Starting a company in the United States is an exciting venture that can lead to great opportunities. While the process of forming a business in the US is relatively simple, mistakes can complicate things and cause unnecessary setbacks. As an entrepreneur, you can avoid many common pitfalls with proper planning, ultimately saving time, money, and stress. In this blog, we’ll discuss the most common mistakes to avoid when forming a company in the U.S., helping you set your business up for success.
Careful about Wrong Business Structure
This is the first step toward starting your legitimate business: selecting the type of entity you want to register. Below are some options to consider:
- Sole proprietorship
- Partnership
- Limited Liability Company (LLC)
- Corporation
Each of these structures are suitable for certain situations but may not work for others. You can explore our detailed comparison of these options in our blog here.
Why is an LLC the most popular choice?
→ Liability protection for its members – Members enjoy protection from personal liability for the company’s debts.
→ Flexibility – An LLC can be formed by a single member or multiple members, with no limit on the number of members.
→ Tax Benefits – LLC are pass through entities, meaning profits/losses are reported on individual tax returns. However, LLCs can also elect to be taxed as S-Corps or C-Corps, depending on their needs.
Having multiple options is beneficial, but choosing the wrong entity can impact critical aspects of your business, such as taxes and liability. Different structures fall under varying tax brackets, have different deadlines, require specific forms, and demand varying levels of compliance.
To ensure your business thrives, it’s essential to carefully weigh your options with a focus on long-term growth.
If you’re unsure about which entity to choose, consulting an experienced professional can help you make the best decision for your business.
Now let’s dive into the common mistakes people often do at the time of incorporation or after the registration of LLC.
1. Wrong state for incorporation
You need a registered office in your state of incorporation, which leads many to assume that forming in their home state is the best choice. However, that’s not always the case. When choosing your state of incorporation, it’s important to consider several factors, such as taxes, compliance requirements, and business-friendly laws.
Why is Wyoming the most popular state for incorporation?
♦ Easy to set up
♦ Lower taxes
♦ Streamlined compliance
For non-residents, incorporating in Wyoming can save you on taxes and reduce paperwork, both during setup and for annual compliance.
However, if your business primarily operates in another state, forming your LLC there might be more practical to avoid extra fees and paperwork.
Here’s why: If you have a business operation in California, forming your LLC in a state like Nevada won’t let you bypass state taxes. You’ll still need to register your out-of-state LLC (called a “foreign LLC”) in the state where your business operates. Additionally, you’ll be required to pay state income taxes in the states where you generate income.
To make the best choice, consider where your business will primarily operate and consult a legal or tax professional to determine the ideal state for your LLC formation.
2. Poor choice of Business Name
When incorporating an LLC, one of the first things you’ll need to decide is your LLC’s name. Most states require LLCs to have a unique and distinguishable name from other businesses in the state. Beyond being a legal requirement, your business name plays a vital role in branding and establishing your business identity.
Choosing a name that is unavailable or does not comply with state naming guidelines can result in rejection of your application—or worse, lead to trademark infringement claims or disputes with other businesses.
Be sure to check if your desired name is available in your state and consider registering it as a trademark for added protection.
3. None or Inadequate Operating Agreement
a. No Operating Agreement at all:
An Operating Agreement may not be legally required in every state, which makes it easy to overlook during incorporation. While you can set up your LLC, open a bank account, and operate your business without one, it remains one of the most critical documents for your LLC, even for the single member LLC. This agreement defines your management structure, ownership percentages, and processes for resolving disputes.
b. Using a generic Operating Agreement:
Many people simply use the template found online as their operating agreement. This is not bad always, but you need to review it before using. Without detailed agreement, you risk internal conflicts and legal challenges that could jeopardize your business.
c. Not updated Operating Agreement:
Many business owners create an operating agreement and then forget about it. It’s important to keep your operating agreement up-to-date. For instance, if a member leaves the LLC, the agreement may need to be amended to reflect this change. Regularly reviewing and updating your operating agreement ensures that your LLC remains compliant with state laws and any internal changes you make.
If it’s not in writing, it doesn’t exist. Anything in writing is legally binding.
