People make all sorts of mistakes with their LLCs. Today, I'm going to talk to you about some single member LLC mistakes that you should avoid.
So a couple years ago, a guy calls me. I should say he had some issues. Yeah, that's probably a nice way to say it. He had some issues. Through his LLC, he had purchased some real estate. So well and good, right? That happens all the time. Have been administratively dissolved. So he wanted to know what he could do because the deed that the guy that he purchased the real estate from had given him was invalid because it was executed while the LLC was administratively dissolved. Which means it was null and void, which means this guy and his LLC didn't own squat. And I told him, well, that's simple enough. You need to do whatever you need to do to get your LLC in order.
And then, go ahead and have the guy issue a new deed. Simple enough, right? Problem was the guy that sold him the property was dead. Yeah, which meant my client was pretty much (beep). So, that guy that called me had all sorts of issues with that LLC. And this was just the tip of the iceberg. And what I want you to get from this is what's at stake. There's a lot at stake if you mess up your LLC.
So if you're a coach, a consultant, a blogger, run an e-commerce store, maybe you create videos on YouTube, or whatever, if you're doing anything that involves running an online business where you're generating revenue from that business, then you need to set up a business entity and you need to make sure you do it the right way. And today, we're going to talk about the big mistakes I see people make when they're doing this and what's at stake if you mess it up.
So if you are running an online business, then at some point you're going to need to start an LLC. And I won't even say, you need to start an LLC. You're going to need to start a business entity. But for most of you, that's going to mean starting an LLC. But here's the thing. You don't know how to do it. It's scary. There's lots of rules. There's lots of issues that you may come into when you're forming that LLC. You don't want to be like that guy that I talked about at the beginning and mess everything up so that you can lose hundreds of thousands of dollars.
Today, I want to share with you the major mistakes I see people make when they're forming their LLC. I mean, let's be honest. What is the worst that could possibly happen? Are you going to go to jail if you mess up your LLC?
Shut up, you're going to jail.
No, you're not going to go to jail. Trust me, you're not going to go to jail if you mess up your LLC. It might get really expensive. You might have a lot of financial issues if you mess up your LLC, but you're definitely not going to jail. Could it cost you some money down the road? Yeah, it definitely could. Honestly, the most likely scenario if you mess up your LLC is that you spend a lot of time and money and effort building this LLC just to find out that you did something wrong and to find out down the road that it might be invalid, or you might be administratively dissolved because you mess something up, or there might be some other sorts of issue that you face down the road that I can't even anticipate at this time. I mean, honestly, starting your LLC is one of the most common questions I get from people who are starting to get their online business underway.
So, just like that guy at the beginning that mess things up and potentially lost hundreds of thousands of dollars. I'll be honest, I don't know what happened with him because he didn't want to spend the money to fight. I put together a list of the common mistakes that people make with their LLC and it is extensive. There are a lot of issues that come up when you're forming your LLC. And I'm trying to figure out what are the most, what are the biggest mistakes that people make? So, let's just go ahead at this from square one. Shall we? I mean, let's just say, if somebody comes to me saying, “Jim, I want to start an LLC. What do I need to do?” What's the first question I'm going to answer for you? And that is, okay, number one, what is your business? What are you doing? And let's just assume for the sake of argument, you're a blogger, you're a YouTuber, you're doing affiliate marketing, and you're doing something online and you want to create a business.
I get people every week that call me, set up consults with me, and want to talk about how they're going to do this, from all over the country. So you're sitting down with me and you're saying, “Jim, I want to set up an LLC.” Now, you're not really sitting down with me. We're doing this probably over a Zoom call because of COVID. So, first thing I'm going to do is ask you about your business. Second thing I'm going to do is ask you where is your business. Let's assume most of you are located here in the United States somewhere. And you're starting your business here in the United States. And you have a physical residence here in the United States. If that is you, then basically what you need to do is you're going to start your LLC in the state where you live.
Single Member LLC Mistake #1 – Filing in the Wrong State
A lot of people make a huge mistake and go filing their LLC in Nevada or Wyoming or Alaska, or somewhere else, Delaware, because they hear a lot of people form corporations in Delaware, because they think that there's some sort of benefit to doing it in those states as opposed to doing it in the state where they live. And that's a huge mistake that people make because it's not necessary. Number two, you're going to need to file as a foreign LLC in the state where you live anyway, because you're doing business in that state. And so, you need to have your LLC in that state. If something comes up, if you get sued, whatever, you want the LLC to be in the state where you live. That's the number one mistake I see people make is they want to form their LLC somewhere else because they heard somewhere online that it's better to form an LLC in Nevada or Wyoming or wherever.
Don't do that. Just form it where you live. I'm here in North Carolina. If I was to set up a business, it's going to be here in North Carolina. So, that's the number one mistake I see people make is they don't set up their business where they live.
