In the business world, just as in life, we all make mistakes from time to time. Unfortunately, there are several common mistakes made by new start-ups that can be both time-consuming and costly.
However, these mistakes can be avoided if you’re well informed.
State of Incorporation:
A crucial mistake made by many start-ups occurs when choosing the best state in which to incorporate. Traditionally, the state of Delaware is considered the gold standard and the most attractive state to potential investors.
Delaware is the most popular state for start-ups to incorporate in, and for venture capital investors, it is the only state to consider.
The primary benefit to incorporating in the state of Delaware is that Delaware offers the strongest and most current corporate law structure, which means that Delaware provides the greatest asset protection of all 50 states.
Essentially, Delaware erects an impenetrable wall between your personal assets and your new company. If you don’t incorporate your start-up in Delaware, you could—possibly—be putting your company’s assets at risk.
In some cases, this common and avoidable start-up mistake can be addressed by converting the business entity to another state. However, many states do not allow entities to convert from one state to another, and you’re then stuck with a company formed in the wrong state.
If you decide to start all over again and form your company in Delaware, you’ll have to spend more money in order to dissolve the corporation and form another one in Delaware, where you should have incorporated your start-up in the first place.
This error can be avoided by carefully mapping out and choosing the optimal state of incorporation for your start-up.
Type of Entity:
Another common but avoidable mistake amongst new start-ups is choosing the correct type of business entity. Generally, most new start-ups who plan to raise capital will establish a C corporation, with an eye toward the future—bringing investors aboard, raising capital and going public.
In many cases, when fundraising is the plan, an LLC or non-profit corporation is less than ideal for a start-up, for a variety of reasons.
However, for private businesses or for holding real estate or other assets the LLC is the entity of choice.
New business owners should thoroughly educate themselves or contact an attorney or tax professional to discuss details about which type of business entity would be best for their start-up.
Number of Authorized Shares:
Did your new corporation authorize the correct number of shares? It is important that your start-up has the proper number of authorized shares to issue. If your company has too many authorized shares you’ll pay higher franchise taxes.
However, having too few shares can be an even bigger problem and will require filing an amendment to the Certificate of Incorporation to obtain more shares, which is also expensive.
Although it may seem like a foregone conclusion, the company name can often be the biggest blunder for start-ups. Before you file your Certificate of Incorporation you should ask yourself—and answer—these questions:
It’s a good idea to wait until you have investigated any and all potential problems with your company name before you file your startup documents.
Entrepreneurs that spend the time to lay out their business plans and research their target markets possess a much greater chance of success. A bit of due diligence goes a long way in preventing wasted time, wasted money and wasted opportunities.