Reonna Green, Founder of She Trademarks, is on a mission to provide women entrepreneurs with the tools needed to succeed and propel their careers. She tells The Female Lead about five common misconceptions of business formation in the U.S., and gives advice on how to avoid making these mistakes...
Although more women than ever are showing great entrepreneurial spirit, most women business owners are not legally protecting themselves regarding business formation.
Surprisingly, the business formation process is typically straightforward. You can quickly go to your Secretary of State's website and fill out the necessary information about your business, submit the fee, and receive registration in two to six weeks, depending on the state.
However, not everyone is legally protecting themselves.
As a trial attorney and Founder of a law firm dedicated to female entrepreneurs, She Trademarks, I know many of the preconceived thoughts small business owners have about legal processes. Check out the top five misconceptions of business formations that need to be debunked below:
1) You Don’t Need a LLC Unless You’re Making Good Money
As an attorney, I often hear from clients that business formation was put on the backburner because they believed they didn't need an LLC, a business structure in the U.S. that protects its owners from personal responsibility for its debts or liabilities, until they made good money.
However, this statement is far from the truth.
Realistically, you need a business entity immediately to protect your personal assets from your business assets and vice versa.
As a new business owner, the only way to protect your assets from the business assets is if you create a separation between yourself and your business. Otherwise, if the company gets sued, your assets could potentially go with it.
Another example of the damaging effects of not correctly separating your personal and business assets through proper business formation is if something happens personally, such as bankruptcy. If your business and personal assets are not separate, you could be forced to sell off your business to cover your personal losses.
As someone who has their own business, I know that it's easy to overlook this step and feel it's unnecessary because of all the demanding hats you wear as a business owner. However, it's essential you do your due diligence and protect your business by separating your assets to eliminate risks and some of the stress you already have as a small business owner.
2) S Corporation Is Not a Business Entity.
The truth is that most small businesses are LLCs being taxed as an S Corporation. An S Corporation has the option to pass corporate income, losses, deductions, and credits through to its shareholders for federal tax purposes.
This can be unclear for people new to the business formation process because they mistakenly think they need to register their business as either an LLC or a Scorp. In reality, a Scorp is not a business entity; instead, it is a tax designation.
Therefore, once your business makes a substantial amount of money, it’s time to consider seeking advice from an accountant to discover if you should transition your business to be taxed as a Scorp.
One of the major benefits of this tax designation includes tax advantages that you might not have been able use before.
3) All Your Money Can Be Ran Through Your Personal Bank Account
One of the biggest mistakes I see small business owners make is running the money earned from their business through their personal accounts.
If you have an LLC and choose to run all your money through a personal bank account, you are setting yourself up for significant financial risks because this is known as commingling funds. Commingling of funds or assets is legally a breach of trust, making it hard to determine which funds and/or assets belong to your company and which ones belong to you personally.
In addition, by choosing to solely use your personal bank account, you defeat the purpose of a separate business entity. For example, if something happens and you can't prove you didn't treat your personal finances differently from your businesses, aka commingling funds, you wouldn't get the benefits and protection of having a separate business entity that an LLC provides.
So, it's necessary to separate your funds to eliminate financial risks once you take that step for your business of becoming an LLC.
4) LLC Formation Is Hard and Expensive
Many business owners put forming an LLC on the backburner because of the perception being “it’s hard and expensive.”
If you are a single-member LLC, meaning you are the only owner, you can actually do the business formation process yourself. It is pretty easy and straightforward and can be done online on your state’s secretary of state website.
However, if you don’t have the time to do this, it’s essential to rely on experts to lay down the foundations for you to secure the success of your business. It’s important to know that you have unlimited resources such as myself to depend on to secure your business.
5) Operating Agreements Are Not Necessary
Last but not least, we must debunk the idea that operating agreements are not necessary. If you were running a partnership and created a business entity like an LLC, operating contracts allow you to outline things like how each member gets paid.
If a member in your business no longer wants to be involved in the industry, it’s important to outline how to move forward to ensure a smooth transition on the business formation front. Disregarding operation agreements leaves you, members of your business, and the foundations of your business at risk.
By outlining how you plan to run your business with others, you minimize mishaps and misunderstandings.
As a new business owner, it’s essential to know that these myths are inaccurate, and believing in them can put you and your business success at significant risks. Unfortunately, women are not typically shown the ropes when it comes to the legalities of creating a business. It’s my priority to ensure that you have the knowledge, tools, and resources to build your empire.
About the author
I’m an attorney now, but I started out as a hairstylist… who didn’t even use client contracts or trademark my logo because I didn’t know any better. Years later, I finished law school myself… and it wasn’t until I started working as an attorney that I realized just how legally vulnerable so many beauty professionals are. Ever since, I’ve devoted my career to helping ambitious beautypreneurs secure their bag and set their businesses up in style.