Starting a Single Member LLC? 4 Mistakes to Avoid!

If you are starting your LLC, then here are 4 common mistakes that people do that you should avoid! Some of the most popular videos I've done have been about the multiple mistakes that people make when forming their single member LLCs. So let me know if you can relate to this. Life is good. You're starting your business. You're ready to roll and you realize I need to form an LLC. After all, you want to make sure that your business is legally protected and limited liability is one of the main benefits of forming an LLC. So you either try to form it yourself, or you go online and you have some sort of do it yourself business do it for you. I'm not going to name any of the names but you know the people I'm talking about.

But unfortunately you didn't quite know exactly what you were doing when you did that. And inadvertently you might've made a mistake. Now, you didn't know you made a mistake when you did it, but you don't know what you don't know. And so you might've done it. That make sense? I hope that makes sense. So you're probably wondering, what was this monumental mistake you made? Well, I don't know exactly what mistake you made, but I do know four of the common mistakes that people make when forming their single member LLCs. And that's what we're going to talk about today.

Many people think that an LLC is this magical, mystical, amazing thing that once you form one, all of the problems and legal issues that come with forming a business, just kind of go into thin air. Wrong, just because an LLC is a relatively easy and inexpensive entity to set up doesn't mean that you can't or won't make some serious mistakes in the process. By the end of today, you're going to know four more major mistakes that people make when setting up their LLCs. And I've done a couple other videos about this. So you want to check those out here. This is going to not only make you aware of these mistakes so that when it comes time to set up your LLC, you know I need to remember Jim said not to do that, so I'm not going to do that. So this is going to actually help you avoid some major problems when it comes to setting up your own LLC.

Single Member LLC Mistake #1 – Not Taking the Legal Steps to Finalize Your LLC

So let's jump into this. So mistake number one is that you set it and forget it. And what do I mean by that? Let's say you go online to a document preparation service, or maybe you get a book on how to set up an LLC and look for some free information or blog posts from some non lawyer telling you what you need to do to set up an LLC. You end up going to your secretary of state's website. You fill out the paperwork, you pay the fees, you got your LLC. You're good to go, right? No.

And then in a couple of weeks, you get a big package in the mail with all of your legal documents. You put them on a shelf or in a drawer, you check off form LLC from your to-do list and you go about your business. Does that sound familiar? Here's what you don't do. You don't get the operating agreement completed. You don't get any EIN number and you don't open a business bank account, three of the major things that you need to do when you're setting up your LLC. Basically you formed the LLC, but then you didn't do anything with it. So you're really the owner of, I would say, nothing.

This is one of the biggest mistakes I see people make when they form their LLCs. If you don't take the legal steps that need to be done to finalize the formation of your LLC, just because you filed something with the secretary of state, doesn't mean you actually have an LLC in place. And an LLC doesn't continue to exist if you don't pay the annual filing fees. If you don't file the annual reports, if you move and you don't update your mailing address. In fact, your LLC can actually be administratively dissolved by the secretary of state's office if you don't do all these things and that can happen without you even knowing it. And at that point, you basically lose all the protection and limited liability and other benefits that come with forming your LLC.

Single Member LLC Mistake #2 – Not Properly Capitalizing Your LLC

And this ties nicely into mistake number two, and that is that you don't fund or properly capitalize your LLC. So what that means is that you either don't open a bank account at all in the name of the LLC, or you do open a bank account, but then you don't properly fund the LLC. In other words, you're not putting any money into that bank account in the form of receipts from customers, your personal investments or anything else that would show that the LLC is adequately capitalized. And if you don't have a business bank account, then you don't have a way to pay your vendors. You don't have a way to receive money from your clients. You really can't exist without a business bank account. And I'm surprised at how many people actually don't take that one simple step.

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Time and time again, I see people that form their LLCs and then they don't do anything to add in any type of financial resources to the business. This is a big, huge problem. And if you do this, then you're just really lazy or you truly don't care about getting your business off the ground and running, getting it funded and getting going. Here is a link to my favorite bank for forming a business checking account. So you can check that out.

