Starting a new business comes with its challenges, and making mistakes is part of the learning curve. However, some errors can cost you both time and money. Below are four common mistakes often made by new startups and how to avoid them.
Choosing the Right State for Your Business
One of the most frequent mistakes entrepreneurs make is not choosing the best state to incorporate their business. While it may seem convenient to incorporate in your home state, Delaware is widely regarded as the most business-friendly state in the U.S. It is especially popular among startups and venture capitalists due to its robust corporate law system and strong property protection policies.
Delaware allows you to create a solid legal barrier between your personal assets and your business, reducing personal risk. Although you can switch states later, some states don’t allow this easily, and starting over in a new state can be expensive and time-consuming. Choose your state carefully from the start to avoid unnecessary headaches.
Choosing the Wrong Company Type
Another common mistake is selecting the wrong business entity. If you plan to raise venture capital, forming a C-Corporation is typically the best option, as it facilitates fundraising. Starting as an LLC or a Non-Profit organization may not be as effective in raising capital.
On the other hand, if your main objective is to hold assets or property, an LLC might be the better choice. Consider your long-term business goals and seek professional advice to select the entity that best suits your needs.
Issuing the Right Amount of Stock Shares
Incorrectly calculating the number of shares to issue is another costly mistake. If you issue too many shares, you may end up paying more in Franchise Tax than necessary. On the flip side, if you issue too few shares, you may need to amend your Certificate of Incorporation, which can also be expensive. Make sure to issue the appropriate number of shares from the start.
Choosing the Right Name for Your Business
While it may seem trivial, selecting the right name for your business is crucial. You should verify the availability of your business name at multiple levels. Ask yourself these questions:
•Is the domain name available for your business?
•Is the name available in the state where you plan to incorporate?
•Is the name available in any other states where you plan to operate?
•Could the name potentially infringe on any existing trademarks?
Choosing a name that meets all these criteria can help avoid legal disputes and branding complications down the line.
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Choosing the right path when starting your business is crucial to long-term success. Whether it’s selecting the right state, company type, or business name, we can assist you every step of the way.
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