In a nutshell, you may have to pay a lot more taxes if you choose the wrong entity. Also, investors might not be as interested in your company because of reasons like -- they might have to file a bunch more state tax returns if you pick the wrong entity.
In most cases, it’s not going to have a material impact on your business. But sometimes you hurt yourself by having to pay high setup and annual fees in two states rather than one.
It’s not a huge deal. But, if you’re starting your business on a microscopic budget, every dollar counts. And if you just have this business as a hobby with no liability risk, losing those extra dollars can be pointless.
Besides the possibility of tax concerns, choosing the wrong entity can cause management issues, make it harder for people to invest in your company, cause complications when trying to issue equity to other owners, and a myriad of other reasons.
You could lose all your liability protection. To keep that protection, you have to follow certain procedures, one of them being a requirement to keep your business finances separate from your personal ones.
This mistake could cost you your entire value of your business. Imagine if a co-founder or contractor created the IP you thought your company owned. Then you got in a dispute and found out they owned everything, the company owned nothing.
Without an entity, you could incur personal liability that could otherwise be avoided. You won’t be able to “pass on” your business if something happened to you. And your business won’t get as much credibility as it deserves.
