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4 Consequences of Picking the Wrong Business Entity

What could go wrong?

Wrong Business EntityOne of the first important decisions you will make when forming a new business is which business entity is right for you. With so many choices, it can be a challenge to understand which form of entity is right for you. In their enthusiasm for the new business, some business owners may rush to decision without spending the time researching their options. Making the wrong decision can impact you and your business negatively. Here are four consequences of picking the wrong business entity.

Taxes

When you are choosing the business entity that is right for you, one of the first things you should consider is tax treatment. Different business entities have different rules regarding paying taxes. For example, in an entity registered under subchapter S of the Internal Revenue Code, commonly called an “S-Corp,” profits or losses are passed directly to the partners to report on their individual tax returns. This means the business’s taxes are paid through the owners and not through the business itself, which is called “pass-through taxation.”

In a C-corporation, the business is also responsible for paying taxes on its income. After taxes are paid, the shareholders may receive some income from the company profits, but they will have to pay taxes on their individual income. This leads to something called “double taxation.”

Limitation on Membership

If the goal of the entity is to seek “Venture Capital” investment, forming the correct type of entity is critical. For example, companies are not allowed to own equity in S-Corporations. S-Corporations are also not allowed to have more than hundred shareholders, or any foreign owners. Improper corporate structure can limit your options for membership and outside investment.

Liability

Many business owners could accept payment for their services personally, and operate as a “sole-proprietorship,” but choose not to because they are concerned about insulating themselves from personal liability. An inappropriate corporate entity can expose the owners to personal liability. For example, a single-member LLC most likely will not insulate the owner from liability in Florida. It is important to seek guidance to establish an entity that will protect the owner.

Legal Expenses

If you choose the incorrect business entity, you will eventually discover your mistake. Maybe your company will be sued, or a partner or employee will steal resources. No matter the cause, once you discover you have chosen the incorrect business entity, you will have to get legal help to resolve the issue.

In order to make sure that you correctly change business entities (and that you choose the one that is truly right for you), contact a business attorney. By working with a qualified professional, you can ensure that you will not make the same mistake twice.

We Can Help!

At J. Muir & Associates, we are here to help. Our goal is to answer any questions you may have about business entities and choose which one is right for you. To find out what we can do for you, schedule your appointment by clicking here or give us a call at at 786-533-1100.

 

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