Business Formation is Not a DIY Task for Most People
Last year when I was preparing a house to put on the market, I went to the hardware store looking for a handyman referral to fix a broken window. The guy at the desk told me it was an easy job and that if I had a few hours on the weekend I could do it myself and save money. Now I don’t know the first thing about installing windows. What sounded easy in his mind, was something I knew would be a challenging and time consuming task with a high degree of error. I was self-aware enough to know that my money was best served hiring a professional to get it done right the first time, rather than calling someone to fix my sloppy work.
Similarly, you may hear that you can save money going the DIY route on your business formation. If you do not know what you are doing you can cost yourself a lot of time, money and headaches looking for a way to fix sloppy work.
Getting a name registered with the state is easy enough but in order for your business entity to be valuable to you, it is imperative to observe to do things the right way. For many, if not most, the primary reason they want to form a company is for personal liability protection. To preserve those protections, it is imperative to comply with a number of corporate formalities. That means having books in order, being properly insured, operating agreements and the like. Maintaining the formalities is critical and where DIYers most often go wrong.
Additionally, it is important to understand the tax implications of your choices. You may have heard that operating as a sole proprietor is a bad idea due to the tax consequences. Many people mistakenly believe doing business as an LLC is a cure against those consequences. LLCs are wonderful vehicles for doing business, but again, only if you know how to take advantage of their flexibility, make the proper tax designations and employ the strategies that take maximum advantage of those designations. These selections and strategies involve complex planning and consulting with professionals is essential.
Finally, choosing the business formation that is appropriate for your profession and situation requires an evaluation of your unique circumstances. In some cases, operating as a basic LLC makes more sense than operating as an S or C corporation. It depends on what you intend to do with the business and a number of other factors that are unique to your situation.
In sum, I have seen the results of the DIY work of people starting their businesses. Even other professionals I’ve met and spoken to are great at their particular niche, but fail to have their business structures optimized to save them on taxes and protect against personal liability in their own businesses. It pays to get your business set up the right way, consult with a professional and in turn learn much more about your business in the process.
