Like many countries around the globe, the United States allows owners and managers of small businesses to form a limited liability company (LLC) as a preferred company type.
Most entrepreneurs appreciate the limited liability company for the ease of formation and operation, the available options for company structuring, operational liability coverage, and unique taxation attachment for business entities.
No matter whether you live in the US or hail from a foreign country, you can appreciate the fact that an LLC will allow you to enhance your image and protect your other possessions.
But, the reality is that a lot of business people who try to establish a new LLC go off the tracks. They, for instance, underestimate complex issues that can influence your level of success. The reality is that an LLC is not simply a form that you fill in. There is a level of strategy that must be involved along with a clear compliance to state and federal regulations.
This paper will discuss the reasons for not establishing an LLC, the nine most frequent mistakes and how entrepreneurs can avoid them.
1. Not Researching the Right State for Formation
Selecting the formation state is without a doubt the most critical choice you will make. Most first timers in business form LLC in Delaware, Wyoming, and Nevada, simply because they are called business friendly states. They never wonder if these states are suitable for them.
- If you are a U.S. resident (business scenario): By law, you are supposed to conduct your primary business activities at the location of the LLC. For example, if you are a resident of California and are doing business as a coffee shop there, going to Wyoming will not cut costs. You will have to register as a foreign LLC and pay additional fees.
- If you live outside the U.S. (business scenario): For international entrepreneurs, states like Wyoming, Delaware, and New Mexico are beneficial due to their privacy and ease of compliance, and low annual fees.
Why this matters: Failing at the primary step of decision making due to a lack of information can comply compliance and inflate costs due to tax burdens.
How to avoid it: Research the pros and cons of each state. Focus on the location of your potential customers, the location of your business activities, and your long-term plans.
2. Picking a Business Name That is Too Generic
One of the most valued intangible assets of the business is the name of the LLC. However, many entrepreneurs make the error of not properly branding themselves and not checking the name for availability.
Some common errors include:
- Naming the business as something which is already taken within the states primary LLC register.
- Ignoring the U.S. Patent and Trademark Office, and assuming the name is not trademarked.
- Choosing a name for a company that does not align with the product offered and that is difficult to pronounce and understand is a mistake.
- Forgetting to check to see if the domain name and social media user names have been taken is another mistake.
Why this is important is that a name is too similar to another or too close to a name that is trademarked. Lawsuits could be initiated or rebranding could be necessary which is an extremely costly mistake.
How to avoid it:
- Run a state name availability search.
- Looking through the trademarked companies on the URL.
- Social media and domain name availability.
- Pick a name which shows your determine values regarding brand and growth.
3. Not having an Operating Agreement Drafted
Not all states may prescribe an operating agreement. However, operating without one comes with a lot of risks.
An operating agreement will strategically define how the LLC is managed. This will include:
- Ownership percentages and member contributions
- Distributing the profits and losses of the LLC.
- Rules for voting and making important decisions.
- How members will be added or removed.
- Rules that will apply to a member that chooses to leave or is deceased.
Why this is important is that absent from the operating agreement, the LLC is governed by the state. This may not be in your best interests. A member could be in a state that mandates all profits be shared equally. This could lead to a lot of unhappiness if one member made a bigger investment.
How to avoid it: Avoid and mitigate disputes and ineffective structures by creating an operating agreement from the outset, even when the company has one member. They can also improve liability insurance’s protective and plaintiff-proof functions.
4. Altering Business and Personal Funds
Efficiency is the primary reason why many entrepreneurs start their business activities from their personal bank accounts. This is a very severe error.
Why this matters:
- Your personal assets are exposed to loss as a result of the reckless assumption that you are a sole proprietorship.
- Accounting and taxation become far more sophisticated.
- You stand to lose the liability protection the court grants, if you are found to have treated your LLC as a disregarded entity.
How to avoid it:
- Apply to the IRS for an Employer Identification Number.
- Open a business bank account.
- For business purchases, use personal credit cards.
- Thoroughly document all revenues and expenditures.
5. Underestimating Tax Obligations
There is flexibility that can be found with LLCs when running a business, but it is this very freedom that takes unprepared business people by surprise when it comes to taxation.
Common tax misconceptions include:
- The assumption that LLCs do not pay any taxes.
- Self-employment taxes are oftentimes ignored.
- Unresolved matters from previous quarters.
- Using inappropriate tax classification (i.e. an LLC that has not elected to become an S-Corporation.)
Why this matters: Poor management of taxes can result in penalties from the IRS, unanticipated invoices, as well as cashflow insufficiencies.