Single Member LLC Mistake #3 – Forming Your LLC in the Wrong State

So, mistake number three, this is a really common one. You form your LLC in the wrong state. For some reason, people think that they should be filing their LLCs in states like Nevada, where there is no corporate income tax or Wyoming where the filing fees are really low. The only problem with this logic is that they actually live in Florida or New York or Ohio or any place else that isn't Wyoming or Nevada.

So when you do this, you're actually causing yourself a great deal more expense, and a lot more headaches than if you just filed in the state where you live and where you're doing business. This is because if you live in Florida, but you file in Nevada, then you have to pay all the fees to Nevada. And then you also have to pay all the fees to the state of Florida, because you have to register your LLC as a foreign entity in your home state of Florida. If you want to get around doing that, you can, but then you have to go through the added time and expense of renting out a virtual office in Nevada, where your business can be operating from.

And all this withstanding, it doesn't change the fact that if you live in a state where there is an income tax, then you still have to pay income taxes in that state anyway, it doesn't matter that your LLC is formed in a state where there is no income tax. It still flows through to you personally. And the state where you live and work is the state that you're going to pay taxes to. So listen up. If you live in North Carolina, file your LLC in North Carolina. Unless there's a really, really good reason for you to file it someplace else, file it in the state where you live. You got me on that? I hope. Okay.

Single Member LLC Mistake #4 – Not Having a Proper Registered Agent

Mistake, number four, you don't have a proper registered agent. I actually have not really talked about this mistake before, but it is a huge mistake. And it's one that a lot of people mess up. By law a registered agent must be open and available to accept service of process during normal business hours every Monday through Friday, unless it's a holiday. So what many online entrepreneurs do is they name themselves as registered agent and usually they'll use either their home address or some other address that's a virtual address.

So stick with me here. To be a proper registered agent, you must be home, if you are an online entrepreneur and available to accept service of process during normal business hours every week, that means no errands during business hours. That means no long extended vacations, no taking the day off to go to your kid's soccer game, and no extended vacation to Florida. That means no, let's take a month off and go to Europe. None of that, you can't do it.

And I know if you're an online entrepreneur, which you probably are if you're watching this video, that doing those types of things is really important to you. That's one of the main benefits of becoming an online entrepreneur is that you can work from anywhere, anytime and make money with your laptop on the beach, sipping Mai Tai's right? That's the whole goal. You want the freedom to travel and live life on your terms and not be dictated by the fact that you need to stay home and wait for somebody to sue you and be available to accept service of process at your home address.

And here's the problem that most online entrepreneurs miss, if you are not home during normal business hours, and somebody does decide to sue you and the bigger you get, the more likely it is that you're going to be sued at some point, and you fail to receive that lawsuit because you're not there, you run the very serious risk of having a default judgment entered against you for failure to respond to a lawsuit, and that is a big problem.

But here's the deal, this is actually a pretty easy fix. For as little as $129 a year, you can pay someone like my firm to be a registered agent for you in all 50 states. So for that very small investment, you get the peace of mind knowing you've got somebody to serve as a registered agent for you, and you're free to go and do whatever you want, wherever you want, whenever you want. And you can still own and operate your business out of your home office. And this also gives you the added benefit of keeping your business anonymous if you so choose and protecting your home business address.

I've done another video that outline eight other mistakes that online entrepreneurs make when setting up their LLCs, You can also check out that. If you want to join a community of online entrepreneurs, just like you, I actually also have a secret Facebook community where I share even more legal tips and tricks to help you keep your online business protected and profitable. Here is the link.

That's it for today. Have a great day folks. Take care!

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Hawthorn Law is a Document Filing Service and CANNOT provide you with any legal or financial advice. The information provided on this website is designed to provide information in regards to the legal aspects of online business. However, it is presented with the understanding that Hawthorn Law is not engaged in rendering legal, accounting or other professional services. If legal advice or other professional assistance is required, the services of a licensed attorney, tax professional or financial advisor should be sought.