Top Five Mistakes in Forming Your Corporation

1. Incorporating without getting the advice of a good CPA.

Since every state has different requirements and tax tables for corporations, and because there are different types of corporate entities (S corporations and C corporations, in addition to the separate category of LLCs), forming a corporation without getting input from a good CPA can cost you money in the long-run.

Why? Because of the different ways corporate income and LLC income can be treated. In addition, very few states will permit a company to change business structures once that structure is decided upon, so it's important upfront to choose your entity wisely.

Generally, you want to get the most personal liability protection with the best tax advantages for your specific situation, and only a good numbers person can look at your current situation and long-term goals to give you the kind of sound objective counsel you need to make the best decision.

2. Thinking the corporate veil gives you unlimited liability protection.

While a corporation affords liability protection, it doesn't extend that protection to criminal acts, fraudulent practices or using the corporation to further your own personal interests, such as raiding corporate coffers for personal expenses. In short, there's no free ride, especially in business, and a quick glance at headlines from large corporate failures such as WorldCom or Enron show the personal and financial toll taken on corporate officers who engage in activities that go beyond the law.

3. Incorporating, then operating without getting the proper local business licenses.

Just because you incorporate doesn't mean you don't have to follow the guidelines of your local municipality when it comes to getting proper licenses and permits. Too often, owners discover they are not in compliance with local business ordinances -- even if they are properly incorporated -- and end up paying thousands in fines or back taxes, or worse, a combination of both with loads of additional penalties.