6 Mistakes To Avoid When Forming An LLC

If you are one of the half a million entrepreneurs launching a business this year, you may be excited and anxious at the same time. You have ambitious goals set for your future success, but you need to navigate the complexities of forming your business to reach them.

Setting up your LLC to maximize the benefits and protections it offers your company is crucial from the very beginning. Avoid these top six mistakes when forming your LLC and you kick start this new endeavor the right way.

Creating the Wrong Business Structure

You know that LLC stands for limited liability company, but did you know that there are several versions of this entity structure to choose from? While the most popular is the single-member LLC, a multi-member or S-Corp formation might be better if you have partners or want to be eligible for specific tax breaks. 

As the name suggests, a single-member involves one individual, while a multi-member LLC has more than one member. S-Corp entities receive the protections of a limited liability company but also enjoy a different tax schedule for corporations with less than 100 shareholders. When forming an LLC, several additional structures are available to choose from, but these three are the most common. 

Determining which is best for your business goals can be challenging without professional guidance. So, consult with a knowledgeable commercial law attorney or accountant familiar with these entities. 

Forming Your Business in the Wrong State

You may have been told that you can incorporate your business in any state you wish, allowing you to take advantage of better tax or legal benefits than where you live. While this is accurate, what you aren’t hearing discussed is the additional red tape you will need to get through to do this.

Before you opt to go to business-friendly states like Nevada or Delaware, make sure the costs of operating in one state while incorporated in another make financial sense. Larger businesses and corporations are typically the ones to take this step since their revenue is significant. For instance, if you form an LLC in Texas but operate primarily in California, you’ll still need to register as a foreign entity in California and pay state taxes in both states.

However, if you’re a small startup without a lot of capital to work with, this could be a financial burden that takes a long time to benefit your goals.  

Not Carrying Adequate Business Insurance

A serious miscalculation that causes brand new businesses to fail is not having sufficient LLC insurance to protect against risk. The liabilities your company will face every day will depend on your industry, but if you aren’t prepared, the fallout could be devastating. 

Legal disputes, property damage, workplace accidents, customer damage claims, and even Mother Nature threaten the longevity of your company. Several insurance policies can protect against risks unique to your industry:

• General Liability Insurance 
• Commercial Property Insurance
• Business Interruption Insurance
• Professional Liability Insurance
• Workers’ Compensation Insurance
• Data Breach Insurance
• Commercial Auto Insurance

Keep in mind that it’s also possible that you’re required to carry one of these policies due to industry and/or government regulations, such as workers’ comp coverage. This is why you must do your research and plan ahead when creating an LLC.

Failing to Be Compliant 

Once your LLC is set up, your work isn’t done. In fact, you will have the ongoing responsibility of keeping it legally compliant with any state and federal laws governing it. Failing to meet the requirements for your business to operate legally can mean putting your personal assets at risk in some situations and potentially being permanently shut down. 

Typical expectations you will need to meet to meet compliance rules include: 

• Use your business name in all official documents.
• Send in a yearly report to your state covering your operations.
• Follow all legal requirements to amend your LLC when making changes to it. 
• Do not blend your business assets with your personal finances. 

To get specifics on what you need to do to meet your state LLC compliance rules, contact your Secretary of State. 

Operating Without Required Licensing

Most local, state, and federal government agencies that govern LLCs have specific licensing requirements. What you will need depends on your industry and the business you conduct. For example, opening a corner market will likely need an occupancy permit, health department certificate, and a retail license. Convenience stores that also sell alcohol will need liquor permits, too. As you can see, this can get complicated, and if you don’t have the necessary licensing, you could face serious consequences.  

Fortunately, most government websites have pages dedicated to small businesses and provide a wealth of resources to figure out what is needed to operate legally.

Not Having Legal Resources

With the myriad of sites boasting how easy it is to form your LLC without any legal assistance, it may be tempting to handle the process yourself. Single-member LLCs are straightforward since you don’t have the complication of shareholders and likely want to incorporate them in your own state. However, this doesn’t mean legal mistakes can’t happen.  

Suppose you are a multi-partnered limited liability company. If you intend to use an S-Corp designation or want to open your business in several states, having legal support is well worth the cost.  

The Takeaway 

Beginning your LLC starts with careful planning and research to ensure its formation occurs without any serious errors that complicate things later. Avoiding these unnecessary mistakes means you can look forward to the years ahead of achieving your goals of building a successful business.