You finally did it. You are starting a business. Time to be your own boss and tackle a new adventure. You have a great idea and a catchy name. You are ready to get your hands dirty and start working in your business so can’t you just rush through the boring legal stuff and tack an LLC onto the end of your name using one of those online services?
The answer is a big NO! Many businesses fail within the first 5 years because they do not take time to set up their business properly—resulting in legal and tax ramifications that shut the business down. You want to be a success? Then don’t rush through the entity selection process. Slow down and get your business set up RIGHT.
Choosing the right entity is more important than you think. Your choice of entity affects:
- Number of Owners (Shareholders, Partners, Members)
- Identity of Owners
- Tax Efficiency & Deductions
- Equity Structure
- Liability Protection
- Control & Management
- Ability to Receive Funding
- Division of Profits & Losses
I know what you are thinking—I’ll just get it set up “for now” and change it later. This is a trap many new businesses fall into. Yes, you can change your entity selection down the road, but doing so often results in severe tax and other penalties. Some businesses cannot afford to take the hit and end up closing shop instead. Not to mention that “for now” often ends up being a lot longer than we anticipate when we are starting a new business. It is easy for 1 year to turn into 3 then 5. 5 years of paying more to Uncle Sam and being greater exposed. 5 years that easily could be avoided, saving your business hundreds of thousands of dollars.
50% of new businesses fail in the first 5 years according to the Small Business Administration (SBA). One of the main reasons – failing to plan and set up the RIGHT way. Is your business protected from Divorce, Death, Bankruptcy, Disability, and During Life Transfers? Are you set up to be as tax efficient as possible? Do your tax returns match your legal documents?
Entity selection laws vary greatly from state to state and on the federal level, changing the level of protection and tax efficiency. For example, an LLC may be set up in South Dakota (one of the most business friendly states in the US), but may elect to be taxed as a S-Corporation at the federal level. Entity selection can get pretty complex and there is a lot to consider chiefly: liability, control, & taxes.
So what entity is right for you? Entity selection is an imperative part of setting up a business. Don’t take a short cut and try to save a quick buck if you want your business to succeed. Discuss your business plan and finances with your CPA and your attorney and together (yes, they need to work together on this one), they can recommend the best entity for your business that provides you tax efficiency and liability protection. Choosing the right entity is the first step. Protecting the owners and the business is the second. Learn more about the risk a divorce, creditor, bankruptcy, sale, disability, or death of any one owner can have on your business without the right plan in place. Schedule a complimentary initial consultation to learn more about how to ensure the success of your business from day 1.
