Top Mistakes When Starting An LLC

Forming an LLC can be a great way to get your business started, and it's one of the most common business entities used by small business owners. It offers limited liability protection for the owner or owners, is flexible, has tax advantages, can have multiple owners, and various other benefits. However, beware, there are several common mistakes that are made when it comes to forming and running an LLC that outweigh or negate all the potential benefits. Here are the biggest mistakes to watch out for with your LLC to ensure the success of your business: 

  1. Failing to create an operating agreement. Think of an operating agreement as the constitution or founding document of your LLC. It lays out the roles, responsibilities, rule, structure and other important aspects of governing and running your LLC. Without an operating agreement you're going to be locked into your states default laws or rules regarding the operations of the company. These may not be advantages or in your best interest, and certainly don't take into consideration the unique aspects of your business. You'll want to align your operating agreement with how the owners want the company. run and what their vision for it is. Here's a few reasons why the operating agreement is a crucial step in setting up your LLC:
    1. You need to clarify ownership roles. The operating agreement specifies who the owners (called "members" in an LLC) are, how much of the company they own, and what their roles and responsibilities are when it comes to the company. 
    2. Decision making is important and should be addressed upfront; the operating agreement is the opportunity to do this at the start. Lay out how major decisions are going to be made, think about what will happen if there is a dispute or disagreement and how the members will settle decision making issue. 
    3. I mentioned above that LLC's are flexible, and one of those ways is in terms of management structure. Are you a member-managed or manager-managed LLC, and how will the day to day management of the company be handled? All things you want to have thought about before an issue arises.
    4. You'll want to make sure that you're maintaining your personal limited liability and protecting that major benefit of an LLC. A well drafted operating agreement helps strengthen the separation between your personal assets and the LLC liabilities, which is a crucial component of maintaining the limited liability protection. 
    5. How are you going to handle a situation where an owner wants to exit the company, for whatever reason, or dies? You don't want to have to figure that out when it happens, or find yourself in business with a spouse or child of an owner when you could have avoided it. Use the operating agreement to plan in advance what happens when some dies, retires, becomes disabled, gets a divorce, or simply wants out. If you don't think these things out in advance the departure of a member, for whatever reason, could lead to serious complications that may have lasting impacts on the business. 
    6. How are profits and losses going to be allocated? There are default provisions for how this could go, but do those work for your company? It could be hard to change the way that works down the road, so it's always better to address those decisions up front and record them properly in the operating agreement. 
  2. Mixing personal and business finances. Maybe the easiest way to find yourself in personal trouble or personally liable for what happens with the LLC is to mix your personal money and finances with those of the business. Combining them can lead to "piercing the corporate veil" which means a court can disregard your LLC protection and expose your personal assets to business liabilities. It's essential to maintain a clear financial separation between the LLC and your personal finances. There may be tax implications as well for co-mingling the finances; the IRS may question business deductions and other issues. Here are some best practices to separate your finances:
    1. Open a business bank account and use the account exclusively for business transactions.
    2. If you're going to make purchases using a credit card, get a separate company credit card. It will allow you to track everything on it as a business expenses and helps reinforce the separation of finances. 
    3. Do not buy things for yourself, family or otherwise personally with the company cards or money. Vice versa, don't buy things for the business with your personal cards or money. The business accounts aren't your personal slush funds. 
  3. Neglecting compliance requirements. There is a common misconception that all you need to do is register an LLC with the state and you're all set, there's no way anyone will ever get through that and hold you personally liable for anything the company does. This is not the case, and don't fall into that trap. Compliance with state and local regulations is an ongoing responsibility for LLC owners. Failure to abide by compliance requirements can lead to legal troubles, fines and potentially dissolution of your LLC. Key compliance requirements may include:
    1. Annual filing with the state and annual reports, along with any fees associated with keeping the LLC in good standing. There are typically deadlines on when these things must be filed, so make sure you're not late or you could face some, or all, of the consequences mentioned above. 
    2. Licensing and permitting is something that most businesses will need to stay on top of. Many localities require a business license in order to operate there, and numerous industries are regulated by some regulatory body on the state level. You need to understand, abide by and stay current with all of that in order to avoid issues. 
    3. Make sure you know who your registered agent is and that they are keeping you updated on any official notice they receive regarding the company. A registerd agent is the individual or company designated by the LLC to receive, or be served, notices, government correspondence and compliance related documents on behalf of the company. The registered agent can be a member, your attorney or a 3rd party company that offers that services among other options. If they aren't doing their job, you'll find yourself in a bad situation. 
    4. You may have formalities in your operating agreement or dictated by state statute, such as holding meetings or authorizing certain company acts. Regardless, it's good to hold, and document, an annual meeting, authorize certain company acts in writing and document major company decisions to show that you have taken the steps to separate the owners and the company. 
  4. Ignoring proper record-keeping. This plays a little bit into the compliance and financial portions mentioned above. Good record keeping is essential for the financial health and legal compliance of your LLC. In terms of financial management, it's clear and organized financial records that allow you to monitor your cash flow, track expenses, and identify areas for improvement in your business operations. Tax compliance will require adequate records for proper filings to minimize the risks of audits or disputes with tax authorities. You'll want to make sure you're protected legally through records and documentation as well - contracts, operating agreement, and other documents help limit the changes of a dispute or lawsuit. Additionally, detailed records will be valuable when seeking financing, attracting investors or selling your business. 

If you have questions about setting up, maintaining and protecting an LLC, contact us for a free consultation. 

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