The Most Common LLC Formation Mistakes You Have To Avoid

It is always exciting to launch a business but you can easily end up intimidated. Unfortunately, you can make many mistakes when you launch an LLC (limited liability company). Fortunately, you already made a good decision by choosing the LLC as the business entity.

When referring to LLC formation, the most common mistakes people make right now are the following.

LLC Formation When It’s An Inappropriate Entity

Limited liability companies have a very good structure but this is not the case for all possible business ventures.

The most important thing to consider is money. Do you want to use outside investors? In this case, the corporation might be a better option. Investors tend to be much more comfortable when they invest in a corporation and they do avoid LLCs. Also, a corporation can issue stocks. As a result, when you think about an IPO, you should not choose to open a limited liability company.

Wrong State Incorporating

If the LLC is the right option in your case, you need to decide incorporating state. Usually, this is where you do business or where you live. However, there are numerous entrepreneurs that regularly incorporate LLCs in other states that have better legal or tax benefits, like Nevada, Wyoming, or Delaware. However, this is something that really counts for corporations, not for smaller businesses.

The Wrong LLC Type

One thing you might not know is that there are 4 main LLC types and several others possible. You need to know the advantages and disadvantages of all before you make your final choice. To keep things short, you can choose LLCs that are “at will”, “member managed”, “term”, and “manager managed”. Choosing an incorrect type will lead to problems in the future.

The Wrong Name

The wrong name is usually a name that is already used. It is really important that you do research before you choose your business name. Fortunately, there are always ledgers to consider in practically all US states.

It is worth saying that it is a very good idea to visit the Patent and Trademark Office. This lets you know if the name you wanted to use is already used or not. Also, it is a very good idea to search on Google to see other possible name uses.

When you violate the trademark of another business, you are in big trouble. Name disputes are time-consuming and costly. Also, they can lead to bankruptcy if you used a name that you were not allowed to.

No Corporate Governance Documents

If you want to launch your business with a partner, this is a huge mistake that should be avoided at all costs. It is very common for people to start a business with family members or friends. Since trust is high, they do not care much about business governance since no disagreements exist. However, when a disagreement appears, it can easily lead to huge problems.

The corporate governance documents will include rules. If unpleasant situations appear or there are disagreements, the documents dictate the course of action.