5 Common Mistakes When Forming an LLC

An LLC is a limited liability company. This is an entity that can protect your personal assets from business liabilities. There are legal and tax implications when setting up an LLC. However, there are common mistakes when forming an LLC that people make. In this article, we will go over 5 of those mistakes and how to avoid them.

You Fail to Create an Operating Agreement

An operating agreement establishes the structure of your LLC. This includes establishing members and their percentage of interest, outlines the duties and responsibilities of the members and documents how your LLC will be run. Without an operating agreement, you can have issues getting business loans and leases. If you do not have an operating agreement, when problems arise there will be no set plan to solve them. This could include if a member wants to sell the company or if a member dies or becomes disabled.

You Don’t Keep Your Operating Agreement Up to Date

When changes in your business happen, like a member leaving, you would want to make sure you updated your operating agreement to reflect those changes.

You Don’t Understand How to File Your Taxes

There are several types of tax returns you can file for an LLC. Most LLCs are disregarded entities, this means any income or loss is reported on Schedule C of your personal tax return. If your LLC has multiple members you will need to file a separate Form 1065 for partnerships. If you have chosen to nominate the S-Corp election you will file a Form 1120S. It is important to note that if you file a 1065 or and 1120S your tax return is due on March 15^th, not April 15^th.

You Fail to Take Advantage of S-Corp Benefits

An LLC as an S-Corp avoids the double taxation that corporations deal with. They can also help you reduce paying self-employment tax. To do this you have to pay yourself through payroll. How does this work? Here’s an example. Let’s say you make $100,000 in profit and you payroll yourself $60,000. The remaining $40,000 is reported as a distribution on your personal income tax return. This amount is not considered wages, so employment tax will not be due on this amount.

You Fail to Keep Your Personal and Business Finances Separate

When it comes to finances you should never comingle funds. This means you should have a business bank account that handles only business transactions. You should have a separate personal account for all personal transactions. Some people use their business account for personal transactions, but this is a bad idea. Doing so could compromise your limited liability status, putting your personal assets at risk.

Avoiding Common Mistakes When Forming an LLC

You can avoid common mistakes when forming an LLC. It is important to not only have a document preparer to file your documents, but you should also work with a tax professional. By using someone who does both you can make sure all your bases are covered.

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