Forming a limited liability company (LLC) is an important step for business owners who are looking to protect their financial interests. However, there are some common mistakes that can be made along the way that can lead to serious problems down the line. Read on to learn more about the 7 most common mistakes made when creating an LLC and how to avoid them.
Failing to Draft a Comprehensive Operating Agreement
A comprehensive operating agreement for an LLC is an important document that outlines how the LLC will be managed and governed. This agreement should include information such as how decisions are made, the responsibilities of each member, and how profits will be distributed. Failing to draft a comprehensive operating agreement can lead to disputes among members and delays in achieving major business objectives, so it’s important to get this done early on.
It’s crucial to be clear and consistent when drafting an operating agreement. Setting expectations upfront allows everyone in the LLC to have a common understanding of their responsibilities, roles, and expectations. This type of document should also address the issue of capital contributions, ownership distributions, leadership structure, accounting policies, dissolution procedures, and other key areas related to running the business. Taking the time to draft a comprehensive operating agreement can represent an important step in protecting yourself as an LLC owner and preventing costly disputes later on.
Failing to draft a comprehensive operating agreement could lead to contentious disagreements among LLC members in the future. Without this document, there will be no standard procedure or protocol to refer to in the event of a disagreement, resulting in uncertain and complicated matters such as contributions and distributions. Moreover, an ambiguous or missing operating agreement can lead courts to make decisions on your behalf without considering all possibilities from a business’s point of view. By failing to take the time to draft a comprehensive operating agreement, entrepreneurs put themselves at risk for expensive legal disputes down the road.
A comprehensive operating agreement, customized to the needs of each particular business, is essential for entrepreneurs who are looking to create an LLC. This document should define how the company will be managed and clarify each individual member’s roles and rights. It should address all financial aspects of the business, such as contributions and distributions, as well as provide for dispute resolution procedures in case disagreements arise. Partnering with a qualified lawyer or business consultant can help you create an effective and customizable operating agreement that will best serve your unique LLC needs.
Without a comprehensive operating agreement, an LLC may find itself easily out of compliance with the law or subject to internal disputes as decisions must be made. Such internal disagreements may even cause significant monetary loss or costly and time-consuming resolution processes such as a lawsuit or other legal proceeding. Having a comprehensive operating agreement in place is invaluable for entrepreneurs looking to create an LLC, as it will help detangle potential misunderstandings and protect everyone involved in doing business with the company.
When creating an LLC, it is critical that members draft a comprehensive operating agreement to establish the internal governance rules of the company. This agreement will detail areas such as decision-making authority, capital contributions and allocations, financial contributions of members, distribution of profits and losses to members, dissolution proceedings, management oversight and duties, potential buyouts in the case of member termination or withdrawal, and anything else that the involved members deem important for setting forth expectations. Having clear terms laid out can help avoid conflicts concerning control of the business or how decisions are made and documented. Approving a written operating agreement can also secure all parties involved in doing business with the company.
Operating agreements are more important than most people realize as they set a framework for members to make business decisions while in agreement with each other and protect everyone from potential conflicts down the road. If an LLC does not have a proper operating agreement, state law may end up determining the terms of operation for the business. This means that if something is not specified within state law, or in the articles of organization, there will be no agreed upon definition or set of rules – making it very hard to resolve issues or disputes between members. To ensure effective functioning of one’s LLC and secure everyone who is a part of it, drafting and approving on an operating agreement should be near the top of one’s list when creating an LLC.
Not Checking Name Availability
Before forming an LLC, business owners must check if their desired company name is available. Business owners can usually do this online by searching state and federal records for the same or similar names. If a business offers services in multiple states, each needs to be checked separately as availability rules vary from one location to another. It’s important that the desired name is indeed available as it would require a process and fees to get another name approved later.
A common mistake LLC owners make when creating an LLC is not double checking that the desired name is indeed available. Even if a business owner consults with a lawyer or service to form the LLC, it is recommended to take 10 minutes and do some basic research for available names. Not doing so could lead to potential legal issues in the future. The good news is that some states now allow businesses to pay a fee and reserve a particular name for up to 120 days while the LLC registration process is being completed.
Checking the availability of a name is not difficult nor time consuming. One way to check for an LLC name availability is to search for similar types of businesses in your area. Often times, registered LLCs are filed under the county or state’s online record-keeping system with information about what business names have already been chosen and if any of those happen to match your desired name. Alternatively, searching records with the United States Patent and Trademark Office (USPTO) can help owners determine whether they should choose a different name or at least pick one that stands out from existing ones so as to avoid confusion among consumers.
