Three Key Mistakes to Avoid While Setting Up an LLC

Posted on

Many small business owners will choose to structure their new business as a limited liability company (LLC). The LLC is a business structure that combines the pass-through taxation of a partnership or sole proprietorship with the limited liability of a corporation. LLCs share many of the same qualities as an S-Corp or C-Corp while enjoying more flexibility and requiring less paperwork.

Eager to start business owners will often jump right in with forming their business entity even if they aren’t exactly sure how to form an LLC. Before rushing into LLC formation, business owners need to make sure that they don’t make the following costly mistakes.         

Commingling funds

When starting a business, it’s very important that you separate your personal funds from your business funds. If you mix your personal and business funds in one bank account, that is considered comingling of funds. Once you comingle funds, it is hard to prove that your LLC is a separate entity.

Establish a separate business bank account so that your personal assets are not co-mingled with business funds. Banks may also require an Employer Identification Number (EIN) to open a business checking account. Even if you are the sole member of the LLC, it is still important to have a business bank account. Anything that the business purchases is considered a business expense should be paid for with the business account.   

Your business name

Your business name is important because it’s the first thing people will know about the business and the brand. Many new business owners form their LLC with only one business name in mind. But what happens if that business name is already in use in the state where you are forming your LLC? Be prepared with a list of back up names in cases your name is not available.

The name you choose for your business must be different than the name of any other business entity registered to do business in your state of incorporation. If you’re not sure if the name is available, many states have an online search tool that allows you to check for similar business names in that state. Spend the necessary time to not only come up with a few memorable names for your business but also to search online to see if others in your industry are using the same name.

Forming Your LLC in the Wrong State

The last mistake you’ll want to avoid with setting up an LLC is forming it in the wrong state. Many business owners incorporate or form their LLC in the state where their company intends to conduct the majority of its business. However, in deciding where to form a business, there are many factors to consider, such as the cost of formation, tax laws, and general laws governing the actions and liabilities of the LLC or corporation within each state.

There are many states that are popular for incorporation such as Delaware, Nevada, and Wyoming. Delaware is popular for its flexible and pro-business statutes. Nevada, on the other hand, is popular for its asset protection laws and lack of franchise taxes and personal income taxes. While Wyoming is a popular choice for its low filing fees.  

However, these benefits are usually more of an advantage to larger companies. If your business will be a small operation, form your LLC in the state where your business has a physical presence. If you decide to form an LLC in a state outside of where your business is located, you’ll have to pay extra fees to operate as a ‘foreign entity’ in your own state, and you’ll also have to appoint a registered agent in the state. Otherwise, you’ll be dealing with too many hassles and fees for operating out-of-state.

Now that you know what mistakes to avoid, you’ll be able to form your LLC with ease and less frustration.