Thinking About Forming an LLC? Avoid Making These Common Business Formation Mistakes

When an idea for a new business comes along, it’s natural to feel energized and excited by this creative spark. As you start laying the groundwork for launching your company, you may start to experience some stress and concern along the way. Suddenly, you face a seemingly endless list of tasks, ranging from the small details (i.e., ordering supplies, choosing a name, etc.) to the larger, more abstract concepts (i.e., planning for long-term sustainability, creating a business succession plan, etc.). Before you start panicking about the sheer volume of to-do lists in front of you, consider enlisting the support of an experienced and knowledgeable business law attorney who can help you create a plan of action to ensure that you launch your business from the strongest foundation possible. One significant choice that new business owners must make is how to structure their ventures—are you looking to establish a sole proprietorship, partnership, or corporation? Many small businesses decide that a limited liability company (LLC) structure best suits their needs and goals. Let’s take a look at some common mistakes that new business owners should avoid making when setting up their LLCs.

Mistake #1: Selecting the Wrong Type of LLC

While most people are familiar with the term “LLC,” they may not realize that there are several different types of LLC formations. For instance, an LLC can be single-member or multi-member, and they may be considered S-Corps (a specific tax designation for an LLC). These subcategories of the LLC structure have distinctive features, so it’s important to work with your business lawyer to identify the best choice for your business needs. Single-member LLCs tend to work best for a business owner who wants liability protection but is not interested in devoting a substantial amount of time and effort to keeping up with paperwork and corporate formalities. This type of LLC requires the owner to file quarterly taxes, and any profits pass along to the owner as taxable income. For the most part, single-member LLCs are taxed similarly to sole proprietorships (unless you pursue an S-Corp tax designation through the IRS).

S-Corps operate as LLCs on a structural level, but the way that the IRS taxes these entities differs. Generally, businesses earning more than $80,000 in yearly profit may benefit from S-Corp designation, and they will follow different tax deadlines and regulations. In addition, the owner will pay themselves a salary, along with regular payroll taxes. The nuances among these types of LLC structures and designations can be confusing for new business owners, so reach out to a knowledgeable business law attorney for specific guidance.

Mistake #2: Forgetting About LLC Compliance Requirements

Once you submit your initial paperwork to create your LLC, it’s natural to want to move on and consider this task complete. However, each state sets forth LLC compliance requirements that your business must recognize and adhere to after it is formed. For instance, you will likely be expected to ensure that you use your business name in all business-related documents, submit your annual report according to the state’s guidelines, and keep your business funds separate from your personal accounts, among other rules and requirements. If you need to make changes to your LLC, you may be required to submit an articles of amendment document to make these alterations legal and official. Neglecting to comply with any LLC requirements may put your business (and personal liability) at risk. Your business formation lawyer will work with you to make sure that you understand the LLC compliance requirements in your state so you can move forward with greater certainty and confidence.

Mistake #3: Relying Solely on Free Online Templates

As you launch your new business, it’s tempting to use free (or inexpensive) templates to create important business documents, such as operating agreements, contracts, and other critical paperwork. Unfortunately, using these generic templates may jeopardize the future of your enterprise, as they tend to include overly vague language and murky statements that will fail to protect your business in court. Should a disagreement or legal dispute arise, a flimsy document may leave you vulnerable and even weaken your claim in the long run. When you invest the time, money, and effort up front by working with a skilled business lawyer to create clear and effective contracts and legal documents, you will likely save your business from future lawsuits and costly litigation. You and your business are worth protecting, so take the time to put the necessary guardrails in place long before disputes arise.

Mistake #4: Going it Alone

Any way you look at it, starting a new business is something worth celebrating. It takes tenacity, courage, and focus to launch a new venture, so take the time to acknowledge these strengths in yourself. However, be careful not to take everything on by yourself—those who go it alone are more likely to struggle with burnout, stress, and other negative impacts. Consider partnering with your business law attorney, thinking of this legal professional as much more than a one-time advisor. Finding a trusted and caring business lawyer carries so many benefits; not only can you rest assured that they will help you launch your business strategically and successfully, but you can also cultivate an ongoing relationship with this dedicated legal advocate as your business grows and thrives. The moment a potential conflict arises, you can turn to your attorney for guidance and feel reassured that this legal professional already understands your goals and needs. New business owners who have devoted their time to creating a solid network of professionals to support their endeavors are more prepared to navigate potential challenges and obstacles as they arise. As you prepare to launch your new business, enlist the guidance of an experienced business attorney to maximize your chances of success.

If you are ready to launch a new business venture, it’s essential to enlist the help of an experienced and trusted business law attorney who can ensure that you follow all the required steps along the way. Call Judex Law, LLC, today at (303) 523-4022 to get started with a knowledgeable and friendly Colorado business lawyer.

Table of Contents