9 corporation formation mistakes that can derail your plans

The mistakes that damage corporations are not filing errors. Filing errors get bounced by the office and fixed the same week. The costly ones are the omissions that nobody notices for years, because a corporation with no record still looks exactly like a corporation with a good one until somebody asks.

Ten of them, in the order they tend to appear.

What to take away

• The most expensive mistakes are made after the filing, in the governance that nobody has time for.
• A share issued in an email, a decision made without a resolution, and a bank account opened before the board authorized anyone are the three that surface in every later dispute.
• Anything to do with tax classification is a mistake of doing it alone. The conditions are the IRS's and the fit is an accountant's judgment.
• A corporation you will not maintain is worse than a simpler form you will.

1. Treating the filing as the finish

The certificate arrives and the work is assumed to be done. In fact the corporation at that moment has no bylaws, no directors properly appointed, no shares issued, and nobody authorized to sign anything. Every one of those is a step that follows the filing, and skipping them leaves an entity that exists but cannot demonstrate who may act for it.

2. Promising equity instead of issuing it

Somebody is told they have ten percent. No shares are issued, no register is updated, nothing is approved by the board. Two years later the promise is either a dispute or a gift with tax consequences nobody planned. Ownership is a register entry, not a sentence in a message.

3. Confusing authorized shares with issued shares

The formation document names a number that may be issued. That is not the number that exists, and treating the two as the same produces a share register that does not reconcile with anything. It is one of the first things a buyer or an investor checks, and it is tedious to unwind years later.

4. No record of decisions

Directors decide, and nobody writes it down. The absence is invisible until a bank, a lender, a claimant or a buyer asks who authorized something. A minute written on the day is a fact. A minute written two years later, from memory, is an argument.

5. Mixing money

The corporation's account pays a personal bill because it was convenient. This is the behavior most often pointed at when someone argues that a corporation and its owner were never really separate, and it is entirely avoidable. The SBA's description of what a business account is for, in its guidance on opening a business bank account, is a fair statement of the discipline.

6. Signing in your own name

Contracts signed without stating the corporation and the capacity you sign in. The signature block should name the corporation, then you, then your office. It takes one extra line and it is the difference between the corporation being bound and you being bound.

7. Choosing a tax classification from a comparison table

An election is made because a video, a forum or a table said it saves money. The eligibility conditions were not checked, the timing was not checked, and the consequences for how the owner is paid were not modeled. The conditions live with the IRS, set out in its pages on S corporation eligibility, and whether any of it fits your numbers is an accountant's answer, not a page's.

8. Letting the public record go stale

The address changes, the officers change, the person who receives legal papers moves away, and the filing still says what it said on day one. The consequence is not usually a fine. It is that something important gets delivered to a place nobody checks. Which entries need updating and when is the subject of keeping the filing current, and who that contact is meant to be is covered in the agent of record.

9. Running two states without noticing

Work is done, or people are hired, in a state where the corporation is not registered. Nobody in the business thinks of it as an expansion, because it happened one hire at a time. Each state defines for itself what counts as doing business there, and the way to find that definition is described in dealing with the filing office.

10. Abandoning rather than closing

The business stops trading and everyone walks away. The corporation does not stop existing because it stopped trading. Recurring obligations continue until it is properly wound up, and the IRS keeps its own list of the federal steps under closing a business. Walking away is the most expensive way to end one, because the cost arrives years later attached to somebody's name.

What the ten have in common

Eight of the ten are omissions rather than actions. That is the difficulty: nothing warns you, no letter arrives, and the entity keeps looking healthy. The only reliable defense is a scheduled review that asks the boring questions, and the honest test of whether a corporation suits you is whether you will keep that appointment. If the answer is no, the comparison in choosing a form is worth revisiting before the machinery is built.

Common questions

Which one is most common?

Number four, by a distance. Almost nobody writes minutes for a small corporation, and almost everybody wishes they had the first time something is contested.

Can these be repaired later?

Most of them, at increasing cost. Records can be reconstructed and ratified, registers can be corrected, filings can be updated. What cannot be repaired is a document that had to exist at a particular moment, and buyers and investors do notice the difference.

Is any of this different for a single-shareholder corporation?

The disputes go away. The evidence problem gets worse, because there is nobody to corroborate what was decided. If anything, the record matters more.

How often should the review happen?

Once a year covers most of it, with an extra look whenever ownership, officers, address or states of operation change. Those four events cause most of the drift.

Does a filing service prevent any of these?

It prevents filing errors. Nine of the ten above happen after the filing and outside anything a service is doing for you, and no service takes responsibility for them.