Dispelling Business Formation Myths

Many business owners struggle with finding time to do proper research before starting a business. As a result, they rely on inaccurate information about business formation and end up making mistakes that thwart their success or cause legal or financial issues.  

There are two reasons why business owners make mistakes when starting a business: (1) They cannot separate fact from fiction due to the abundance of information online, and (2) They do not seek the assistance of a business formation attorney. There are countless myths and misconceptions spread on the Internet and social media by people who call themselves “entrepreneurs” but have no clue what they are talking about.  

If you are considering starting a business, COFFYLAW, LLC can help. With offices in New York and New Jersey, the business formation attorneys at COFFYLAW, LLC provide personal counsel and trusted legal guidance to clients across the country.  

Business Formation Myths 

As an aspiring entrepreneur or new business owner, you may encounter dozens of business formation misconceptions when trying to understand how to start a business. Below is the list of some of the most common myths about business formation and the facts behind them:  

• Myth #1: You need to have a profitable business before establishing an LLC. One of the most ridiculous myths about business formation is that you should not create an LLC before your business becomes profitable. This is complete nonsense because it is always best to protect yourself and your assets by establishing an LLC or another entity as soon as you start a business. If you wait until your business is “profitable” to create an LLC, you may end up mixing your personal and business assets, which may entail legal issues.  
• Myth #2: The choice of a business structure is not critical unless you have a large business. There is a common misconception among new business owners that choosing a business entity (LLC, sole proprietorship, corporation, etc.) is only important for those with large businesses. However, this is far from the truth. The business structure you choose will have a major impact on every aspect of your business, including taxes and personal liability, regardless of the size of the company. If you are not sure which business structure to choose, consult with an experienced business formation attorney.  
• Myth #3: Non-citizens cannot form or operate an LLC. This is false. There are no laws that would prohibit non-citizens from forming or operating Limited Liability Companies in the U.S. Whether you are a foreign citizen or entity, you can create and operate an LLC in the United States.  
• Myth #4: Forming a corporation provides absolute liability protection no matter what. One of the primary reasons business owners form a corporation is to limit their personal liability for the corporation’s debts and legal actions. However, forming a corporation may not provide absolute liability protection if the corporation is used for illegal purposes. In that case, courts may be able to “pierce the corporate veil” to hold shareholders or directors personally liable.  
• Myth #5: There is no need to pay taxes if you establish an LLC in another state. It is true that you can establish an LLC in any state regardless of where you reside, and doing so may be a cost-efficient option. However, it does not mean that you will not be required to pay taxes. On the contrary, you may have to deal with double taxation problems.  
• Myth #6: LLCs cannot go public. Technically, an LLC cannot be publicly traded because the entity is a private ownership arrangement. However, since LLCs can be taxed as partnerships, the business can be structured as a publicly traded partnership to have shares traded on a securities exchange.  
• Myth #7: Sole proprietorships cannot have employees. Many people assume that a sole proprietor cannot hire employees, mainly due to the name of the entity. Even though a sole proprietorship is not a business entity, per se, a sole proprietor can have employees, and there is no limit on the number of employees sole proprietors can employ.  
• Myth #8: Business formation is expensive and time-consuming. There is a common misconception that establishing a business is an unreasonably long and costly endeavor. However, the process of business formation is relatively straightforward and may not be as expensive as you think. Otherwise, there wouldn’t be so many LLCs, corporations, and sole proprietorships in our country.  
• Myth #9: You do not need an attorney to form a business. Many business owners mistakenly believe that they can save money by trying to form a business on their own. However, doing so may do more harm than good and end up costing you more money in the long run. A skilled business formation attorney can help you choose the appropriate business entity, handle the paperwork, assess potential issues, and help develop a customized plan for your business to increase operational efficiency and limit your personal liability.  

While this is not an exhaustive list of myths about business formation, it addresses some of the most common misconceptions about starting a business. If you do not want to fall for other traps when establishing a business, reach out to an attorney to guide you through the business formation process.  

COFFYLAW, LLC: Skilled Legal Counsel  

If you are an aspiring entrepreneur or business owner who needs help with business formation, contact COFFYLAW, LLC for legal counsel. The business formation attorneys at COFFYLAW, LLC represent clients across the United States, including New Jersey and New York. Schedule a consultation with knowledgeable attorneys to clear up any questions you may have about business formation.