6 Common LLC Creation Mistakes

6 Common LLC Creation Mistakes

Starting a new business is exciting but also a little intimidating. There’s a lot you probably don’t know, and mistakes can end up costing you.

If you’ve decided to start a limited liability company (LLC), then you’ve already avoided the biggest mistake, which is not having a business entity at all. But you’ll also want to avoid these 6 other common mistakes people make when starting an LLC.

Mistake 1: Choosing to Become an LLC When It’s Not the Right Entity for Your Business

The first mistake people make when creating an LLC is choosing an LLC to begin with. The limited liability company is a great business structure for many business ventures, but it’s not suitable for all.

The main consideration is money. Do you plan on growing with capital from outside investors? If so, a corporation is likely a better choice for you. Investors are typically more comfortable investing in corporations than in LLCs. Corporations are also the only entities that can issue stock, so if you dream of a big IPO in the future, then the corporation is the entity for you.

Mistake 2: Incorporating Your Business in the Wrong State

Once you’ve determined that the LLC is the right entity for your business, your next step is to decide on where to incorporate it, i.e., where to register it.

Most of the time, incorporating in the state where you live and do business is the best solution. Some entrepreneurs want to incorporate in other states like Delaware, Wyoming, or Nevada for the supposed tax and legal benefits. This can make sense for larger companies, but it rarely makes sense for smaller LLCs.

Incorporating your business in a state your business isn’t based in means taking on hassles like maintaining a registered agent in both the state you live in and incorporate in, filing paperwork in both states, and paying fees to both states. After considering the time and money involved, it’s typically not a savvy move for most LLCs. It’s usually smarter to incorporate in your home state.

Mistake 3: Choosing the Wrong Type of LLC

There are actually four types of LLCs you can create in South Carolina, as we’ve covered before in a previous blog. Check out that blog for more information, but in short, know that an LLC can be either “term” or “at will” and “member managed” or “manager managed.” If you select the wrong type when setting up your LLC, it can be bad for the LLC and the members down the line.

Mistake 4: Choosing a Bad Name

What makes a “bad” name? One that’s already being used.

Before choosing a business name, do some research. You can search for existing business names in South Carolina here under “Existing Business,” which is a good start. (South Carolina does not allow a new business to register a name that’s not “grammatically distinguishable” from existing names.) You might also want to search the trademark database at the US Patent and Trademark Office here to see if the name you have in mind is being used somewhere else. Finally, a thorough Google search for your proposed name can turn up other uses of the name.

Your name matters because if you inadvertently violate someone else’s trademark, you can get in trouble. Disputes over names can end up being costly and time-consuming if someone sues you over the name and you want to defend your right to use it. But even if you decide to let go of the name, it will cost you time and money to rebrand your digital and physical presence. Worse, you will have lost the brand recognition and goodwill you’ve built up over the years in your community. So choose wisely. 

Mistake 5: Not Having Corporate Governance Documents  

This is probably the single biggest mistake you can make when you plan to start an LLC with business partners. Many people go into business with friends or family members, and at the start everything is copacetic. Everyone gets along and there are no major disagreements. But many an experienced business attorney will tell you that times change, and that’s when things can get ugly.

Imagine that you’re in a business with two friends and everything is going well at first. Then one friend unexpectedly dies, and you find you’re now in business with their spouse. Or the other friend starts slacking off, working fewer hours but taking the same profits as the hard-working partners. Or you become incapacitated and can no longer work. Or the three of you disagree on how to raise money for the company. What happens to you, your investment, and the business in these situations?

Corporate governance documents are intended to lay out the rules so that when a disagreement or unpleasant situation arises, what happens next is clear. These simple documents can preserve good relations between partners, protect the partners’ investments, and protect the business itself.

Two important documents that any business owner with partners should consider getting during the creation of their business:

An operating agreement. This spells out how the company should be managed, how profits and losses are handled, how much of the company each member owns, what each member’s responsibilities are, and more.

A buy-sell agreement. This document covers what happens to the business when a member dies, becomes incapacitated, stops working, etc. Read more about buy-sell agreements here.

By addressing future scenarios now, you can avoid major problems down the line. Just know that it’s vital to discuss these things before you and your partners start operating your business.

Mistake 6: Not Getting Legal Assistance When You Need It

It’s very easy to go online and get the forms to start an LLC yourself, without the help of an attorney. Is that smart?

In some cases, doing so is fine and poses no future problems, particularly with single-member LLCs that operate within one state and are wholly self-funded. These business owners would likely benefit from speaking with a business attorney, but they may feel pretty confident that they can create their LLC on their own.

But other entrepreneurs should consider speaking with an attorney before and during the creation process of their LLC. This is especially true in any of the following situations:

• You have business partners
• You plan to take on money from outside investors
• You plan to do business in multiple states

The cost is usually the main reason that people don’t want to spend the money on an attorney at this stage, and that’s understandable. Business owners want to make money before they spend it. But the money you spend up front on corporate governance documents or advice from an experienced attorney can save you money and mistakes down the road. (Plus, don’t forget this expense is a business write-off when it comes to tax time.)

Questions About Your LLC? Speak with Business Attorney Gem McDowell

Gem McDowell is a business attorney with over 25 years of experience helping people start and run their businesses. He’s a problem solver who can help you start out right and avoid the many mistakes he’s seen in the past. Contact Gem at his Mt. Pleasant office today to schedule a free consultation by calling (843) 284-1021 or filling out this contact form.