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5 Mistakes to Avoid When Choosing Your Business Entity
As someone who is probably new to the business world, some unfamiliar terms are likely to come across during your entrepreneurial journey. And one of them is a business entity. But before we explain what business entities mean and why they are very important, we need to let you know that understanding these unfamiliar business terms will go a long way in helping you navigate the business world.
What Exactly Is a Business Entity?
To put it in simple terms, a business entity can be seen as an organization that a person or group of people creates for the sole purpose of conducting business or engaging in a trade. From this short explanation, one thing we can draw out from this is that irrespective of how a business organization is organized, the goal of every single one of them, whether it is created by a single individual or a group of like-minded people, is to engage in trade.
Therefore, before starting a business, one of the first things you want to do is choose how your company or organization will be structured. In other words, you need to choose the business entity that fits your business.
On paper, there are various kinds of business entities out there. In Canada, in particular, recognizes more than a dozen different types of business entities. But we have noticed that many business owners in Canada often choose between sole proprietorship, Limited Liability Company (LTD) or Corporations, Co-op's or Cooperatives, and general partnership, etc.
However, one thing you have to realize is that the type of business entity you choose will:
- Determine the structure of your organization
- Determine how the company will be taxed
- How the company will be operated
- It will also show that will be liable for paying off all the debts incurred during the business operations.
- It will also determine how well you will receive money from willing investors.
- The type of entity you choose will also determine the size of the loan you can get for your business and if you can get any loan at all. And lastly...
- Your business entity structure will also determine your risk exposure should anyone sue your business.
Now that you know what business entity is and why they are important. We will next familiarize you with some of the mistakes you must avoid when choosing your business entity.
Mistakes to Avoid When Choosing Your Business Entity
When choosing your business entity, there are some mistakes that you need to avoid because failure to do that can cost your new business dearly either now or in the future. So, here are 5 common mistakes that you need to watch out for
· Failing to Form a Legal Entity for Your Business
One of the common mistakes that many people make is believing that they can start their business without forming a legal entity. While this is true, starting your business without one is still not advisable. The problem is that if you do not have a legal entity before starting a business, it can complicate your business dealings, particularly in the financial aspect, as you expand your business.
Other disadvantages of not forming a legal business entity include severe risk to all your assets and risk to your business credibility, which could potentially scare away investors. Also, it can bring risks to your brand and company name.
To avoid this mistake, file for a legal business entity. If you are starting your business, you can file for a limited liability company (LLC). This entity type is particularly good for new businesses as it would help protect your assets and, most importantly, reduce your financial vulnerability.
· Not Thinking About the Future Growth of the Company
Another mistake that many new start-ups often make is that they don’t envision the future growth of their business. It is hard to tell if they don’t believe in themselves or have a poor outlook on the business world. If you are an entrepreneur, your first aspiration is to envision that a big investor will someday come to your aid and grow your business. And in other to achieve this, you will need to have an entity. We are saying here that the entity you chose will likely play. Not only that, but the entity could also majorly impact your bottom line.
· Not Putting Proper Protections in Place
This is yet another common mistake that quite a several young entrepreneurs often make. They don't think about the safety of their assets and intellectual assets. Therefore, to ensure that you can mitigate all the risks involved in entrepreneurship, you need to fill for a business entity that will help protect your business assets and the same business from all legal and financial problems. Aside from the financial aspect, a legal entity will also prevent your business Trademarks and certificate of operation, plus your business license.
· Failure to Separate Business finance from Personal Finances
Another mistake many people make when choosing a business entity is failure to separate their finances from their business finance. This type of mistake is one of the commonest out there! This is because many business owners need to see the problems in utilizing their finances for their business...and vice versa.
One of the best ways to prevent this is by using a different account for your business and personal finances.
· Failure to Consider the Tax Implications
One thing to note is that the type of tax you will be subjected to will depend on your business structure. Now the problem is, when you are not careful when choosing your business entity, you could run into many tax problems. You can imagine a small business filing for an entity that works best for a big/large cooperation, the kind of taxes he would be getting may eventually run the business enterprise to the ground.
One way to prevent this is to study your business model and, if possible, hire a lawyer to explain all the business entities to you. And from there, you can pick the ones that will best serve you right.
Now that you know about the common mistakes new entrepreneurs make when choosing their first business entity, this article will be able to guide you when filing your own. However, if you are still convinced, don’t hesitate to contact us at Steven And Company Law Corporation today. Our entity comparison will help you map out the pros and cons and help you make the right choice.