Single Member LLC Mistake #2 – Using the Wrong Address
So we're continuing to have this discussion, we figured out, okay, we're going to set up the business where we live. What's the next major issue? What address do I use? You would be amazed how many people mess this up. Now, just let's think about it. So, you are an online business. You maybe working from home. In all likelihood, you are working from home. Well, let's talk about what home looks like for you. I've talked to people where they are young. They're living at home with their parents. They're sharing space with roommates. They live in one place for six months, then they would go to another place.
Do you remember what it was like? I remember what it was like. When I was young, I used to move around quite a bit. I mean, when I was in law school alone, I lived in one, two, three or four different places just in law school because every year I would move. It was just crazy. So when you are young, chances are you're moving around. That's one issue. Now, even if you're not young, maybe you're older. And if you don't own a house, if you're renting from someplace, or you are living with parents still, or you're going through turmoil where maybe you're not going to be in the same place where you're at right now for very long, there's a lot of reasons why using your home address is probably not going to be a smart move.
So then the question becomes, well, okay, Jim, what address do I use then? And so if you're in a place where you're not comfortable using the address where you're living, which in most cases, it's not, you got to remember, when you file this LLC, you can change the address later. It's a pain, but you can do it. It's not that big of a pain, actually, it's pretty easy. However, as soon as you file that LLC, that's public record. And public record, if you hear something that says public record, what you should gather from that is that means junk mail. That means scammers, con artists, and all sorts of people are going to mail you stuff that are going to try and get you to do something with them. And usually, it means spending money on them.
Some people will send paperwork that looks really official, looks like it's from the state, looks like it's something you actually have to do when it's nothing that you actually have to do. So, you need to make sure you are okay with use. If you're going to use your home address, you need to make sure that you're okay with that, and you need to make sure the people you live with are okay with you doing that. If they're not, then you're going to probably want to do what I would recommend. And that is to use a virtual address. You can't use a post office box and there's number of reasons for that. But what you can do is you can go to a place like Mail Boxes Etc., or The UPS Store, or someplace like that, and you can rent what's called a virtual address. Or you can go to a virtual office and rent a virtual address. That is a physical address where somebody is going to be getting your mail and then they can forward it on to you.
Single Member LLC Mistake #3 – Not Using a Registered Agent
And that is the best solution if you're living someplace where your living arrangement is not necessarily, what's the word I would use, permanent. That's what I would recommend doing, which leads to the next question is what about this registered agent thing. Okay. For the registered agent, this is another major mistake people make. When you're starting an online business, chances are you want freedom. You want time freedom, financial freedom, and you want to be able to go where you want, when you want, however you want, without anybody getting crawling on your back. If you're moving around a lot, and that might be taking vacations, or you're just not home, or you're traveling, whatever you're doing, you need somebody at a physical location from normal business hours, Monday through Friday to accept service if your business gets sued.
Now, when you're just starting out, this is not a huge deal. As you begin to grow, this could be a bigger deal. So, this is an investment you're probably going to want to make. And if you do it, with most places, it's between a 100, 200 bucks a year as an annual fee. At Hawthorn Law, we can serve as your registered agent in all of the 50 states. There is that annual fee, but it gives you that peace of mind knowing that you've got a physical location where if you get sued, somebody is available to accept service. If they don't accept service, or if you use a address that you're no longer living at, or if it's wrong and you get sued and they can't serve you, well, then you're going to have problems. Because if somebody tries to sue a corporation and they can't serve them at the address provided in the corporate paperwork, then you run the risk of a default judgment being entered against you.
And that's a whole another can of worms that we're not going to get into right now. So, that's the third major mistake I see people make is they use the wrong address for the registered agent in addition to the wrong address that we use for your normal house.
Single Member LLC Mistake #4 – Filing the S-election Too Early
The last mistake that I'm going to talk about today that I see people make is they go in right in off the bat. They're not generating any revenue. They don't know what they're doing. The business is literally just starting up and they file for an S-corporation at the same time that they file their LLC. This is just not necessary for most people. I've talked about this in other videos. An S-election is a tax election.
If you're just coming down, if you're sitting and talking to me and you're just starting this business from scratch, you don't need an S-election. You don't need that yet. It's just a lot of time and money that you don't need to worry about. As soon as you start generating enough money, then you can file your S-election, but don't worry about it just at the beginning.
Those are the four or so major mistakes I see people make with their LLC. So just to recap, what we talked about is filing in the wrong state, using the wrong address, not using a registered agent, and filing S-election way too early in the process. I want to give you a bonus though. I want to give you a bonus tip. The bonus tip I'm going to give you today is you don't put an operating agreement in place.
You can do all the things that you want with the LLC, but just because you file something with the state, you've given them all the addresses and all those things. If you don't have an operating agreement that governs how the business is run, you run the risk of somewhere down the line somebody actually what doing what's called piercing that corporate veil. And you don't want that to happen because that leads to all sorts of bad stuff that you just don't want to have happened. That's your bonus tip for today!