Failing to check the availability of an LLC name in advance can lead to many legal headaches later on. If your preferred name is already taken by another business, registering a company under that moniker could cause you to face copyright infringement claims and other issues. Additionally, it may lead to expensive rebranding activities if the company wishes to keep using the same name without breaching someone’s rights. Ultimately, even just a few minutes spent searching for name availability can save owners a great deal of future trouble.
In order to settle on a suitable name, LLC owners should conduct a formal name search with the relevant government agencies in their state. For example, in some states this process can be easily completed online. If a given name is not available, it’s important to keep searching until you find an appropriate alternative that isn’t already taken by another business.
Unfortunately, many LLC owners don’t take the important step of checking name availability before registering their company. This is hugely problematic as organizations are only able to officially form an LLC with a unique name that hasn’t yet been claimed by another business. Therefore, it’s essential to ensure proper availability before moving forward with initial setup. This can save you from having to pay additional fees to register a new LLC name and could help you avoid any potential legal disputes that may occur if the same name has already been used in your state.
Neglecting to File the Articles of Organization with the State
To form an LLC, the first step is to research how to create an LLC in each state in which you intend to do business. This usually involves submitting articles of organization or a similar document required by the state government. The next step is filing those documents with the necessary authorities, such as the secretary of state, and paying associated filing fees. Neglecting this step can hamper the startup process and even lead to potential legal issues down the road.
In most states, the articles of organization must be filed within a certain period after the creation of the LLC. The paperwork can be lengthy and failing to properly fill it out can result in rejections of filing or delays in setting up an LLC. After filing with the secretary of state or similar office, business owners must typically also check local regulations for their LLC including obtaining business licenses and permits. Failing to do so can create additional legal problems that could have been avoided by researching local requirements prior to formation of an LLC.
Similarly, learning the specifics of LLC operations is also important. The business structure decides how profits are distributed to members and who is responsible for debts and other liabilities. Each state has laws governing LLCs in terms of accounting, filing taxes returns, and limits on the scope of the company under an LLC status. Understanding how an LLC operates before creating one can lessen those common mistakes for establishing these entities.
One mistake often made when creating an LLC is not filing the Articles of Organization with the state. This document provides a few essential types of information, including the address of the business and its registered agent. Additionally, filing this paperwork establishes proof that an LLC exists, which is critical for outsiders looking to initiate business relationships with a company. Without these documents, it can be difficult for third parties like banks or suppliers to trust an enterprise has been created properly.
Failing to file the Articles of Organization as soon as possible, especially if there is a delay between the time an LLC is created and when it begins operating, can lead to further problems. Depending on the state, businesses may incur fines for not filing their documents and will have to pay them before they can complete the process. Additionally, the LLC won’t be recognized legally until its paperwork is approved, meaning that any contracts or deals are likely null and void until everything has been cleared up. To ensure this problem doesn’t arise, take care of filing all necessary documents with the state shortly after creating an LLC.
The Articles of Organization are the main documents used to form an LLC and create a legal record in the state where it operates. This document is crucial for establishing your business as an LLC and could be requested later on if any disputes or issues arise involving taxes, contracts, or other points of contention. Without it, the LLC won’t be recognized legally, and any agreements made with customers or vendors before filing may not be valid since the LLC didn’t exist at that time. To ensure you have all bases covered after creating an LLC, make sure to file the Articles of Organization with your state as soon as possible.
Forgetting to Get an EIN from the IRS
Most LLCs will also need an Employer Identification Number (EIN), which is issued by the Internal Revenue Service (IRS). An EIN is required for filing business taxes and any other time a company interacts with the IRS. Without an EIN, most financial transactions such as opening a bank account or hiring workers are impossible. To get an EIN, owners must file Form SS-4 with the IRS and wait for it to be approved.
However, many new LLC owners forget to get an EIN until it’s too late. Without it, all business taxes need to be paid from a personal account, which can unnecessarily complicate the filing process and cause financial loss due to higher fees. To ensure smooth operations, LLC owners should acquire an EIN as soon as possible after forming their company so that they can open bank accounts and begin filing taxes right away.
An Employer Identification Number (EIN) is essential for any LLC. It’s used to identify the company for tax purposes and open business bank accounts. To get an EIN from the Internal Revenue Service, LLC owners must go through a simple online application process. This can be done in just a few minutes and requires very little information, such as the LLC name and address. Once an EIN is obtained, it should be used while opening business accounts and filing taxes to ensure that all funds are properly tracked and taxed accordingly.
