Tax and Legal Mistakes to Avoid When Setting Up Your Business
When you finally make the decision to start your own business, you’re immediately overcome with excitement and determination but soon after that, your emotions shift and go from excitement to pure panic! You’re panicking because you’re starting your own business! That’s a huge and scary undertaking, especially if you’re doing it by yourself. It’s huge because you’re more than likely transitioning from working a 9 to 5 job to fully owning and operating your own business… that’s quite a transition; It’s scary because you know the statistics of small business survival rates… you’ve heard it all before. But despite the statistics and the transition, you’re ready to take on the risks associated with becoming an entrepreneur.
The great thing about becoming an entrepreneur in this day and age is that there are others who have done it before you so you’re at a huge advantage. All those failed businesses that are part of that small business survival percentage… all you have to do is the complete opposite of what they did, right! You don’t have to be part of that statistic if you follow in the footsteps of successful entrepreneurs before you… but it’s okay if you do make mistakes because we’re all human.
The probability of an entrepreneur making business mistakes is very high because they’re either new to this or didn’t learn from their previous mistakes… but nonetheless, business owners are going to make mistakes but you’re less likely to make certain mistakes if you know them in advance. There are careers that are heavily impacted by mistakes more than others but it’s the tax and legal mistakes that get businesses into big trouble.
If you were to talk to any successful small business owner, almost all of them would tell you to avoid these tax and legal mistakes in order to achieve the success you know you’re capable of when starting your own business.
This is a silly, yet very common mistake that entrepreneurs make. You’ve seen how mixing business with pleasure is never a good idea in movies and on various TV shows… well, that same logic applies to your business endeavors as well.
If your business is a corporation, in the eyes of the government and the IRS, it’s considered a completely separate entity and finances must be separate as well to keep and maintain the barrier that protects your personal assets. If you set your business up as a sole proprietorship, the business is not a separate entity.
As the owner, you are entitled to any and all profits… that initially sounds like a great business move, right? For some it does, but what people fail to realize is that just as you’re entitled to all the profits your business makes, you’re also responsible and liable for any debts, liabilities, or losses your business incurs. So, it’s very important that you choose the right legal entity.
Speaking of choosing the right entity, make sure you don’t choose the wrong one!
As mentioned above, it might sound appealing to set your business up as a sole proprietorship because you keep all profits but it comes with some hard consequences if any debts or liabilities arise. Most small business owners choose to set their businesses up as LLCs because it gives you a corporate shield of protection against your personal assets in the event that someone tries to sue you.
The main thing about determining which legal entity is right for you is to know the different entities out there and find out information about each one so that you will be able to make an informed decision on which one is best for your business. You want to make an informed decision because the corporate structure you choose is what’s going to determine how you file your taxes. If you file them wrong, it could be a huge mess to clean up. The great news is that there are kinds of resources available to give you the information you need… these resources will give you the information to make running your business easier.
Bad recordkeeping is just bad any way you look at it. A lot of business owners think that because they’ve gone paperless, they can just throw away hard copies of receipts and other important documents… that’s not the case at all. In order for you to have an accurate projection of your business’ growth, you have to effectively document your expenses and deductions.
That’s not saying that you need to keep a receipt from Home Depot from when you bought paint for a business project but when it comes to income tax returns, the IRS has a period of limitations for you to follow based on certain situations… you can check it out and see which ones apply to you.
All in all, the best approach to avoiding these tax and legal mistakes when starting your own business is to be proactive about it. Even if you know you’re not going to start your own business until a year or two out, start doing your research now to plant the seed of information. That way, when you are ready, you’ll have the knowledge to make it a smooth process.