While it may seem like a hassle, having a well-maintained operating agreement is crucial for avoiding disputes and clarifying business operations. If needed, you can always seek help from consultants to draft or update your operating agreement effectively.
4. No Separate Business Bank Account
One of the key benefits of starting an LLC is the ability to manage your business assets separately from your personal assets. This separation provides a layer of protection—if your business assets are ever seized, your personal belongings remain safe. However, this protection only works if you actively keep your personal and business finances separate.
That’s why one of the first steps you should take as an LLC owner is setting up a separate bank account for your business. Failing to do so could jeopardize your limited liability status, putting your personal assets at risk.
To stay organized, you might also consider investing in quality accounting software to manage your expenses and payroll. Automating these processes can save you time and reduce stress in the long run.
5. Ignoring Tax Requirements
One of the most common mistakes business owners make is misunderstanding how to properly file LLC taxes. The IRS doesn’t recognize LLCs as a separate tax entity, so how your LLC is taxed depends on its classification:
Ø Single-Member LLC:
Typically treated as a “disregarded entity” for tax purposes, meaning the LLC’s income and expenses are reported directly on the owner’s personal tax return. The LLC itself does not pay federal income taxes.
Ø Multi-Member LLC:
Generally treated as a partnership, with income, deductions, and credits passing through to the members, who report them on their individual tax returns.
Ø LLC Electing Corporate Taxation:
An LLC can choose to be taxed as a C Corporation or an S Corporation, depending on its business needs.
♦ C Corporation: the business pays corporate income tax on its profits, and any dividends distributed to owners are taxed again at the individual level (double taxation).
♦ S Corporation: profits and losses pass through to the owners’ personal tax returns, avoiding double taxation, but the owners must meet specific requirements, such as receiving a reasonable salary if actively involved in the business.
LLCs offer flexible tax options, but they also come with responsibilities. Failing to plan for tax obligations, which can lead to unexpected liabilities during tax season. Additionally, you must maintain records of all business income, expenses, and assets, including their values. If you’re unsure about any requirements, consult a tax professional to understand your LLC’s tax obligations and develop a sound tax strategy.
6. Lack of Legal Compliance Awareness
It’s important to note that forming an LLC isn’t a “set it and forget it” process. After submitting your initial paperwork, you’ll need to stay compliant with state and federal requirements. Neglecting compliance can lead to serious issues, such as “piercing the corporate veil,” where business owners lose liability protection, putting their personal assets at risk.
While LLCs are relatively easy to maintain, they still have ongoing requirements to remain in good standing with the state:
Annual Reports and Fees: Once your LLC is formed, you must pay your state’s annual fees and file annual reports. These reports typically include updated information about your LLC, such as its management structure, number of members, and business address.
Articles of Amendment: If there are significant changes to your LLC, such as a change in management or ownership, you’ll need to file articles of amendment with your state.
Using Your LLC Name: Always use your registered business name on all official documents to maintain compliance.
Even though LLCs are straightforward to manage, they require attention to detail to maintain compliance and avoid potential issues. Work with professionals when needed to ensure your LLC remains in good standing and your business stays on track for long-term success. Failure to comply with these requirements can result in penalties, loss of good standing, and even administrative dissolution of your LLC.
7. Consult Professionals
The big takeaway here is this: LLCs are great… when they’re done right. Give your business the best chance to succeed by avoiding common mistakes that can hold your LLC back. And don’t let fear stop you from taking the leap!
Many LLC mistakes stem from inexperience or a lack of knowledge. The good news? You can prevent most of them by understanding what they are, taking steps to avoid them, and having a plan in place to address any issues that arise.
It’s natural to be cautious about the cost of hiring a legal professional, especially when you’re just starting and trying to manage expenses. But remember, this upfront investment is tax-deductible and can save you significant money and hassle in the long run by ensuring your LLC is set up correctly from the start.
Let us assist you in setting up your LLC in the United States. Our team is here to provide detailed guidance on LLC formation and compliance requirements. With Bizfyle, you can easily establish and manage your LLC, even while staying outside the US—completely hassle-free. Let us handle the complexities so you can focus on growing your business.
