Why Starting an LLC Can Be a Nightmare
If you’re starting a business, you may be considering forming a limited liability company (LLC). Starting an LLC, if you don’t do it correctly, can, in fact, be a nightmare, but it’s easily avoided. You just need to know the proper steps and what can happen if you make an error.
It’s worth the time and effort, though, since an LLC offers many benefits. It offers liability protection for ownership and greater flexibility than a corporation, particularly in terms of taxes. The LLC itself does not pay taxes. As a “pass-through” entity, income passes through the business to the owner or owners, who report it on their personal tax returns. ‘
Here we will cover common LLC formation errors, and how to avoid them.
Choosing a Name
If you have yet to choose a business name, it’s important to choose wisely. Your name will be the identity of your business and should reflect what you do. It should also be unique and easy to remember.
If you’ve already chosen a business name, before you form your LLC, you need to make sure that it’s not already taken. This is a step that is commonly missed by entrepreneurs. If the name you’ve chosen is already being used in your state, your LLC filing will be rejected, and you’ll have to start all over again.
It’s easy to find out if the name is available – just do a business name search on your secretary of state’s website. However, you should also check the US Patent and Trademark Office to make sure the name hasn’t been trademarked.
Then do a domain name search to make sure that you will be able to use your name for your website. This will also tell you if someone else is using your business name in another state. You can do a domain search through web hosting sites such as GoDaddy.
If you don’t follow these steps, you’ll run into issues that will delay your business from getting up and running.
Filing Articles of Organization
The articles of organization is the form that you will fill out to form your LLC. In some states it’s called a certificate of organization or a certificate of formation.
These forms vary by state but can generally be filed online. You’ll need to fill out the LLC name, the name and address of the registered agent, the names of the LLC owners, and in some states, the way the LLC will be managed. Fees vary by state and range from $70 to $500.
Clerical errors on these documents can be a hassle to get corrected, so make sure that you do it right the first time. You’ll have to fill out new forms to amend your documents, and sometimes a fee is charged.
The Operating Agreement
This is the number one most important step, and it is commonly missed by entrepreneurs because in most states it is not required. However, it is critical to have an operating agreement, particularly if your LLC will have more than one member or may have more than one member in the future.
The operating agreement should clearly define the following:
The percentage of each member’s interests in the LLC
How profits and losses will be allocated to each member
Each member’s rights and responsibilities
The management structure and management roles of members
The voting rights of each member
Rules for meetings and voting
What happens when a member sells their interest, becomes disabled, or dies
It should also, most critically, specify what happens in the case of member disputes. If disputes arise and there is no operating agreement, or the operating agreement does not specify dispute resolution procedures, the courts will likely become involved and default state rules will apply.
It is highly recommended that you have an attorney assist you with drawing up your operating agreement to make sure that all bases are covered and to avoid future issues.
Business Licenses and Permits
It’s important to make sure you’re in compliance with all laws at the local, state, and federal levels. It’s likely, depending on your location and type of business, that you’ll need business licenses and permits.
Do some research to determine which licenses you need. At the very least you’ll probably need a sales tax permit to sell products and collect sales tax.
Obtain an EIN
EIN stands for Employer Identification Number and is like a social security number for your business, allowing the IRS to identify your business easily. It is also known as a Federal Tax Identification Number (FTIN), or sometimes for corporations a Tax Identification Number (TIN).
An EIN is required if your LLC has more than one member, if you plan to hire employees, or if you choose to have your LLC taxed as a corporation. The application is free and can be found on the IRS website. The application is form SS-4, and it can be mailed to the IRS or submitted electronically, and once your information on the application has been validated, the EIN is assigned immediately.
Annual Reports
Most states have annual reporting requirements for LLCs. You need to make sure that you file annual reports on time. If you don’t file annual reports on time you could be subject to penalties that range from additional fees to the forced dissolution of your LLC.
In Closing
Starting an LLC can be a nightmare, but it doesn’t have to be. You just need to make sure that you take all the proper steps so that you and your business are protected. The operating agreement, in particular, should not be overlooked. Having everything clearly defined in the document will save you a lot of potential issues in the future. Again, having an attorney’s help is highly recommended.