Our main business is forming LLC’s and Corporations so we’ve seen how an LLC formation can go wrong in many ways.
Here are a few we’ve encountered (and sometimes had to clean up either from people or our competitor’s clients):
- I filed it myself! – I think the Do-It-Yourself mentality is crucial for a startup with limited resources. However, I think the legal filing that actually creates your company and potentially protects your personal assets (houses, cars, bank accounts, etc.) is an area you might consider going with a pro. Sure, it’s pretty easy to file an LLC in many states, but this is only one step, there are crucial steps you need to follow after the filing that fully form your LLC. In our experience, these after-formation tasks rarely get done.
- No Operating Agreement! – OK so you’ve filed your LLC and you’re done right? Most people think so – until the IRS or a process server with a lawsuit shows up. The Operating Agreement is the core document of your company that details things like the ownership percentage of each owner, the operating rules, how profits are handled, how disagreements are dealt with, liability protection clauses, etc. Even worse, you might have a blank Operating Agreement sitting around in an Minute Book or on a hard drive – which is pretty much useless.
- Didn’t Hold an Organizational Meeting – Even if you have an Operating Agreement, did you hold an Organizational Meeting to determine ownership percentage, how much cash/property you’re putting into the business? You should hold this meeting which will complete the details of your Operating Agreement, then give each member (owner) a signed copy.
- Making the S-Corporation Election – Having your LLC taxed as an S-Corporation certainly has some advantages in the right circumstance, but filing this election (using form 8832) can change how your LLC is run and managed dramatically. For instance, you will probably have to do payroll for yourself (and other members) once the election is made which is complicated and burdensome for a small LLC with limited resources – say hello to monthly deposits, quarterly taxes (both Federal and State).
- Selected Wrong Type of Entity on IRS Employer Identification Number Application – Related to the point above, picking the wrong entity type on your FEIN (which determines which tax forms you will use) is not an un-fixable mistake but we see this happening all the time and is something better done right the first time.
How to Prevent These Problems:
- Use a professional LLC formation service like ours or an attorney if you feel that you need legal advice.
- Make sure you get a personalized Operating Agreement with your LLC formation (we provide this, in editable digital format as well).
- Make sure to hold that Organizational Meeting! We give you step-by-step instructions and personalized documents “ready for signature”.
- Consider talking to a tax advisor before filing your S-Corporation Election.
- Make sure after doing the above, that you select the right type of entity when applying for you EIN (1 member = disregarded entity, 2 or more members = partnership, etc.)
Any other issues we should be aware of? Let us know in the comments!