To find out if you’re getting the best results from your business entity structure, start with a FREE business assessment.