Top 6 Mistakes Startup Entrepreneurs Make Registering Their LLC
| 4 minutes read
Starting a business is an exciting process, but it can also be overwhelming. Registering your business as an LLC is critical to protecting yourself from personal liability and staying compliant with local regulations. Unfortunately, many startup entrepreneurs make mistakes when registering their LLC that could potentially lead to serious legal issues down the road. In this article, we’ll discuss the top six mistakes that startup entrepreneurs make when registering their LLC and how to avoid them. With these tips, you can set up a successful business for years to come.
1) Registering in the Wrong State:
When you register your LLC, it’s important to choose the right state. Some states are more business-friendly than others and may offer different tax or legal benefits. Make sure you research the different state regulations before filing your paperwork.
It may be necessary to register your LLC in your home state based on the nature of your business. If you have nexus in your home state, then you will either need to register your LLC in your home state, or register the LLC in a state with better asset protection laws like Wyoming, then register it as a foreign entity doing business in your home state.
Nexus is the physical connection you have to your location. For example, if you have W2 employees or an office in the state, you have nexus. You will need to have your business registered in that state in this case.
However, if you don’t have nexus, you should seriously consider registering your LLC in a state with better privacy and asset protection laws like Wyoming.
2) Not Naming the LLC Correctly:
It’s critical that you name your LLC correctly when registering it. This can help you avoid confusion with other businesses and will make it easier for customers to find you.
Naming a business can be a tricky endeavor. For privacy reasons, you may not want your company brand to be the same as your LLC name. This helps create a veil of privacy around your business assets.
However, in some cases, you may want your brand to be the registered company name of your LLC. For marketing and branding reasons this may be beneficial to use your brand name as your company name. You need to consider trademarks in this case though to make sure you are not using a brand or company name for your LLC that already has a registered trademark.
3) Not Understanding the Difference Between a Single-Member LLC and a Multi-Member LLC:
Single-member LLCs are owned by one person, while multi-member LLCs are owned by multiple people. Both types of LLCs are subject to different regulations and filing requirements, so make sure you understand the difference before registering your LLC.
A single-member LLC is owned by one person. From a tax perspective, this means you can use your personal tax id (SSN or ITIN) as the business tax id. When filing your taxes, your income or loss would flow thru to your personal tax return on your schedule C.
For a multi-member LLC, you would be required to apply for and obtain an EIN. Since your LLC would be considered a partnership, you would need to file a partnership tax return, 1065, and each partner would be issued a K1 tax form at the end of the year.
4) Not Having a Registered Agent for Your LLC:
In some states, it’s required that LLCs have a registered agent who will receive legal documents on behalf of the business. Make sure you understand the rules for your state and hire a registered agent if necessary.
Every state requires that you have an address in the state where your LLC is registered to meet legal requirements for the secretary of state. Some states require that you use a registered agent while others allow you to be your own registered agent.
While it may be legally allowed to be your own registered agent, this is a huge mistake that many people make when registering their LLC. If you use your own address, that exposes your address to public record and could interfere with your business or home life. If you are sued, the process server will appear at your registered address to serve you with a lawsuit. No one wants their employees or family to encounter that situation.
It is preferable to use a commercial registered agent because their address will be the only publicly available address related to your company giving you much more privacy in your business affairs.
5) Not Filing the Proper Paperwork Like Your Operating Agreement or Articles of Organization:
To keep your LLC in compliance with state regulations, you must file the appropriate paperwork. This includes articles of organization, operating agreements, and other documents that outline the ownership and management of your business.
A very common mistake is not drafting a proper operating agreement for your LLC. An operating agreement is essentially a contract between you and your LLC that stipulates what happens in various situations and how to treat them. It is a critical document that many people don’t even consider because it is not required by the secretary of state.
This is one of the reasons that registering your own LLC is not a good idea. Using a proper business registration service like BusinessAnywhere helps to avoid all of these issues.
6) Not Staying Organized:
Finally, one of the most common mistakes that startup entrepreneurs make is not staying organized. Staying organized will help you stay compliant with regulations and avoid potential legal issues. Make sure all documents related to your LLC are filed in a secure location and consider using an online accounting system to keep track of expenses and income.
Again, this is where using a proper business registration service like BusinessAnywhere will help you to alleviate all of these issues. With BusinessAnywhere all of your company documents like your articles of organization, operating agreement, and EIN letter are always handy in your dashboard. Your annual filings will be automatically filed and your annual fees automatically paid so your company always remains compliant with the state.
By following these tips, you can ensure that your LLC is set up correctly and avoid common mistakes. With the right steps, you can protect your business and maximize its potential for success.