How to avoid it:
- Consult a tax professional before filing your LLC.
- Learn how federal, state, and local taxes apply to your industry.
- Understand pass-through taxation vs. corporate taxation.
- Use accounting software or hire a bookkeeper to stay compliant.
6. Ignoring Required Permits and Licenses
The legality that an LLC provides is not a reason to assume that an LLC can start doing business freely. There is a range of business activities that may require:
- A federal business license (for the sale of certain regulated products, or operating certain regulated activities like aviation).
- A state business license (for certain professions such as law, accounting, or the provision of medical services).
- Local licenses (including, but not limited to, food service licenses, and permits for the collection of municipal sales tax of certain retail operations or for zoning).
Why this matters: The absence of certain permits, or operating within a certain jurisdiction without the proper legal documents, may attract penalties such as fines, restrictions of the business activities, or legal action.
How to avoid it: Look at the federal, state and local requirements for licenses and permits before the business is operational.
7. Neglecting the Protection of Intellectual Property
The assets of a business that are in the form of a name, logo and creative works are critical, and The failure to protect them is an oversight that most budding entrepreneurs are likely to make.
Common mistakes include:
- Neglecting to trademark a business or registered the logo associated with it.
- Failing to register a domain name associated with the business.
- Neglecting original content copyrighting ( blogs, videos, courses, etc.).
How does this impact your brand: Competitors can siphon your brand equity, resulting in expensive rebranding or lawsuits.
How to do this:
- Apply for a trademark with the USPTO.
- Purchase the domain names and corresponding social media usernames.
- Consider copyrighting any original works.
- Explore patents if you are working on a new product.
8. Ignoring the Follow-Up Compliance Obligations
The initial setup of the LLC may seem to many entrepreneurs as the end of the matter. However, states impose ongoing obligations with respect to the LLC.
- Ongoing requirements may include:
- Filing annual or biennial reports.
- Payment of franchise tax or annual state minimum tax.
- Keeping a registered agent.
- Alter the records for the LLC if there is a change in ownership.
What is the impact on your brand: Failing to meet deadlines imposed for the payment of the obligations will result in late fees, fines, or even the administrative dissolution of the LLC.
How to do this:
- Obtain a compliance calendar.
- Hire a registered agent service (we can help with this at Bizstartz).
- Establish deadlines for tax payment and annual filings.
9. The Overestimation of Individual Competence
Considering the possibility of filing the LLC and having the supporting documents prepared yourself, a lot of people do not appreciate the gravity of the situation in the matter of compliance with the tax and licensing.
Why is this an important matter:
- There are delays in the approval of your entity if any documents are filed incorrectly.
- Infringement of the imposed compliance requirements can result in penalties and fines.
- Without assistance, you might not maximize savings on your taxes.
What you can do to prevent this:
- Engage with Certified Mail and Taxation LLC or similar firms regarding LLC formation, compliance, and taxation.
- Utilize providers, such as Bizstartz, for LLC Registration, EIN, BOI Filing, Registered Agent services, and recurring compliance.
Final Thoughts
One of the first and most important steps in starting your own business is forming an LLC. Methinks it is a no-brainer. If, however, you go about it the wrong way, it is a complete waste of time. First understand these nine mistakes in order to save time and money, protect your self and assets and position your business for any future ventures.
You can start right and take the help of Bizstartz. LLC Formation, EIN, Registered agents, BOI filing, Bank Account Set Up and much more is provided by Bizstartz. Their services are tailor made for local and international clients.
FAQs on LLC Formation
1. Do I need to physically reside in the U.S to be able to form an LLC?
No, you do not. Bizstartz helps international clients with the formation of LLCs in Wyoming and Delaware which do not require physical presence.
2. How much does an LLC formation cost?
This depends on the state. The cost falls anywhere between $50 and $500, not including additional recurring yearly fees. Fees for registered agents, EIN, or BOI filing, come at an additional, optional cost.
3. Is it necessary to hire a lawyer for LLC formation?
No. The steps can be simplified without employing a lawyer by getting help from an LLC service provider like Bizstartz.
4. Can one person own an LLC?
It is legal for one person to own an LLC. One-member LLCs are relatively common and provide the same liability protection as an LLC with two or more members.
5. How long does it take to form an LLC?
Each state has its approval times with some states taking a few days and others taking weeks. On average, approval times are a few days to several weeks. Bizstartz helps expedite the approval process by certifying that all documentation is collected and filed in the proper order.
