6 Common Mistakes To Avoid When Forming Your Limited Liability Company

Now that you’ve decided to start a business, you’ll want to take a positive step and form an LLC to protect your personal assets. Forming an LLC and starting your business off with a strong foundation (vs. a sole proprietorship) will be one of the most important decisions you will make when establishing a business entity.

If you’re in the beginning stages of forming your company, conduct some research about individual business structures and the pros and cons of each entity. An LLC is often the best option for small business owners. Do it right, and you’ll build the foundation for a successful business. Go about it the wrong way, and your LLC can cost you time, money, and most importantly, your livelihood.

Here are 6 common mistakes to avoid when forming your Limited Liability Company:

1. Failure to know how the LLC is taxed. The LLC can be taxed in four different methods; disregarded, partnership or an S or C corporation. Unfortunately, most have no idea, especially when forming one online, what the differences are. Plus you must have the proper operating agreement to match how the LLC is taxed. There is a big difference between a single member LLC taxed as an S corporation vs. a multi-member LLC taxed as an S corporation. Make sure you file the proper federal tax forms when making the S election federal.

2. Failure to properly structure your business entity. Unfortunately, many people fail to get the proper counsel before structuring their businesses. They may rely on family, friends, or other business owners for advice. It’s essential to talk to a professional who specializes in business entity structures before forming your business. Knowing the essentials can save you a lot of money and headaches in the future.

3. Failure to establish a business line of credit before you actually need it. Insufficient capitalization is one of the major reasons new businesses fold up. If you base your need for credit on your lack of cash flow, chances are that you’ll walk away from the lender empty handed. Clean up your personal credit now so you can build a foundation of credit worthiness for your business later.

4. Failure to recognize the business as a separate entity. Don’t ever mix business expenses with personal expenses. It not only becomes an accounting nightmare, but you can face legal issues down the road if you don’t treat your LLC as a separate business structure.

5. Failure to include all the proper documents when filing LLC documents. Because your business is a legal, separate entity from you, it’s essential to include all the proper documents when you file. Otherwise, your paperwork may get rejected, and the filing process may be delayed. Be sure to include all compulsory information when you file, such as the principal office address and the required information about the registered office and agent.

6. Failure to complete an LLC Operating Agreement. When you form an LLC, you’ll need to structure your financial arrangements and working agreement in a way that is compatible with the co-owners of the business. This agreement includes but is not limited to the percentage of ownership in the business, each individual’s share of profits or losses, the individual rights and responsibilities of each owner, and a statement of what will happen to the business if one of the owners leave the company.

Forming a Limited Liability Company can be a positive step forward. Avoid the headaches and novice mistakes by consulting with a specialist who can walk you through the process. Once you form an LLC, your business will gain credibility in the eyes of the public and the law. Plus you will keep the IRS off your back!

For more information on starting your llc, read on! Starting a llc.

About The Author: Scott Letourneau is the CEO of Fast Business Credit, Inc. When it comes to securing cash and vendor lines of credit and avoiding costly mistakes his company is the authority. For further assistance regarding the development of business credit go to http://www.FastBusinessCredit.com or call FBC at 1-888-313-6333 or 702-977-5246.