Introduction to Business Formation: Why It’s Important
By: Barry E. Haimo, Esq.
May 2, 2024
Forming a business entity is easy to do, but not as easy to do right. Forming the wrong entity can be a huge problem. Also, putting the wrong information on the filing can be harmful to you as well.
The bottom line is that formation has a lot of variables, including taxation, partners, vision, practicality and goals. We regularly clean up messes relating to both of these mistakes.
Think Carefully about the Kind of Business Structure You Want to Be
Many people choose the type of structure for their business without putting much thought into it. And this is understandable. They’re excited. They want to get going.
But if you want to avoid future problems, it’s often not the right way to go.
Read Transcript
Hi. This is Barry Haimo. Thanks for tuning in to another dose of Bite-Sized Bits of Knowledge, where we give you meaningful information in a short amount of time. Today is the intro to formation. Basically, with formation, you know, the right structure can make all the difference.
I mean, I cannot stress it enough. It’s the foundation upon which you’re building something special, something that you can scale if you want to scale or otherwise achieve your goals as you define it. Not every business is the same. Not everybody has the same goals. There’s so many different types of businesses, so many different types of business models.
That’s what makes all the different options so complex, because it starts with vision and direction. So our recommendation is to get holistic advice. Talk to your attorney, talk to your CPA, make sure they’re talking. Your financial adviser could be in the discussion as well. We call that the trifecta of representation.
In our case, we’re very unique because we speak tax. We have a tax background. Multiple attorneys at our firm have tax backgrounds. We also obviously know the business law, so we can understand both of those components, whereas most firms don’t.
I would say, remember mistakes are costly in more ways than one. They can be expensive, yes, in terms of money. They can also be time consuming and disruptive. They can also handicap you from reaching your goals because if you don’t structure the right way, you might find that you’re on a path to a wall and you have to do some restructuring to get into a better vehicle. A better type of entity to get to where you want to go. And that could be really a problem for so many reasons. It’s going to be disruptive to your business.
An example of an administrative hassle is, if you have to restructure, that means you have to uproot everything you’ve done. It means that you have to disconnect and reconnect your bank accounts because you now will have a new company named “New Company,” a new bank account, new Employer Identification Number – EIN. That means all of your payroll has to be adjusted, your banking adjusted, your insurance titling, your tax payments, everything that goes into your business that you probably have forgotten about because you work really hard to get it on autopilot. You’ve got to go back to the drawing board and you’ve got to redo it.
And I got to tell you that for me personally, it would be not worth it. And it would keep me kind of in a place where it would prevent me from going to the next level if that’s what I wanted. So just keep in mind that. Don’t just knee jerk into the S Corp that your CPA has advised because that’s tax tunnel vision. And don’t just do the LLC that your friends or your lawyer tells you to, because that also can have some disadvantages. We’re going to jump into that next, into all the different options, and we’re going to go into each one individually after that.
Thank you for stopping by. Don’t forget to download our free business formation entity chart. You can also get our Business Planning Stress Test as well. The links are in the description. Thank you for stopping by and stay tuned for more.
That gives you a sense of why the type of formation you choose is so important, but here at Haimo Law, we like detail. We like specifics. So let’s dive into the nitty-gritty.
Why the Right Business Structure Is So Important
Selecting the appropriate business formation isn’t a one-size-fits-all endeavor. That’s why it’s crucial to engage in discussions with an experienced business accountant or attorney. They can customize the structure to align with your specific requirements.
This is absolutely vital, because picking the best structure for you can significantly influence your business’s success and advantages.
Here are the key benefits of selecting the right business formation:
Asset Protection. Some business structures are better than others at safeguarding your personal assets from potential business liabilities. For example, forming an LLC or corporation separates your personal finances from your business finances, reducing the risk to your personal assets like your home or savings during legal or financial challenges.
Tax Efficiency. Each business formation offers unique tax benefits. For instance, an LLC or S-Corporation provides pass-through taxation, potentially decreasing your overall tax liability by reporting business profits on your personal tax return. Conversely, a C-Corporation’s flexibility in tax strategies might benefit larger businesses.
Credibility and Longevity. Certain formations, such as corporations, convey professionalism and longevity to stakeholders, enhancing your market credibility and fostering growth opportunities and partnerships.
Capital Access. Depending on your chosen formation, you may have better access to financing options. Corporations, for example, can issue stock, attracting investors and providing vital capital for business expansion or new projects.
Estate Planning. The appropriate business structure facilitates smooth transfer of business assets to heirs or beneficiaries, ensuring the continuation of your business legacy.
Scalability. Your business needs may evolve as it grows. The right formation allows for scalability and seamless adaptation to changing circumstances, enabling strategic expansion and transitions between formations.
Compliance and Regulation. Each business structure has its own regulatory obligations. Selecting the suitable formation ensures compliance with legal requirements, reducing the risk of fines or legal complications.
Management Flexibility. Different formations offer various management structures, allowing alignment with your leadership style and business vision.
In short, choosing the correct business formation is not merely a legal necessity, but also a strategic decision with profound implications for your business’s trajectory. By considering your goals, risk tolerance, and long-term vision, you can select the optimal formation to maximize benefits, minimize risks, and position your business for sustained growth and prosperity.
Want to learn more about how Haimo Law can help you select the best possible structure for your business? Get in touch today to get started!
And don’t forget to download our FREE:
and
Florida business entity comparison chart
Originally published 10/28/2021. Updated 05/02/2024.
Author:
Barry E. Haimo, Esq.
Haimo Law
Strategic Planning With Purpose®
Email: barry@haimolaw.com
YouTube: http://www.youtube.com/user/haimolawtv
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