Unfortunately, some LLC owners forget to get an EIN from the IRS. Without this identification number, they won’t be able to open business bank accounts and will have trouble filing taxes. Even worse, certain states may even consider an LLC without an EIN unlawful. To avoid any of these complications, it is essential that new LLCs obtain an EIN right away. It’s a small step that can save them plenty of hassle and stress down the line.
Fortunately, it’s easy to get an EIN directly from the IRS. All LLC owners need to do is fill out a short form with basic information about their business and submit it to the IRS either online or through the mail. An EIN is generally issued within one business day after application submission. Once received, it’s important that LLC owners remember to keep their EIN in a safe place as they will be required to use it when completing paperwork or making tax payments.
Failure to obtain an EIN can lead to many complications. An LLC needs an EIN in order to open a business bank account or apply for business professional licensing, among other things. If the IRS is later to find out that a business is operating without a valid EIN, its owner may face fines and other penalties.
An EIN is a nine digit number assigned by the IRS that identifies a business entity. Obtaining an EIN is easy and free; however, many people forget to take this essential step when starting their LLC. An LLC needs an EIN in order to open a business bank account or apply for business professional licensing with the state. Moreover, without an EIN the IRS will not be able to track taxes filed by the business, which means that they may be unaware of incidences where the business fails to report income or pay taxes it owes. If the IRS finds out later on that a business was operating without a valid EIN, it can impose significant fines and other penalties on its owner.
Disregarding Formalities in Daily Operations
LLCs are legally-protected entities and it’s important for owners to observe the regulations that keep them protected. This means operating the business according to the LLC’s bylaws, which include keeping minutes and records of meetings, not mixing personal funds with those of the business, and treating professional partners and co-owners as such. Not following standard formalities can potentially get owners in trouble with state or federal regulators.
LLCs are legally-protected entities, but it doesn’t mean owners should be completely rigid regarding their management. Reasonable flexing of company formalities to account for the daily demands of running a business can be beneficial in creating an efficient and successful operation. Strict adherence to written documents like bylaws and the articles of organization should still be observed, but not every decision or action needs to take place according to standard protocol. Meeting minutes, for instance, may not always be necessary when making small decisions that don’t require any formal resolution. Avoiding procedural bureaucracies as much as possible will keep operations running smoothly without bringing on unnecessary paperwork requirements.
When determining when rigid observance or flexing of LLC formalities is necessary, consider whether the decision affects other owners’ interests or rights. Major decisions that could change the LLC structure, ownership, and financial operations should still be governed by official company documents like the articles of organization and operating agreement. The same applies to actions such as loan applications and investments since more than one owner may be involved financially. For matters with fewer implications, it may not always be necessary to follow strict procedural rules. Ultimately, it falls on the LLC owners themselves to use their best judgement in balancing formalities with practical daily operations.
To remain compliant with state LLC laws, it’s best to adhere to the operational rules prescribed in the articles of organization and operating agreement when making major decisions. Additionally, having good recordkeeping practices allows for an up-to-date history of all important documents, financial information, and decisions made by any of the LLC members. Documenting resolutions and mindful communication between members may be wise if differences arise. By following these formalities, owners may help avoid conflict within their business partnership or protect themselves from liability. It’s always a good idea to consult with a professional before disregarding official procedural requirements to make sure that LLC laws are being adhered to.
Disregarding certain LLC procedural formalities isn’t always a bad thing. In day-to-day operations, it’s acceptable to throw out the rule book if circumstances require a more flexible approach. Important operational decisions should always be discussed and consented upon by all members or properly documented in written agreement. In many cases, historical or current business owners can successfully manage their LLC workflow without exercising extreme formality. Paperwork and official documents like meeting minutes won’t need to be filed unless state law requires it, such as with multi-member LLCs in California or votes taken on major organizational changes. Consulting an attorney beforehand is advised when operating outside the box to ensure that all necessary steps have been taken for proper formation and compliance with LLC laws.
If disregarding formalities is the best approach to accomplish desired outcomes, a properly designed LLC framework will support performing business more efficiently. Using technology to automate several aspects of LLC governance is particularly beneficial in this respect. With the right tools such as online voting and digital filing, smaller details become easier to manage and errors due to paperwork become minimal if not avoided altogether.