7 Common Mistakes When Incorporating a Business

Shivani Sinha | 21-Mar-2016

Are you planning to incorporate your own business in India? Make note of these and be sure you avoid these simple mistakes which entrepreneurs are not aware of while they start up with new business plans. Here are some common mistakes while incorporating a LLP or PVT LTD company-

1. Do not want to take the risk of starting a small business: Some business owners fear the risk of setting up a small business. No business is small, go ahead and incorporate your own Private Limited or LLP company and business owners can anytime separate their personal assets from the business in case of small business. There is also lesser risk of losses in case of a small business. 

2. Lack of written agreements: Lack of signatures and agreements between parties is illegal. Lack of founder’s signature is illegal which also happened in the case of Facebook. An agreement or a contract is very important between the parties liable to start up a partnership or to start a business. This is a legal entity and an agreement reduces the risk in case of complete bankruptcy, reduces risks and ensures liability in case of losses.
Not just that, the employees that you will hire must also sign a contract and such documents must be preserved. These confidentiality agreements are important in order to make sure that nobody steals your idea or that your employees don't begin to work for any other company simultaneously. Everything that your company’s policies include, right from billing to marketing, all of it should be documented and signed by the company’s employees.

3. Agreement on a vesting period with stockholders: The stockholders who have your stock issued on their name are practically owners of part of your company’s shares. You cannot let them go before the vesting period and before they have given your company what was asked. If such situations arise, where the stockholders exit before the vesting period, you will not only have given part of your company’s share for free but also, the profits that you might have incurred because of it. It is therefore, a necessity that there is a deal made on the vesting period so that the stockholders are enforced to stay with your company for the decided period of time before claiming ownership or financial rights.

4. Neglecting payroll taxes: It is illegal to skip your payroll taxes which can arouse the IRS to come after other company assets as well. Tax returns must be payable by any business otherwise your business will be marked and not recognized as Private Limited or LLP company by your respective state. So, it is mandatory that you file your tax return, how much ever be your profits.

5. Incorporating your business when you are working for someone else: In case you are already working for someone else and you incorporate your own, is a big mistake. In case you fail to follow corporate formalities it is also illegal for your business.  Also, using another company’s property to start up a new venture can be a major IP issue and lease and disclosure of Intellectual Property of another company.
This is the case when the business plan of your business and the company you work for are the same. If your employer did its due diligence when writing your employment contract, the agreement is declared to be incomplete. This makes your business subject to lawsuit and is vulnerable. Also, if you used any of your employer’s intellectual property, resources or confidential information — even just once — your employer can claim at your business legally for protection of intellectual property act, any resources of your employer - employer’s computers, internet, or phones to work on your own business, and document distinct boundaries between any businesses as legal claim can be sued in either cases.

6. Maintain your article of association and other documents: Maintaining articles is very important. You complete official documents in different formats which are different catering to different states, Documentation including shareholders, corporate structure all should be according to the government and legal procedures. Also keep the minutes of any minutes of meeting very accurate.

7. Failing to research corporate entities: Choose the corporate entity which suits you and your business the most. Get the advice of attorney and business advisors to come up with best business plans and tax structures as the tax structure for different corporate entities is different. Having a Private Limited company is advantageous as one can separate personal assets anytime from your business. Form a Private Limited company for your business today.

When a Private Limited or LLP company is not managed legally the government may not ascertain the Private Limited or LLP company as an independent entity and if it finds business is not separate the business owner will not be protected by the liability. His personal assets will be seized and business would be closed.
These mistakes when avoided, can lead to starting a business safe and secure in any location or zone of your business. So be an entrepreneur and start your own business in the right way and avoid these simple mistakes that can lead to a lawsuit against or failure of your business. Fagnum very well knows the worth of your business and so we try to make you come out of all the negative situations. Can you now list out the mistakes you ought to make while incorporating a business?

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of Fagnum.com. The writers are solely responsible for any claims arising out of the contents of this article.
About the Author
Shivani Sinha
A Master degree holder is a Content Developer and an SEO specialist. Having more than 6 years of experience into content development and marketing, she has contributed substantially in this arena. She is good at brainstorming and fast in writing crispy content, bold slogans, catchy captions and punchy one liners. Her stories are well researched and provide for an interesting read. She enjoys working in association with entrepreneurs while spearheading business launches providing marketing advice.