Real State

Mistakes To Avoid When Using an LLC

A document on different types of business formations

In most situations, LLCs are the ideal type of entity to set up when starting a business. An LLC is often the ideal mix between a corporation and a partnership. LLCs offer their members the benefits of corporations and partnerships without the owners having to deal with the complexities necessary to actually operate a corporation. However, each business is different, and it is important to determine whether an LLC, a corporation, or a partnership is the best fit for your situation. Some questions you could ask during this process is if a business is too small to incorporate. If you determine that the LLC model is the right fit for your entity, however, there are some mistakes you should know about. Here are the mistakes to avoid when using an LLC.

Not Following Proper Filing Formalities for LLCs

Failure to adhere to certain filing formalities may result in a court not allowing for corporate veil or charging order protection, which is something no one wants. Instructions on forming an entity can be found on the Secretary of State website; be sure to check if they cover your respective jurisdiction. Here are common steps when it comes to forming LLCs:

  • Choosing your registered agent
  • Determining publication requirements
  • Making payment for formation fees
  • Paying annual renewal fees

Not Hiring an Attorney When Forming Your LLC

Every industry is different and comes with its own nuances. It is crucial that you understand how to navigate the necessary paperwork, draft operating agreements, and obtain necessary licenses for your particular field. Many of these protocols differ from industry to industry, so hiring an attorney who understands the specifics of your circumstances is paramount – having the expertise in one industry might not necessarily translate to another. You’ll want someone with experience tailored to your specific industry so they can help you meet its various challenges.

Not Acting Fairly or Legally

Concealing or misrepresenting the state of your finances and other material facts to outsiders, vendors, or creditors can end up costing you a lot down the line. Don’t try to cut corners when forming an LLC. 

Mixing Personal and Business Assets

Investing enough cash in your business can help your LLC meet expenses and liabilities. In order to establish legitimacy, you’ll need to be able to prove that you can maintain an operational business account that will cover expenses and generate revenue. While doing so, it is highly advised that you keep your personal finances separate. Get an identification number for your federal employer, open a business-only checking account and ensure that your personal finances are kept separate.

Neglecting to Obtain Operating Agreements

Obtaining formal written operating agreements grants your LLCs credibility. These operating agreements are a crucial yet often neglected aspect of owning and operating LLCs. Having a well-drafted operating agreement is key to the success of your entity. Here are some aspects you should consider during the drafting process:

  • Understanding if your LLC should be member(s) managed or manager managed. A manager managed LLC is ideal in most cases.
  • Understanding forced distributions.
  • Non pro rata distributions – you may not want to be required to give all the members of your LLC equal distribution.
  • Transfer restrictions – who should be allowed to be a member of your LLC?

For guidance on forming an LLC and additional information about asset protection and wealth creation services, visit us at Protect Wealth Academy today!

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