In this article, you will find some of the common mistakes that happen with most startups. Learn what they are and how you can avoid them to ensure that your startup does not end up a failure.
1. Choosing the wrong business entity type
You must understand the business entity you are choosing for your business before making your final decision. This is important to do because each business entity has its own advantages and disadvantages. You need to know how these advantages and disadvantages affect your business, in order to choose the one that best applies to your specific business needs. Therefore, you need to know some basic facts about each business entity, so that you can choose the one that works best for your business’s operations.
Sole Proprietorship
- - Owned and operated by one person
- - No legal separation between owner and the business
- - Unlimited liability
- - Pass-through taxation (filed on personal income tax return)
Limited Liability Partnership
- - Ability to raise necessary funds due to multiple owners
- - A partnership agreement must be executed
- - Complimentary skills lead to quicker growth
- - Profits must be shared depending on the partnership agreement
- - Must consult with a partner before making decisions
- - Unlimited liability
- - Pass-through taxation (filed on the personal income tax return of each partner)
Private Limited Company
- - Limited liability protection
- - Easier to raise capital and funding from external capitalists
- - Easy to transfer ownership
- - Perpetual lifetime
- - Double taxation
- - Higher start-up costs due to the mandatory requirement to capitalize
- - More federal and state regulations
- - Profits are subjected to taxes
Based on the information provided, you should be able to determine which business entity will be most suitable for your business. This will help you avoid choosing one that sets your business back, instead of moving it forward. If you still need more help before making a decision, consult an attorney, tax advisor, or accountant.
Read more about the 6 mistakes to avoid with your startup at InCorp Global.
