One of the simplest ways to open a business is to start up a limited liability company (LLC). It is not a complex procedure that demands formalities of a corporation.

The business entity is simple to keep and does not need to conduct annual board meetings or have complex structures. This arrangement also enables the business owners to direct their energy to the most important thing to them, which is to expand their business.

It is easy to maintain but not to form just because it is easy to maintain. Depending on your state, the procedure of formation of LLCs might be confusing. There are some mistakes that you may make in the process and this may give you a headache in the future.

To make your life easier, therefore, we have listed the most typical LLC formation pitfalls entrepreneurs make. We are going to explain to you below how to avoid such pitfalls effectively and provide you with tips on how to have a smooth formation process. Continue reading to know how to form a free LLC in the right way.

7 Common LLC Formation Pitfalls

Business owners make seven common LLC mistakes when they file their entity:

Employing the Wrong Forms

Make sure you fill the proper forms before you send your formation documents. A common mistake that most businesspeople commit is completing the incorrect forms.

Each state has its requirements and filing procedures of the LLC. You may end up delaying your application or even having your application rejected in case you used or submitted an incorrect form.

To prevent this you should use only forms that you can find in your Secretary of State office. The Secretary of state sites offer a library of downloadable incorporation forms on most of their websites. You will be able to ensure that the forms in these websites are official and up-to-date.

Choosing a Wrong Name

In most states, LLCs must possess a unique business name which has not been registered in the state. Nevertheless, there are still those applicants who commit the same mistake of choosing names that are either not available or do not meet the naming requirements of the state.

Thus, as you begin to choose a business name, research the LLC name requirements in your state. We would also recommend you to use the business entity search tool of your state to see whether your target name is available.

What will occur in case you adopt an LLC name, which is already in use? Your LLC might be denied. Your Secretary of State will probably request you to put on some other thing.

Failure to Obtain Business License

The other LLC pitfall that entrepreneurs encounter is the failure to obtain a business license. Businesses should acquire a license in some states prior to commencing their operations.

The lack of the required permits may result in legal problems and even shutting down of your business. You might also need to get other permits based on the business activity you desire to engage in the state. As an example, in case you wish to open a bar in Nevada, you will require a liquor license issued by the Department of Taxation of the state.

Template Operating Agreement

Operating agreements play an essential part in the work of an LLC. They lay out the rights and duties of the LLC members and define a definite structure of the manner in which the business will be operated and managed.

Even though in most states it is not a legal requirement, LLCs are strongly advised to have one. To be more exact, it is advised that they do not use template agreements, which they discovered on the Internet.

Operating agreements are designed in accordance with the needs and objectives of an LLC. It should particularly provide requirements on the manner in which your business will be run, something that is not easy to attain using a standard agreement.

Misincorporation in a Bad State

Incorporation of your LLC in a particular state will determine how it will be taxed and the protection the members will have and that is why you should incorporate in the right state.

Research and find out what state will be the home of your LLC. Research the taxations and LLC laws of your target state. These laws will inform you more about the tax consequences and the legal environment in which your business will have to operate.

You are able to compare states and get to know which one can give your LLC a better opportunity to succeed.

Selecting the Wrong Entity

Although the limited liability LLCs provide can prove to be an asset to your business, the entity is flawed. The drawbacks that you need to take into account before you make a decision to become an LLC include:

• The cost of an LLC formation is high as compared to others.
• Transfer of ownership of an LLC may be hard.
• The protection of limited liability of an LLC is not unlimited.

We also recommend collaboration with business formation experts. These professionals will guide you on the kind of business entity that can suit your needs and objectives. They will take into account the nature of your business, your long term objectives and your risk taking capacity so as to advise you on the most appropriate entity to take.

Failure to Remember to Obey LLC Requirements

Finally, the most prevailing LLC error that most businessmen commit is the failure to follow its requirements. Although LLCs are simple to keep, they are not free of requirements that they must meet in order to be in good standing with the state.

After you have created your LLC, you are expected to pay the annual fees and file annual reports to your state. The states also use annual reports to have proper records of the businesses in their jurisdiction. Such reports normally include the new details of your LLC including the management structure, the number of members as well as the address of the business.

The inability to meet the LLC requirements may lead to fines and even the loss of good standing defined by the laws of your state. In case you lose a good status, your LLC will face a danger of being administratively dissolved.

Final Words

Creating an LLC is not a matter of filling out some paperwork but building a solid legal, financial, and operation base of your business. Your initial choices can influence such factors as the amount of taxes you have to pay or the ease of scaling and the safety of your business in the future. This is why it is very important to do your homework: to select the right entity, to know your tax obligations, to draft a strong operating agreement, to remain in compliance with state laws, and more importantly; to plan to grow.

When you establish your LLC without making the typical errors and put a clear and strategic vision in place, you will provide your business with the greatest opportunity to succeed over the long-term. With The Finance Focus, you can be sure of every step you take, thus you can launch with confidence and grow with clarity.