Demystifying 4 Myths about Business Entities

Demystifying 4 Myths about Business Entities

“Just set up an LLC . . .” These are famous last words in the business world.

Setting up a business entity structure might not be the most exciting aspect of starting your own business. However, as a new, or even an experienced, business owner, there can be unexpected surprises but protecting your business should not be one of them. This essential step will not only help protect you legally in the long run but also possibly help improve your tax situation. We all want to pay fewer taxes if at all possible, right? 

There are all sorts of myths (rumors) about how business entities should be set up or structured. You don’t need uncertainty and confusion in your business. How can you best protect yourself from a business and personal perspective? Here are 4 myths that you should NOT believe. 

MYTH #1 – Small Businesses Don’t Need a Business Entity

It is possible to set up a business without a business entity, but this puts you (personally) and your business at risk. Shoes can be worn without socks, but don’t you want to protect your feet and help prolong the fresh scent of your footwear? The sock will help protect and absorb the scent from your feet while preserving the interior part of the shoe from being worn down. This is similar to your business (with less odor). Without a proper business entity, your personal and professional life can be seen as one which makes you vulnerable to lawsuits and potentially serious debt. 

For example, if your company is structured as a sole proprietorship or general partnership and you go out of business, business creditors would come after your personal assets to pay off your business debts. The same is true if your business is ever sued.

By structuring your business as a limited liability company (LLC) or a corporation, you can shield your personal assets from liabilities incurred by your business. When properly set up and maintained, such structures establish your company as a separate legal entity distinct from you as an individual, preventing you from being held personally liable for the company’s debts or legal disputes.

The best way to avoid such pitfalls is to set it up properly from the start. Give us a call at (954) 237-4011 or click here to schedule an intro call to find out the best structure for your business regardless of the size of your business. 

MYTH #2: There’s no need to set up an entity for your business until it’s profitable.

We all drag our feet with important tasks that should be at the top of our list such as reviewing our taxes before Aprilwink, wink. Setting up your business entity as soon as possible should be at the top of your list. It is easy to procrastinate but if you are already earning revenue, or even better making a profit, you should have your business set up to work best for you from the beginning. This is true not only because liability can arise well before you are profitable, but also because incorporating your business is likely to lead to even more income and profit.

For example, having the proper entity in place in the early stages allows you to receive credit in your business name, raise money from investors, and even possibly get some tax credits. The act of incorporating itself shows that you take your company seriously, which can inspire increased interest from customers, vendors, and financial backers. 

MYTH #3 – A corporate entity offers absolute liability protection.

When properly created and maintained, entities like an LLC or corporation can shield your personal assets from creditors, lawsuits, and other liabilities incurred by your business. However, the protection afforded by these entities is not absolute.

But there are some circumstances in which a creditor can come after your personal assets to settle a claim against your business. When this happens, it’s known as “piercing the corporate veil.” While the corporate veil can be pierced if you commit fraud or negligence, in most cases, it happens due to innocent mistakes. These errors can include inadvertently mixing your personal and business finances, personally signing off on a business loan, or failing to abide by administrative formalities. Indeed, co-mingling of personal and business funds is by far the #1 way the corporate veil is pierced.

Are you looking for help to keep up with the corporate formalities or just looking to review what you already have in place? We are happy to take a peek over documents or chat with you about where you are and where you could be with your business. Feel free to email us at

Don’t forget about suitable business insurance, which should always be your first line of defense to help shelter your business and safeguard your personal liability.  

MYTH#4 – Incorporating in Delaware or Nevada is always best.

You may have been told that establishing your corporate entity in Delaware or Nevada is your best bet for tax purposes. But for most businesses, incorporating in these states is completely unnecessary—and it may even cost your company in the long run.

Although many companies do incorporate in these states, it’s for very specific reasons, such as to raise investment capital or take advantage of favorable securities laws to go public. However, unless you are actually doing business in these two states, your company isn’t going to receive any significant tax benefits or additional asset protection by incorporating there. While Nevada and Delaware don’t have state personal- or corporate-income taxes, that doesn’t mean your business will avoid state-level taxes entirely. The fact is, if you are a resident of, or doing business in, a state that has state income taxes, you must still pay those taxes, even if you are incorporated elsewhere.

Plus, if you incorporate outside of the state where you live or conduct business, you must file as a foreign registrant in your home state. Such double filings can result in extra filing fees and administrative expenses that make out-of-state incorporation financially unfeasible. However, there are instances where it might make sense to set up your business entity in states like Delaware or Nevada, or even Wyoming or South Dakota. Contact us, at (954) 237-4011 or email us at to schedule an intro call for advice on the best location for establishing your entity and for support in navigating the requirements for maintaining the entity in each state you do business in.

BONUS: Myth #5 – I already have an S Corp

This one drives me up a wall every time I hear it. An S-corp is a tax structure, not a legal one. You can have an LLC or a corporation that is taxed as an S-corp. Should you elect S-corp status? This is a conversation best had with your accountant on the line too.

We Can Help

Setting up the right entity for your business isn’t something you should take lightly or try to do-it-yourself (DIY) . We will offer you trusted advice on the legal entity that’s most advantageous for your business, while also ensuring that your entity is properly set up, with all  the necessary agreements and other resources in place.