Below, you’ll see the most common errors made by entrepreneurs when starting a Limited Liability Company in the United States.
1. Mixing Personal and Business Funds
It’s necessary to have separate accounts for LLC members and the business.
Some people do have two separate bank accounts: one for the business and one for personal use. However, they pay personal expenses with the business account or business expenses with the personal account, which is a serious mistake.
If you have to incur any business expenses using your personal account, the correct procedure is to have the business reimburse you for that money.
Even if you had no other option, we recommend making business-related expenses using the business account because judges and lawyers review these records when conducting their investigations.
2. Not Having an Operating Agreement or Contract
There’s a common misconception that an Operating Agreement is only required when two or more people are involved, and it shouldn’t be necessary for single-member LLCs.
“Why would I need a contract if I’m the only one running my business?”
Let us tell you that this operating agreement is a formality where you establish the separation between you as an individual and the business you created.
Some of the points covered in this agreement include:
- Who forms the Limited Liability Company?
- What is the purpose of the business?
- What is the formation date?
- What business activities will be conducted?
- Who are the members?
- Where will the LLC’s corporate office be located?
- What is the ownership percentage of each member?
- How will taxes be paid?
- How are profits distributed?
- If an additional member wanted to join, what are the terms established?
When a lawsuit occurs, the first place an attorney looks if there is improper use of the LLC is public records (and all the business records we fill out when registering a business are public records).
That’s why you need to have an operating agreement.
3. Not Following Legal Formalities
Larger companies, on a periodic or annual basis, hold meetings where:
- Financial statements are reviewed.
- Decisions are made about hiring another manager.
- Important decisions regarding the company are made.
At the end of these meetings, paperwork called “minutes” is completed, which is a record of dates, times, participants, decisions made, and agreements reached at that meeting.
In the case of single-member LLCs, it might seem strange to have meetings with yourself.
It’s not about having an imaginary meeting but about following certain procedures. Even if you are the sole member, you still make your own decisions (like renting equipment, subcontracting a service or sales personnel, etc).
What you should do is keep a written record of all these decisions you make. You can buy a folder or a planner to organize this paperwork.
For example, if you make a certain decision, write down the date, description, sign it, and keep it.
4. Not Properly Capitalizing Your Business
All businesses and companies should always have funds in their bank account to cover overhead expenses (which are the fixed and operational expenses of the business).
However, many LLC owners or members conclude that if they withdraw all the funds from the bank and put the money into their personal account as they earn it, they can protect themselves. They believe that in the event of a lawsuit, there would be no money in the company’s account.
However, this is not the case. The only thing achieved by doing this is showing inappropriate behavior, indicating that the business is not being treated seriously, with fixed expenses.
So our recommendation is to always keep your funds for overhead expenses in your company’s account.
5. Not Properly Representing Yourself When Signing Contracts
A company’s contract should always be signed by the LLC, not by an individual member. It should be a contract between your LLC and the other party (whether a company or an individual).
At the end of the contract, the LLC’s name should be there, and then there should be a space where you need to sign and indicate your title as a member of the LLC.
One example of this error might be when renting equipment in the name of an individual instead of the LLC. This creates confusion and fails to establish a proper separation between the individual and the business.
If a contract has your personal name and not the LLC’s name, it means you, as an individual, are entering into the contract.
So whenever you sign a business contract, it must be in the name of the LLC, not as an individual.
Other Errors in a US LLC
- Putting your personal information in the state’s public records without considering the consequences this may bring.
- Defining the purpose of the LLC in a limited manner, without any breadth or flexibility in operating the business.
- Ignoring securities laws by issuing shares of your company to investors, friends, or family without being fully informed and without legal advice on the securities issuance process.
- Inappropriately hiring employees without following proper procedures and legal requirements for hiring employees.
- Not seeking the assistance of a lawyer or a company that offers legal services and can answer your questions about legal matters, review documents, and help ensure that you meet all legal requirements when establishing your company.
Need Help to Avoid These Errors in Your Limited Liability Company?
Having assistance saves you time and money and prevents serious mistakes by providing you with the right guidance on the processes you need to follow to have an optimal company free from legal issues.
So if you need guidance, contact us here, and we will be happy to assist you.