Common Mistakes When Setting Up an LLC: Avoid These to Protect Your Business

📝Not having a written operating agreement can lead to misunderstandings and disputes among LLC owners.

💰Failing to do the required annual filings can result in administrative dissolution of the LLC and loss of liability protection.

💼Mixing personal and business finances can make it difficult to track and protect the limited liability status of the LLC.

📜Inadequate recordkeeping can lead to accounting errors, tax issues, and difficulties in proving the legitimacy of the business.

🔒Not formally closing the LLC when it's no longer active can expose the owner to ongoing legal and financial obligations.

Do I need a written operating agreement if I'm the only owner of the LLC?

—Although not legally required in most states, having a written operating agreement is still recommended for single-owner LLCs. It helps establish the legitimacy of your business, set ground rules, and avoid potential disputes in the future.

What happens if I fail to do the required annual filings?

—Failing to do the required annual filings can result in the administrative dissolution of your LLC, which means it will no longer exist as a legal entity. This can expose your personal assets to liability and lead to legal and financial problems.

Why is it important to keep personal and business finances separate?

—Keeping personal and business finances separate is crucial to maintain the limited liability protection provided by the LLC. Mixing funds can lead to piercing the corporate veil, where personal assets may be at risk in case of lawsuits or financial difficulties faced by the business.

What kind of records should I keep for my LLC?

—You should maintain accurate records of your LLC's income, expenses, contracts, agreements, and any significant business transactions. This includes financial statements, receipts, invoices, bank statements, and any relevant legal documents. Good recordkeeping helps with tax compliance and provides proof of the legitimacy of your business.

Why should I formally close my LLC when I no longer operate it?

—Formally closing your LLC is essential to avoid ongoing legal and financial obligations. If you don't formally close it, you may still be responsible for filing taxes, paying fees, and maintaining records, which can lead to penalties and unnecessary liabilities.

00:00In this video, Attorney Elizabeth Potts Weinstein discusses the top 5 mistakes people make when setting up their LLCs.

01:11Mistake #1: Not having a written operating agreement, even for single-owner LLCs.

03:04Mistake #2: Failing to do the required annual filings, which can lead to administrative dissolution.

03:53Mistake #3: Mixing personal and business finances, risking the limited liability status.

06:13Mistake #4: Inadequate recordkeeping, leading to accounting errors and difficulties in proving legitimacy.

08:29Mistake #5: Not formally closing the LLC, exposing the owner to ongoing legal and financial obligations.