Companies seeking to incorporate often make unintended mistakes during the incorporation process that can undermine long-term competitive advantage. Some business owners accidentally omit critical documents from their incorporation filings, which can lead to legal liability, unnecessary taxes, and disagreements among members of the founding team. Navigating through the incorporation process is essential for a startup company because a corporate entity can reinvest extra revenue and attract more investors.
Four avoidable incorporation mistakes that companies often make during the process:
1. Incorporating in the Wrong Jurisdiction
Many business owners choose to incorporate in their home state without weighing the advantages and disadvantages of other jurisdictions. A startup company can choose to incorporate as a foreign entity in all 50 states with either a physical presence or a registered agent residing within the state of organization. Incorporating in another state can entail additional filing fees and paperwork, but the advantages can be more lucrative because some states impose no corporate taxes. Companies might also choose to incorporate in another state to enjoy a legal environment that is more favorable to their business strategy. Selecting the most beneficial jurisdiction can help companies perform more effectively and earn a competitive advantage over industry rivals.
2. Failing to File All Paperwork
States have very specific paperwork submission requirements for companies seeking to incorporate. Business owners must ensure that paperwork is submitted on time, sent to the right location, and conveyed in an appropriate manner. Companies that make a paperwork mistake during the incorporation process could have to pay extra filing fees or wait years to amend founding documents. For example, the IRS forbids corporations from amending their tax treatment for 60 months if paperwork is not submitted on the day of incorporation. Some companies also make the mistake of leaving out essential filings because they are optional. Incomplete incorporation paperwork could subject business owners to additional taxes, filing fees, and unnecessary legal risks.
3. No Shareholder Agreement
New business owners often neglect to draft a shareholder agreement to focus on building their company. Members of a founding team might also fear that the negotiations involved with developing a shareholder agreement could undermine workplace harmony. Unfortunately, business owners always regret their failure to draft a shareholder agreement once the company becomes successful. Shareholders who have a significant amount of money on the line could feel betrayed when they leave post-incorporation shareholder negotiations with less than they expected. The founding team should, therefore, always draft an initial shareholder agreement because these documents are mutually beneficial for everyone in the long run.
4. Choosing to Not Incorporate
Business owners who form a company often delay incorporation to conserve the limited time available for developing their enterprise. Incorporation may initially appear daunting, but the process is relatively straightforward for organizations that employ a strategic approach. The logistics of the company formation process should be planned before the date of filing. Decision-makers should not be afraid to seek professional legal advice to shield themselves or the business from potential liability. Choosing to incorporate pays off in the long-run for most companies because they can reduce their time to market, raise more capital, and reinvest additional revenue.